Open market negotiations can take weeks to conduct – unless you do them on the web. But does online bidding really work in construction?
Going once, going twice, sold to the gentleman 300 miles away. The tense atmosphere of the auction is no longer the preserve of plumy-voiced men with gavels surrounded by antiques. The internet has brought it to the general public. You can bid for anything online, from holidays to CDs, through sites such as QXL.com and ebay.co.uk. And there are real bargains to be had. One lucky surfer recently picked up a flight from Rome to Brussels for just 40p on the Virgin Airlines website.

But are there the same bargains to be had in construction through online auctions? And isn't fierce competition for the lowest price what the industry is trying to move away from?

The reverse auction has been heralded as a way for contractors to get value for money online while reducing the cost and time involved in procurement. It usually entails a buyer posting a request for a quotation to suppliers on a hosting website and inviting them to tender. The suppliers can be picked from a preferred list or through a search of the website's database. Some sites will even suggest suppliers that meet the buyer's needs.

Anonymous suppliers
The suppliers post their quotes to a secure section of the site accessible to the buyer. Using this information, the buyer invites selected suppliers to join the auction. On the date and time of the auction, the suppliers post up their bids until time is up; then the buyer selects a preferred bid. Suppliers can see each other's bids throughout the auction, but they remain anonymous to each other.

Having your suppliers fight for your business through an internet auction sounds exciting, but is it a viable way to procure materials? In the age of partnering, do auctions diminish collaborative spirit and privilege price over value for money?

Online procurement specialist eu-supply.com has been trying to win the industry round to reverse auctions for the past year. It's not been an easy struggle, but companies are starting to show interest, says marketing manager Neil Shaw. "Online bidding has taken off in the last five months. After the dotcom hype died down at the beginning of the year, companies have really started to experiment with the services they need."

Shaw emphasises that reverse auctions aren't for use in all procurement situations. "Auctions aren't suitable for partnering arrangements with suppliers. But they are useful for when a buyer wants to test the open market."

Auctions don't mean a complete lack of human contact, Shaw insists. "We wouldn't advocate doing all communication through email or online. There's still a certain amount of communication through the telephone arranging the online auction, especially in the early stages."

Apart from the obvious benefit, common to all internet transactions, of reduced paperwork, Shaw says online auctions have their own particular benefits. "Open market negotiations, the kind that take place with online auctions, can take weeks to conduct without using the internet. Online those negotiations can take place in an hour."

"It is also much more open," he adds. "The suppliers can see what they have to bid to be in with a chance of winning the business, so they don't price themselves out, and the buyer gets the advantage of a competitive situation." It's not all-out price competition, though. "Buyers can also weight a bid," says Shaw. "If a supplier has a particularly good delivery record, the buyer can adjust the bid so that supplier can bid higher than the others and still win the business. Alternatively, if another supplier has lower quality than the others, that bid can be weighted so the supplier has to bid less to be in with a chance."

Taylor Woodrow is one contractor that has begun to experiment with reverse auctions. Its head of e-procurement, Alan Parfitt, is keen to point out that online bidding is a fact of everyday life in other industries. "Auctions are the norm in the petrochemical industry and will become so in construction too.

"An auction is not suitable for all situations," he says. "When the subcontractor has a big design input or for a framework agreement, it's not appropriate. But for commodities it can establish a competitive pricing level. The problem with buildings is that they are all in different locations, using different materials, and it's not always easy to know what the right pricing level is, especially if you are building in an unfamiliar location."

Tender documents
A successful auction brings greater benefits than cuts in paperwork, says Parfitt. "It also gives me visibility of the procurement process. I recently watched an auction conducted in Scotland from my desk in London. All the tender documents were online for me to view, and it is all fully auditable, rather than scraps of paper or phone conversations. The whole process is contractually neater."

Though Parfitt warns that to run auctions successfully, you have to be neat yourself. "To run an auction you have to have your own house in order. You have to work out proper specifications in advance and be ready to tender the job from the moment the auction ends. Instead of another two weeks of negotiations after the tender has been awarded with the supplier trying to move the price up, work on the contract can start straight away. It reduces procurement cycle times and introduces an certain discipline to procurement."

He stresses that the process is still in the early stages, however. "We need to run more pilots to fine-tune the process, but in the right situation, auctions are good for everyone."

With that ringing endorsement, it seems that all the construction industry has to do to benefit from reverse auctions is try them.