Everyone hates reverse auctions except the buyers who set them up, and even some of them have doubts they end up with a good deal. Howls of protest from mechanical contractors have been among the loudest of all. With good reason, because the talents brought to bear in mechanical contracting defy commoditization. Nonetheless, momentum is unstoppable in many industries for this form of procurement, and it appears unlikely that the construction industry will completely rid itself of what amounts to price gouging in reverse.
That being the case, you might as well make the best of it. Such is the message of Stuart Maudlin, principal of Auctus Development in Houston, who has built a consulting business advising participants how to do exactly that. I heard him speak a few months ago, and feel compelled to share some of his ideas with readers who might benefit from them. Although Maudlin has no experience with construction industry reverse auctions, many of his concepts seem just as applicable to construction auctions as anywhere else.
First and foremost, he emphasizes the importance of preparation, and who could argue with that? Preparing for a reverse auction involves not only the usual details of estimating and bidding, but subtleties that the average contractor might miss.
For instance, it's important to determine who should participate in the auction, and what they will need in the way of computer and communications equipment. Maudlin advises CEOs and CFOs who are not part of the auction team to stay away once the auction is in progress. An auction demands full concentration from the designated participants. They can't afford to squander time and attention briefing the top brass on all that is transpiring. It's good to have some nonparticipants attend the auction as a learning experience, although they need to be unobtrusive once the auction gets underway.
He also recommends that an IT staffer be part of the auction team. Part of that person's job should be to set up more than one computer system logged onto the auction, just in case.
Study the auction protocols. People who have participated in reverse auctions typically report little bidding activity until the clock winds down toward the end of the designated time. Then the action heats up and time extensions come into play. Learn how to use the clock to your advantage.
Time extensions have been known to prolong sessions by several hours. So participants should be prepared to stay late and outlast the competition. This means clearing one's schedule of business and personal obligations. Contracts have been lost because a key participant had to leave to pick up kids from school. Be prepared to deliver sandwiches and soft drinks to the auction team if they end up working into dinnertime.
Winning By Losing
The most intriguing part of Maudlin's presentation was his contention that winning the auction may not always be the primary goal of a participant. Sometimes it may be in a company's best interest to finish second or third. That's because reverse auctions don't necessarily close the door on subsequent negotiations. If a winning bidder doesn't look like it can perform satisfactorily, the customer may look to the second or third bidder. So when bidding against weak competitors, it may be better to settle for second or third position rather than drive the price down to rock bottom.Reverse auction participants need to decide upon such strategy before the bidding begins. Assessing your competition is part of the pre-auction preparation, as is deciding on your goal. The goal in most cases will be to win the job while not going below your predetermined "live with" price, but under the scenario above the primary goal might be keeping the project price up in the hope of getting a subsequent call from the customer.
Conversely, the goal may be to win the job at any price. This could be a rational strategy if there are other values to be gained apart from winning the auction itself. It may be the opportunity to connect with a marquee customer that could be used to a marketing advantage, or a chance to profit from value engineering or equipment upgrades based on the plans and specs.
"I don't counsel unethical behavior," says Maudlin. "Reverse auctions have rules that need to be obeyed, but those rules have loopholes that can be exploited." He can be reached at 713/794-0482, smaudlin@auctusdev.com.
