The auction of bulk goods dates to the Babylonian Empire (about 500 B.C.), continuing through the rise and fall of the Roman Empire. Auctions diminished considerably during the Middle Ages but began to reappear in the 17th century and have been present ever since.
Traditional auctions start with a minimum bid and continue as long as the bid escalates. Bidding continues until no one is willing to bid any higher, and the highest bidder is awarded the item.
However, as civilizations have become more advanced, so have auctions. Traditional auctions allow buyers to congregate to establish the highest price a seller could receive for his goods. A variation of this process, called a reverse auction, now permits sellers of materials and services to bid the lowest price buyers will pay for materials and services.
Online reverse auctions
Current auctions not only involve a wider variety of goods and services but also offer several delivery mechanisms. The Internet has opened up a new marketplace to conduct auctions. Auctions that previously were reserved almost exclusively for selling fine antiques and artwork now have become electronic vehicles used to further the sale of goods and services between individuals, as well as companies.
Procurement specialists representing the "big three" automakers—Daimler-Chrysler, Ford and General Motors—realized several years ago the power and economies of scale that existed by using the availability of buyers and sellers to procure commodity parts and materials. These corporations went so far as to set up dedicated Internet sites to be used exclusively for securing materials and parts. As the Internet developed, these same companies realized the electronic marketplace also could provide a powerful tool to procure commodity-type services. This led to a proliferation of online reverse auctions involving construction materials and services.
Online reverse auctions usually take place on a portal set up to specifically present the products and services identified in the bid documents. Bidding rules usually are posted online, including the right of the buyer to terminate or extend the bidding indefinitely. Other rules may include definitive minimum bid price reductions usually listed in percentage points. Computer screen formats vary, but the information presented typically includes a line-item description and quantity of items up for bid. It also may include a preview period of items up for bid, allowing the participant to familiarize himself with the format and pertinent information.
When an electronic auction starts, it usually is limited to a 20- or 30-minute time period. Indicators listing "best" or "not best" bid rankings are posted on the screen, usually next to the "bidding time left" indicator. "Best" low bids can trigger an automatic "autoextend" feature, allowing participants an additional time period and another opportunity to consider a lower price and bid again.
Purchasing departments of large corporations who traditionally purchased roofing contracts quickly identified roofing projects as prime candidates for online reverse auctions. But when you analyze this electronic practice with regard to roofing, flaws with the reasoning quickly become apparent.
Many roofing materials are commodity items, but it is incorrect to categorize the actual installation of roofing products as a commodity. The process of roof system installation can be considered unique or customized because no two roofs are exactly alike or installed under identical conditions. In addition, the expertise one particular contractor may have with the installation idiosyncrasies of a particular type of roof system may not be true for another contractor.
A major capital expenditure, such as a new roof, cannot be auctioned electronically in about one hour's time based simply on a review of drawings and specifications. It is thorough evaluation and negotiation of the design, material selection, and installation based on experience between a vested buyer and seller that helps to ensure a successful project. This process is not a commodity.
Another significant point is that online roof auctions cannot resolve errors, omissions or problems that exist within an Internet bid document. Online reverse auctions have been conducted more than once for the same roofing project because of errors in the bid documents that couldn't be communicated during the electronic transaction. This problem resolution is best accomplished through person-to-person communication without the added pressure of running out of time online.
Auctions and roofing
Reacting to a growing trend of online reverse auctions, NRCA issued a position paper in June 2002 that cited several reasons against this practice, including:
NRCA and an industry alliance comprised of various construction trade organizations formed the Reverse Auction Construction Coalition (RACC) in February 2005 in an attempt to fight the use of online reverse auctions and treatment of construction as a commodity. This coalition actively is lobbying Congress for passage of legislation to prohibit all federal government agencies from using online reverse auctions to procure federal construction or attempting to treat construction as a commodity.
Other views
Although NRCA does not support online reverse auctions, there are participants who say the pros of online reverse auctions include the bids starting on time; the possibility of significant savings in procurement costs; and the offer of competitive price and value.
However, I solicited comments from several commercial building owner representatives regarding the use of online reverse auctions, and their experiences were not positive.
David Hulley, roofing manager of Benderson Development Co. Inc., University Park, Fla., one of the largest privately owned development companies in North America, owns and manages more than 250 retail properties in 35 states, encompassing more than 24 million square feet (2 million m2) of leasable space.
Hulley says when his company tried online reverse auctions, a "disconnect occurred with the roofing contractor." Information was not communicated properly, leading to contractor confusion and disenchantment with this process and resulting in problems with the proj-ect. The building owner and contractor lose the opportunity to develop a true business relationship through old-fashioned discussion and negotiations. Hulley further comments that Benderson Development stopped using online reverse roof auctions several years ago.
Elaine Deak, P.E., is a project engineer in charge of roofing for Smurfit-Stone Container Corp., Chicago. Smurfit-Stone Container is an integrated manufacturer of paperboard and paper-based packaging. The company operates about 250 facilities located primarily in the U.S., Canada and Mexico and employs 35,000 people.
Deak says despite the success the procurement staff at Smurfit-Stone Container has enjoyed using online reverse auctions to purchase various materials and services, the crossover to successfully purchasing roofing contracts never was fully realized. She cites several reasons, including the limited level of computer literacy of some participating roofing contractors. She also says some data presented online were misinterpreted, resulting in the bidding contractors inputting incorrect information.
Bill Lisowski, a former maintenance manager for a large national retailer and now a retail operations management consultant with John G. Mengelson Inc., Chicago, says online reverse auctions often do not focus on quality.
"Too many times, reverse auctions are limited to price rather than a careful blend of price and quality of service," Lisowski says. "This approach has caused several problems with some vendors refusing to execute their awarded contracts because they couldn't afford the bid.
"Reverse auctions may have a role in the marketplace if they are designed with full collaboration between the procurement department and the operations business team," he continues. "The bidding process must incorporate quality and price to allow for the building and nurturing of a business partnership. Until reverse auctions consistently deliver on this, they may produce less-than-desired results."
Getting attention
A Progress Report published in January 2005 at Louisiana State University, Online Reverse Bid Auctions for Construction Contractors and Subcontractors, Phase I: Review and Collection of Existing Materials and Data, states that with regard to reverse roof auctions, "There is no data supporting the claims of cost savings for construction services."
Studies such as this and the multitude of problems that roofing professionals have experienced using online reverse auctions—including attempting to decipher unclear bid documents, coping with unrealistic online time constraints, the inability to communicate "live" with someone and providing numbers to keep a relationship with a customer—should be drawing the close attention of procurement groups.
The Associated General Contractors of America (AGC) also issued a white paper on Sept. 16, 2003, about reverse auctions for procurement of construction. To support its position, AGC discusses why online reverse auctions do not guarantee the lowest price for building owners; may encourage imprudent bidding practices and breach federal procurement and state laws; and do not allow owners to evaluate nonprice factors, such as quality and performance. AGC also argues sealed bidding ensures responsive, responsible bidders.
What lies ahead
NRCA will continue to fight against the use of online reverse auctions within the low- and steep-slope roofing arenas, as well as through the efforts of the RACC in Washington, D.C.
Chuck Scislo is an NRCA senior director of technical services.
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