Why clients want internet auctions – and how contractors should react
When the news broke in December 2001 that GlaxoSmithKline was procuring parts of its west London headquarters using internet auctions, the pharmaceutical company was as popular as a chain-smoking drunk at a children's birthday party. Everyone agreed that it contradicted everything that the rethought construction industry was supposed to be about: rather than profit through partnership, this was knuckleduster, blackjacks and every man for himself.

Well, that was then. Now it has been officially declared that there is no contradiction between reverse auctions – so called because the lowest bid wins – and supply-chain integration. We know this because the same government that sponsored the Egan report has just adopted reverse auctions, as has BAA, the company most closely associated with implementing it. And if that is not enough to convince the doubters, Sir John Egan himself has given it his blessing. "One of the key recommendations of Rethinking Construction was to achieve partnering within the supply chain: to achieve greater transparency, continuous improvement and improved productivity," he says. "To establish and maintain these long-term relationships, reverse auctioning can be a valuable technique." What on earth is going on, has Egan and the government undergone a Damascene conversion?

The adoption of reverse auction bidding was probably inevitable. Gordon Brown is faced with spiralling public debt and is desperate to claw back public sector cash, and private companies are on a constant quest for greater efficiency in a world of ever-stiffer competition. Reverse auctions have arrived and are here to stay. The Office of Government Commerce, the Treasury agency that is pushing the technique in Whitehall, says it saved 29% on the cost of tea for the Ministry of Defence and the NHS. BAA says it has shaved 10% off the cost of temporary accommodation at Heathrow's Terminal 5 project, and the client of the speculative office building we feature on page 40 reckons auctions cut his construction costs by 10%, or £690,000.

This argument about cost savings does not cut much ice with the consultants and contractors who are supposed to deliver them. Peter Rogers, the chairman of the strategic forum and director of developer Stanhope expresses the deep reservations of many industry figures: "If you are buying pencils or paper towels – highly repetitive products – then you can probably use reverse auction bidding," he says. "The minute you come to a more complex product where there are variables and you are looking for intellectual input – a situation where there is real integration between people, with opportunities to design out cost, I get very nervous about reverse-auction bidding because it can't account for these things." Cheap equals nasty.

A knockdown argument?
Mike Halsall, an IT consultant specialising in e-procurement, responds that quality doesn't fall – efficiency rises. "Suppliers become more efficient because if a company has to operate more efficiently, it buys more efficiently," he says. "It deploys its assets more efficiently, it manages its people better, it chases money faster and if it cannot keep up with the mean average efficiency in a market then it goes bust."

Auction fans also have an answer to those who say the process is inconsistent with supply-chain integration. They maintain that an auction is merely a technique for choosing the companies who are to form the supply chain. "The principles behind an integrated supply chain mean getting into relationships," says Tom Dengenis, chief executive officer of internet portal Asite. "A reverse auction is just a competitive process to get into a commercial relationship." Once the relationship has been formed, the teams can get on with partnering, just as Egan said.

BAA has put this theory into practice. Martin Plimmer, the company's supply-chain director, says: "We used a reverse auction to procure temporary accommodation on a framework basis. We undertook market research to establish those suppliers who would supply an appropriate service to us. We ended up with a supplier who was delighted to supply BAA. It generated significant savings for BAA and a profit for the supplier." Plimmer says that now this supplier has been selected, it will be subject to the usual periodical performance evaluations.

A reverse auction is just a competitive process to get into a commercial relationship

Tom Dengenis, Asite

What about Rogers' point that auctions reduce the unique and complex variables of a construction project to the crude measure of cost? Here, the defenders of auctions are willing to concede a little ground – BAA says it probably would not use an auction to select a consultant to masterplan an airport. However, they add that auctions can be used to procure whole construction projects and appoint firms to framework agreements, providing that what is supplied is clearly defined. Auctions are good at procuring commodities such as pencils and tea bags, so construction services should be made to resemble commodities. In other words, the buyer must be clear about what it wants.

"It's like any technology; it can be used rightly or wrongly and in the wrong hands it can be used to shaft suppliers. If you only care about price and not other parameters, like quality, then you will just get a low price," warns Halsall. "Also, if you have inappropriate suppliers and there's not a level playing field the consequences could be bad." This should be the industry's cue to step in and wield some influence.

The inevitable growth of auctions suggests that suppliers adopt a pragmatic response, so rather than refusing to take part in them, it can attempt to lay down rules to ensure auctions are conducted properly. The reality is competitive tendering is not going to go away – if it did, every job would risk ending up like the Scottish parliament. And holding auctions on the internet is admirably transparent: every bidders can see what every other bidder is offering, unlike the old brown envelope culture.

Simon Rawlinson, a partner at cost consultant Davis Langdon & Everest, sketches out how a code of conduct for reverse auctions may look. "It is important that the auction should form the conclusion of a broader tender process which involves prequalification, the submission of a tender, assessed on the basis of cost, time and service or product quality, and the opportunity to resolve qualifications and queries prior to the conclusion of the bidding process.

Suicide bids: one consultant’s experience of an auction that went wrong

A major corporate client used an auction extranet to appoint a series of two-year framework agreements covering a full range of professional services. All of the consultants involved were national practices. The tender was used to appoint multiple framework consultants for each discipline, and the total annual value of the national framework for our discipline was £7m, split into four regions.

We submitted a technical questionnaire, but were not required to make a presentation or submit a bid in advance of the auction. Our starting point was a competitive bid that represented a substantial discount on scale fees. We set a bottom line at 10% below our initial bid.

The auction was delayed by five hours and did not start until 10:30pm, finishing after midnight. As a result, it would have been difficult to consult with colleagues during the course of the auction. The initial bids were high, but in less than 15 minutes on the first auction, the bid had gone below our bottom line and we were out of the running. We watched as more than 70 further bids were submitted, taking the price from our bottom line of £2.1m to a winning bid of £900,000. This pattern was repeated on all four regions.

As we were outside of the latter stages of the auction, it was clear to us that there were only two players in the bid, and that they had already secured the commission. However, they kept bidding against one another, reducing the fee levels further. The “successful” consultants ended up submitting bids that represented up to an 80% discount on scale fees. It would not be possible to deliver any level of service at these fees. Both the client and the consultant lost out in the auction.

Following our experience on this tender, the practice determined not to enter any more tender auctions for professional services.

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