Reverse Auction?
The reverse auction is a procurement Strategy to get competitive prices and lower procurement costs. Oil & Gas/Power PSUs/Govt. Departments/Construction Companies/Large Corporations use this method for procuring various items/services.
In a reverse auction, a buyer requests a desired product or service. Sellers then bid for the amount they are willing to pay for the goods or services, and the winning bidder is the seller willing to accept the lowest amount.
Forward Auction vs. Reverse Auction
In a regular auction, buyers compete with each other and at the end, the contract is awarded to a buyer who bids the highest price whereas a reverse auction is the complete opposite of a regular auction.
Herein, the bid is invited by the buyer and sellers compete against each other. The contract is awarded to the seller who bids the lowest price i.e. L1 basis. In short, the least cost method is used here for evaluation.
This method works only when there are many suppliers who offer similar products and services and price is a key factor.
i.e. Enlistment of various suppliers for different items would be required on Company’s database. Pre Bid meetings would be required before issuance of inquiry to identify probable vendor list.
Reverse Auction Process:
• Identify the list of probable suppliers/Contractors;
• Issuance of Enquiry with complete technical specifications and Technical/Commercial/Financial Criteria;
• Evaluation of Bids on the lowest cost basis;
• E-Reverse Auction after the opening of prices. (Applicability of the same is generally mentioned in Bid Document itself).
• Award of Contract to Lowest Bidder.
E-Reverse Auction after the opening of Price Bids:
E-Reverse auction is an online, real-time dynamic auction between the Buyer and a number of suppliers who compete against each other to win the contract by submitting successively lower-priced bids (increasingly higher prices in case of the forward auction) i.e. Reverse Auction will start on L1 price.
Different terms used in the e-Tendering Portal relevant to Reverse Auction:
Current Price: Current Price available against any line item (lot) under the “Live Auction” tab shows the latest L1 value received against that lot.
Decremental Value/ Decremental Price / Decrement Price: It is the minimum value that shall be decremented by any competing bidder from the “Current Price” while entering his quote. The bidder can reduce only in multiples of this value.
My Auction Price: Bidder enters and submits his quote in the space provided against “My Auction Price”. E.g. If the Current Price at a moment is X and the Reduced Price = is Y. Then Bidder shall be able to enter My Auction Price = Z where Z = X-n*Y and ‘n’ is an integer greater than zero (0). (E-Tender IOCL Notice)
Reverse Auction Examples?
- Construction and real estate companies often profit from reverse bidding. Provide new clients with a platform to bid directly on upcoming projects.
- public sector companies were able to choose to reverse bids when seeking contracts.
Reverse Auction Benefits?
The advantages of Reverse Auction are:
- Fast – This type of auction is very fast, saving buyers and sellers a lot of time researching the market.
- Waste-Free - Buyers can easily present all their requirements with minimal or no wastage of time and other resources.
- Easy Compare - Buyers can also compare products and services and choose the best one accordingly.
- Best Price - Buyers take ownership of products and services at the best price possible.
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The Bottom Line:
Reverse Auction is highly beneficial to reduce costs when corporations are having large enlisted suppliers for similar items. It saves time & cost. The buyer gets the best price here, however, the disadvantage of such a scheme can be upon the quality of products because of aggressive lowest-price strategies adopted by sellers to influence the prices.
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