It is currently providing services to governments in Italy, France and Spain. It is also used by companies such as the state-owned Electricité de France, Italian transport giant Arriva and even local government in such cities as Paris, Rome and Valencia.
BravoSolution does not just provide the technology for reverse auctions. “The real service we provide is the service of our people,” says Federico Vitaletti, BravoSolution’s chief executive officer.
“We help companies redefine their organisation so they can save money.” Vitaletti says it typically takes a large company three years to change from traditional procurement to running its own reverse auctions. BravoSolution supplies advisers to analyse a company’s procurement methodology and to re-engineer it so it operates in a strict and disciplined way. Then it identifies the opportunities for a company to benefit from reverse auctions, carries out test auctions and trains the company’s staff. Finally, the company carries out live auctions as part of its procurement strategy.
BravoSolution and its client, who wished to remain anonymous, invited Building to attend the reverse auction of a *10m (£6.9m) speculative office development in Milan. The auction was for the contract to construct the whole building, the design work having already been carried out. It was the culmination of two months’ preparatory work. BravoSolution helped manage the procurement process in collaboration with the architect. It ensured a full set of drawings was produced and a specification drawn up. The architect and BravoSolution jointly produced a bill of materials and identified reputable contractors. These were invited to submit a bid based on the specification, and were given time to put in requests for information. Finally, they submitted a closed bid conventionally.
The auction is carried out in a meeting room in the architect’s office in central Milan. A whole range of people have turned up to witness it, including the client and the architect. The atmosphere
is relaxed, people are milling around and chatting to each other.
The focal point of the room is a huge screen connected to a computer at the end of the meeting room table. This displays the names of 12 Italian contractors, and alongside each name is the price each submitted as a closed bid. There is also a second figure that has been adjusted to account for performance variations between the contractors. For example, one contractor proposes to construct the building in 12 months, another in 10, the savings from the faster build time are factored in. According to Halsall, virtually anything can be factored into this adjusted bid price –
for example, a company’s current workload or financial position.
This process is open; you commit yourself in front of others. Outside this process, people are squeezed even more
Gianmaria Berreta, architect
The cheapest tender appears at the top of the screen and is the reserve price. The highest is 30% more than the cheapest. “The prices vary depending on the contractors’ understanding of the specification,” says Vitaletti. Each contractor can see the bids of their competitors, but not their names.
At 10am the auction gets under way. “Everyone turns off their phones and nobody leaves the room,” says Vitaletti. “This is to avoid the risk of people ringing up the suppliers and telling them who their competitors are.” The auction is ridiculously calm;
people continue chatting and occasionally glance up at the screen. “It all happens in the last 10 minutes,” says Vitaletti. In theory, the auction lasts 30 minutes but goes on much longer. This is because there has to be a clear five-minute interval between the last bid and the auction closing.
With 11 minutes to go, nothing has happened. With less than
10 minutes to go the figures on the screen suddenly start changing rapidly. The more expensive contractors have dropped out of the auction and those still in the running start slugging it out. Two firms are fighting to win the auction, and the lowest price has dropped 1.5%. As Vitaletti predicted, the real action
is saved until the final moments, with prices changing every
minute by amounts less than 1%. The architect, Gianmaria Berreta, is wandering around the room with his head in his hands muttering that the contractors can’t do it for this price. Everyone else is watching the screen intently. At 11.38am the auction
ends and there is a spontaneous round of applause. The winning bid is about 5% cheaper than the initial reserve. The losing contractor is less than 0.2% more expensive.
The Bollinger is cracked and a congratulatory toast drunk. Everyone celebrates and relaxes while the figures are
confirmed and a network check is carried out to ensure that they are absolutely final. After 20 minutes the successful contractor is notified that it is the preferred supplier. The final bid will be scrutinised to determine that the contractor can actually construct the building for this price – something all the bidders agreed to before the auction.
I don’t have a problem if I have all the information, but if the specification for the project is not clear and I have won the auction with the lowest price then it is difficult
Francesco Grimaldi, SEI
The aftermath: The client’s view
As expected, the client is delighted with the outcome. “I am firmly convinced of the benefits as a user. This is the best tool to optimise purchases of this kind,” he say. “We thought the original price before the auction started was good as the process prior to the auction had brought the price down,” he says. “In my opinion the whole process has saved at least 10% off the total job. The auction is the last act; it has created a very competitive environment for our suppliers.” The client explains why he feels the auction worked out well, and why he feels confident of getting a good job. “First of all, the specification was done very well, in a very detailed manner by the architect. This is recognised by the bidder. Second, the very steps of the auction convinced me the offers were not the final offers. Thirdly, we did not extend the invitation to tender to any old builders, we only asked good builders to bid.”
The architect’s view
For a man who looked very worried half an hour ago, Gianmaria Berreta has perked up surprisingly quickly. He is upbeat about reverse auctions: “I think this is very good for Italy because the professionals are not accustomed to producing a full specification and range of drawings. This obliges the architect to do this, so it is more efficient – the procedure is improved, which is a good thing because people are not well prepared to procure buildings here. This process is also open; you commit yourself in front of others. Outside this process people are squeezed even more.”
