Eganism is being threatened by a very different way of doing business, as blue-chip employers switch to 'reverse auction' tendering on the internet – a ruthless game in which the client picks off bidders until there is just one left.
Hooray for The Internet. It brings people closer together. It allows them to collaborate on projects over vast distances at any time of the day, and fuses construction's many tribes into a single virtual company. It accomplishes the complex process of purchasing materials with a few quick keystrokes. And it lets clients bring back the kind of aggressive, lowest-cost tendering that most in the industry believed was a thing of the past.

They are doing this through a procurement process called "reverse auction bidding" – a system in which firms tender for contracts against each other, online, and in real time. The firm that puts in the lowest bid gets the work.

"Reverse auction bidding flies in the face of all the good Egan initiatives," says Rod Pettigrew, legal adviser to the Heating and Ventilating Contractors Association. "For M&E contractors, it turns the clock back to lowest cost and failure to achieve proper value for services."

At the end of last year, the HVCA held a meeting at which members vented their anger about the increasing number of clients using the auctions. Pettigrew is producing a detailed report on the issue for the Constructors Liaison Group. He is also planning to write to the companies using the system to make them aware of his members' discontent.

The alarm was raised in December when it was revealed that pharmaceuticals giant GlaxoSmithKline had procured M&E services on two projects using reverse auctions. This week, two blue-chip clients, BP and Cable & Wireless, confirmed that reverse auction bidding was under "active consideration" as part of their e-procurement drives. And Building understands that a leading housebuilder and a design-and-build contractor are assessing the procurement route's feasibility.

Incensed by the spread of the system, many M&E contractors are boycotting the auctions.

"It's just a glorified Dutch auction, an attempt to drive prices down, and there is no way we will ever enter into it," states Robert Stewart, director of M&E firm Maxwell Stewart.

M&E firm Gratte Manley has come to the same conclusion, after losing out twice in online auctions for Glaxo contracts. "Reverse auction bidding advocates an opposite view to that given by the Egan principles," says Graham Manley, a director of Gratte Manley. "Services cannot be treated like products – you have to maintain quality."

Another trade body, the British Constructional Steel Association, says they have had concerns from their members surrounding online bidding. Marian Rich, the association's legal director, says she has had reports of several major clients using the system.

Not all internet ventures encourage lowest-cost tendering, however. For example, Asite, the portal chaired by Sir John Egan, claims to foster integrated supply chains that can share the savings that technology brings.

"Reverse auctions are obviously counter-Egan," says Tim Wright, Asite's director of sales. "There are clients that embrace Egan and there are those that don't."

However, Asite itself was embarrassed last December when it emerged that it hosted an auction tool. Asite managing director Alastair Mellon says the tool was not designed for tendering, but instead allows firms to auction off surplus inventory. "Short-term reverse auctioning of widgets or services, or for that matter aggravated buying," he says, "has a corrosive effect on complex design-led supply chains."

He adds: "What we're not encouraging is the use of reverse auctioning for the tendering of packages because that's counter to our philosophy."

For M&E contractors, it turns the clock back to lowest cost and failure to achieve value

Rod Pettigrew, legal adviser, HVCA

The clients that are trying reverse auctions are still assessing their desirability, as the pressure against the scheme increases. GlaxoSmithKline's head of global strategic planning Kevin Thomas says the firm is currently reviewing the system's success. "After the trials are evaluated, a decision will be made on whether or not there is a place for online bidding at Glaxo," he says.

However, Thomas is understood to favour a move away from lowest-cost competitive tendering as a procurement strategy. While at Glaxo Wellcome, and before its merger with SmithKline Beecham in 2000, Thomas introduced a partnering-style procurement system. He is believed to be working to extend supply-chain integration across the whole group, but until that happens, M&E firms are stuck with it.

The dilemma for specialists is that if it they participate in the auctions, they will contribute to driving tender prices down. And if they do not get involved, they risk losing business and possibly their relationships with their all-important clients.

Mitie Engineering Services director John Cullen admits that the issue had caused controversy at board meetings but for the moment Mitie is steering clear. "There has been a lot of opposition among M&E contractors about this tender process, and after a lot of thought, I don't think we want to get dragged into it," he says.

However, e-procurement expert John Simkin, who has advised companies on setting up reverse auctions, says firms will have to go along with the new approach or face extinction.

"The view that online auctions are glorified Dutch auctions, centring on lowest price and not on best-quality service, exhibits a complete lack of understanding of the purpose and value of the process." He does acknowledge that technology brings about resistance and uncertainty, but insists that failure to embrace the idea will restrict companies' opportunities to win business.

Tony Pollington, executive secretary of the Confederation of Construction Clients, says he has sympathy with suppliers and that he is against reverse auctions in principle. He urges clients not to abuse the system. "In our clients' charter we ask that clients act as ethically as they can," he says.

But it seems there are still many who are willing to take part in the auctions, and this willingness is making specialist contractors' decision on whether to compete or not especially difficult.

David Hill, managing director of Hills Electrical Services, says he has no compunction about using the system. If there is a tender to be won, he says, his company will bid for it.

"I have no problems in tendering for work using the systems. We try to subscribe to Egan principles and best value, but if there is business using reverse bidding, we'll go for it – as long as it is commercially viable," he says.

The client's choice between partnering and reverse-auction bidding represents a choice between co-operation and competition.

Fingers on buttons: How reverse-auction bidding works

  • The client invites prequalified firms to tender for a contract on a website, managed on the client’s behalf by an IT firm
  • The subcontractors submit bids in advance of the auction
  • Just before the auction begins, the client displays the lowest bid on the website
  • When the auction begins, firms have about 45 minutes to undercut the displayed bid
  • When it is complete, the buyer has an opportunity to review the bids to ensure that quality, service and other value-adding considerations are met
  • The contract is awarded