UK: Online Reverse Auctions

If you say yes to either of the following questions you are likely to come across electronic reverse auctions soon, if you haven't done so already.

• Are you involved in tendering for high value contracts?

• Do you contract with any central government department, local government authority or charity?

Sarah Staines explains the process and identifies the legal issues.

Electronic Reverse Auctions "eRA" are a procurement methodology using a secure internet platform to enable competing suppliers to bid in real time for specific contracts.

There is no restriction on the size or purpose of a contract suitable for eRA but the average cost of using the facilities of an eRA platform supplier is said to be between £8k and £10k so it is unlikely to be used for smaller sized procurements.

eRA works best when used for contracts which have high level specifications attached to the tender and where there are a number of potential suppliers. It is also useful where a fixed number of potential suppliers are already "approved" by the purchaser or have a previous relationship with them. It is especially useful where bidding transparency is important, particularly where value for money is required to be demonstrated (as in the public sector or for charities).

All those approved to bid will be given passwords to access a secure auction platform. At the start of the auction an initial market price will be set to start the bidding. Thereafter supplier bids will be placed on the platform on the secure website for all (or all approved bidders) to see, but the identity of the bidders will be kept secret. Each bidder will be invited to bid below the last price posted until only one bidder is left. The auction can be timed; once the time for bidding has closed or at a fixed end time of the auction (just like e-Bay) the successful tenderer will know that they have given the final accepted bid.

If you are not certain the bidders have provided enough evidence of suitability then the auction result can be suspended or delayed. If you want final say on selection then you can build that into the process.

Often the process will include prior evaluation of the bidder and its technical response to a tender. Technical specifications can be converted into a price equivalent using a previously disclosed formulae.

Alternatively, all aspects of the tender and bids can be processed on-line. This is really only suitable for bids which are structured by price rather than by other qualities.

A dummy auction could be held to make sure everyone knows how the process works.

There are no specific legal bars to conducting the tendering and auction process electronically by way of an eRA. However, the usual provisos of conducting business on the internet apply.

The process will include consideration and action on the following legal and commercial issues:

• Identify which contracts are suitable for eRA;

• Prepare specifications and tender invitation information - evaluate what elements can be converted into values to enable value bidding on each element e.g. price, lead time, warranties, technical factors;

• Set terms and conditions;

• Evaluate the supplier sources for their ability to achieve your required benchmarks on quality and delivery;

• All acceptable suppliers to agree terms and conditions;

• Supply invitation to tender documents and specifications (if required for a particular contract receive written tenders to approve, or reject);

• Select those who will be entered into the eRA;

• Set starting price, date of on-line auction and clarify the rules for the process (including training if necessary);

• Conduct auction;

• Feedback to the unsuccessful;

• Contract awarded to the successful.

This is an innovative method of procurement, particularly useful for large projects where the body of suppliers is well known to the contractor. The openness of bidding makes the transaction transparent and ensures the procurer with value for money.

The Office of Government Commerce is encouraging eRA for service supply to the public sector, there is no reason to believe it cannot work well in the private sector too, particularly for Charities and other bodies who need to be transparent in such transactions and demonstrate that they are doing all that is possible to obtain value for money.

© Pictons 2005 First published in Pictons’ "In the Know" email newsletter.

Pictons Solicitors LLP is regulated by the Law Society. The information in this article is correct at the time of publication in January 2005. Every care has been taken in the preparation of this article. However, no responsibility can be accepted for any person who acts on the basis of information contained in it. You are recommended to obtain specific advice in respect of individual cases