REVERSE AUCTIONING

Presented by P. K. Choudhary GM/GT, RITES Ltd.

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Auction is a well known tool and is said to have originated as far back as 500 B.C. (Wikipedia). In normal auction many buyers compete for purchase of item(s) put for sale by single seller (also known as the forward auction). The prospective buyers compete amongst themselves by offering multiple quotes, each higher in value than previous quote, and highest bidder purchases the item. Such auctions are demand driven.

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In Reverse Auction, many sellers of goods and services compete amongst themselves for providing goods and services that a buyer requests for. Thus it is supply driven. With the development of internet based online auction tools in mid 1990s, Reverse Auction started gaining popularity and has developed into a remarkable purchase tool for the corporate world and is being used mainly for purchase of articles and goods. Its innovative use for finalizing the Civil Works Contract has proved that this tool can also be successfully used for item-rate contract jobs and will not only save costs for the buyer but also save considerable time in finalizing contracts. RBI, SBI, IOCL, HPCL, BPCL, EIL, ISPRL and ONGC have already started Reverse Auctioning and Indian Railways also should not fall behind.

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Traditional Purchase In traditional purchase the buyer obtains offers from vendors (through single or two bid process) and based on well established corporate procedures, places order on the lowest technically acceptable bidder. In traditional purchase, the price at which the goods and services are procured would depend to a large extent on the number of bidders in the process, the availability of resources and the negotiating skills of the buyer. A Vendor is expected to submit his best offer and does not know what the other vendors have quoted and has no opportunity to correct his offer after the price-bid submission date, unless postbid negotiations are resorted to. In Indian government sector, any post-bid negotiation with other than L1 bidder is discouraged by CVC. The process does not provide the vendor with an instant feed back about the market price for his goods and thus does not compel him to lower his price in relation to the market.

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Traditional Purchase In case, all the vendors, on account of various risk perceptions (right or wrong), quote a high price, the buyer is left with no option but to resort to negotiations with only L1 bidder in government and public sector purchases. The buyer may or may not have the requisite knowledge of the market, to conduct the negotiations. Thus there is a risk that the buyer could end up paying a price much higher than the market price for the goods or services sought.

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Reverse Auction Reverse Auction is a Web-based application for procurement. Easy to use, web based tools have been developed to streamline the competitive bidding process. The bidder can submit his bids from the comfort of his office (within the country or abroad). The process permits the bidder to remain anonymous but all bidders have an equal opportunity to see the lowest bid at any particular point of time. Bidders are permitted to revise their bids any number of times within a given timeframe. Thus prices are free to move in very competitive and dynamic conditions.

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Reverse Auction The vendors begin competing with each other. This brings about a high level of profitability, control, and simplicity to corporate procurement process. Negotiations are not required to bring the price down and the buyer can be sure that the price is the most favorable that the market can offer. No single bidder is given an unfair advantage. Reverse Auction process also speeds up the contract award process. CVC had vide Office Order No 46/9/03 dated September 11 2003 given approval to Reverse Auction.

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Reverse Auction To address the issue of having only one figure against which the bidders would be required to quote, a Detailed Schedule of Rates (SOR) is to be prepared and the same is to be given to the bidders. The bidders are then required to quote a decrement on the Total Initial Contract Price and the order would be placed on the lowest bidder with the rates and the lump-sum item apportioned in relation to the price quoted. There may be concerns that the bidders may not accept an SOR provided to them. Therefore the SOR must reflect workable rates and cash flow for the Contractor must be at a comfortable level during the construction stage, to make the Reverse Auction a success. After the SOR is finalized, it may be given to the technically acceptable bidders at least 10 days before the Reverse Auction and their view may be sought.

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Reverse Auction The Owner (Employer or Client) has the option of modifying the SOR rates based on the comments from the bidders. But the Reserve price for the start of the Reverse Auction should be decided by the Owner. The decrement amount is also to be decided by the Owner. Actions have to be taken to minimize all speculative items of expenditure so that bidders can quote competitive rates . The following decisions have to be taken such as: 1. To take care of Geological surprises during execution, if any, Geotechnical Reference Frames may be introduced for determining realistic compensation. 2. To take care of increase in steel prices after the bid date, formula for enhanced compensation may be prescribed. 3. Diesel may be made a free supply item up to a predetermined limit. 4. Bids in only Indian Rupees are to be quoted. 5. No deviations may be accepted. Need for loading of the quoted price may be done away with.

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Reverse Auction C1 India has conducted Reverse Auction in the past. The credentials of the party are impressive as the party has conducted E-Procurement /Reverse Auction for clients like RBI, SBI, IOCL, HPCL & BPCL, EIL and ISPRL. There may be other parties as well. The Party has to provide all the details with respect to the security features. They included the following:1.Two Factor Authentications 2.Bid Encryption at the Database 3. Online Antivirus Scanning 4.128 bit SSL Encryption 5.Digital Notarization 6.Audit Trail of each activity 7.Privilege based User Access 8.Firewall for screening the System Access 9.Intrusion detection system

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Reverse Auction Their processes should be audited by Standard Testing Quality Certification (STQC), an agency under Ministry of Information Technology. The website should be secured by Seal and Encryption. The bidders have to be informed at the pre-bid stage itself, that they would be required to participate in a Reverse Auction. All technically acceptable bidders should be given training on Reverse Auction so that they could quote from the comfort of the office. The concerns with respect to failure of the internet during Reverse Auction and the methodology for continuing the process have to be clarified. Like, in case of a failure of the internet, the agency would be accessible through mobile phones and they would have to send their offer by fax and the same would be accepted.

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Reverse Auction Compliance is to be obtained from the bidders after completion of the training and before the start of the Reverse Auction process. Initially, bidders are required to submit only their techno-commercial bids incorporating their methodology for execution of the project. These bidders may be from Pre-Qualified list through a separate tender. Priced bids are not sought from the bidders. After the recommendation and approval of the successful bidders on evaluation of their techno-commercial offer, SOR is issued to the successful bidders. After modification of SOR and training of bidders, each bidder is to be given an identity and a password. Their identities shall not be known to anybody other than the agency administrator. Bidder is required to modify the password issued by the administrator to ensure security.

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Reverse Auction It is to be informed to the bidders that the bidding window is say 2 hours but in case a bid is received within the last 5 minutes, the software should be designed to automatically extend the process by 5 minutes so that the other bidders have at least clear 5 minutes to respond. In case another bid is received within the extended time period, the software should automatically extend the time by another 5 minutes. Thus the process will continue until no bid is received during last 5 minutes in the extended time. On the day of the Reverse Auction, Owners representative should be present in the control room of the agency along with the administrator to ensure that the process goes on as planned. Arrangements may be made to witness the whole process online through a big screen in the conference room of the Owners premises. The process generally heats up towards the end of the period.

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Reverse Auction A representative graph is presented on how the bidders responded in a particular case and at what time the process ended. The competition was so fierce that the Reverse Auction continued till 3.27 pm (a period of 4 hours 27 minutes). In all 189 bids were received from the bidders. A confirmatory fax with respect to the last price offered by the bidders may be sent immediately at the end of the Reverse Auction.

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Reverse Auction

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Conclusion The Reverse Auction process is a remarkable procurement tool and can save considerable time and costs for the buyer. The process however needs to be handled carefully and it should be ensured that adequate numbers of bidders are competing. Also the possibility of cartelization should be avoided. The buyer needs to ensure that realistic procurement prices are ascertained before commencing the Reverse Auction. Speculative items should be reduced to the minimum and loadings avoided.

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