Despite his seemingly sudden conversion, Berreta qualifies his opinion by referring to his project as “a very simple, standard building”. He does not believe reverse auctions are suitable for complex jobs. “In the south of Italy we are doing a large, frameless glass dome as part of a hotel. There are very few people who can build this dome, the technology is very risky and if the dome falls down it would be a disaster. Because the technology is so complex it is very difficult to have a final, fixed price. For this you could
use the auction to procure the hotel and let the glass package separately. You have to see auctions with common sense rather than as a religion.”
The specialist contractor’s view
One of the conditions of attending the auction was that the contractors involved remained anonymous. However, we spoke
to two Italian specialists who have participated in other reverse auctions.
Francesco Grimaldi is both technical and commercial director of SEI, an M&E company employing about 200 people. His firm has been involved in 10 auctions. “Before the bid it is necessary to have all the documentation. I need a technical specification and good drawings as I cannot speak to the client. I don’t have a problem if I have all the information beforehand, but if the specification for the project is not clear and I have won the auction with the lowest price then it is difficult. If I can’t buy an Italian or English boiler for more money I go to China to buy the equipment for the lowest price. I want the boiler type and the country where it is made to be indicated. If the auction is run correctly I don’t have a problem.” Like it or not, Grimaldi knows that reverse auction bidding is now part of his working life. “I think in the future there will be more of these auctions. For example, we work for Vivendi. It is normal now for them to use auctions for all their services.”
The OGC: Holding the torch?Many people in the construction industry are deeply concerned about the Office of Government Commerce’s decision to recommend that Whitehall departments adopt reverse auctions. To help clarify exactly what the OGC wants it to be used for, where it adds value and what safeguards will be introduced to ensure the process is fair, Building asked a cross-section of readers for their principal concerns and put some of these to the OGC.
Unfortunately, the OGC refused to answer any specific questions. Instead, it issued the following statement: “The use of reverse auctions by the government is already yielding significant value-for-money gains in cases where their use is appropriate and where the product can be robustly and precisely specified.
“We are aware this poses many questions on the suitability and practical application for the construction industry, which is why we have launched a study to establish the suitability, advantages and disadvantages of e-auctions. We intend to involve the construction industry in this process before reaching any conclusion.”
If the OGC is to have any influence on the uptake of reverse auction bidding within the industry, let alone carry the torch for this innovative form of procurement, then it might want to brush up on its public relations …
FOR reverse auction bidding
The reason for the OGC’s enthusiastic take-up of reverse auction bidding is because it saves buyers money, which is good news for the UK’s taxpayers. Average savings from the use of reverse auctions the public sector are currently estimated at approximately 25% when viewed against traditional paper-based tendering, with the potential for far higher savings dependent upon the type of goods or services tendered for.
Reverse auctions are about efficient and transparent procurement, not extracting the lowest price. The parameters that determine selection can include other elements such as project timeframe, which, in some instances, is more relevant than cost. Clients that know they have the best supplier and the most advantageous commercial offer are better placed to negotiate longer-term relationships safe in the knowledge that they have established a rock-solid basis for negotiation.
Suppliers get increased transparency both in terms of procurement processes and the market because they can see what their competitors are bidding during the auction, unlike sealed bids. This has the further benefit of reducing knock down pricing as suppliers can see what their competitors are bidding and can put in a slightly lower bid rather than putting in a very low price just to secure the job.
Trust increases when negotiating participants are certain that their offer and subsequent acceptance are based on a visible process that guarantees both security and anonymity.
Provided the procurement process is properly managed, electronic reverse auctions can be used for the procurement of anything from commodities to complex products and services.
Procurement is expensive and time-consuming; a methodology that streamlines the process leads to measurable cost savings. It also makes viable collaborative procurement (joint purchasing) across several departments or organisations.
Remember, the internet has imposed a series of structural changes to the way we do business, including the emergence of online auctions. Its rising adoption will ultimately submerge anything that fails to align with our quest for constantly improving efficiency. If anybody is in doubt about this, consider the extraordinary success of online auction site eBay.
AGAINST reverse auction bidding
Fundamentally, reverse auctions tend to reinforce traditional procurement practices at a time when the industry and leading clients – especially key government clients – are moving towards team delivery in an effort to promote process integration.
The emphasis on achieving lowest price ignores the fact that best practice procurement concentrates on reducing waste, on whole life costs rather than capital, and on achieving reasonable margins for the supply side. The equation consists of achieving cost-effectiveness and decent margins – not lowest price!
Quality issues and “soft issues” such as the ability to teamwork are often excluded. Even when they are included bidders are not made aware of specific changes to quality, quantities, programme and other factors that would justify further rounds of bidding to achieve a lower price.
Reverse auctions perpetuate the practice of tendering that Egan condemned as wasteful, especially when it involves countless rounds of bidding down the supply chain.
There is a second aspect to reverse auctions that needs consideration, the procedure that has been adopted for the auction. Bad practices associated with paper processes do not suddenly change their complexion because of the adoption of electronic processes. Bidding processes should be operated in a fair and transparent manner. While online, failure to act even-handedly towards each bidder, or indulging in antics such as “Dutch auctioning”, will amount to flagrant disregard of all existing best practice guidance. Importantly, such behaviour would make a public sector tenderer liable for breach of an implied contract that he would operate the process fairly. This was the view expressed by Judge Humphrey Lloyd in the Harman case more than three years ago. In certain circumstances such liability could attach to private sector tenderers.