Spotlight on Reverse Auctions

The concept of a "reverse auction" has been around for some time. However, until the Federal Acquisition Regulation (FAR) was changed in 1997 to allow their use and web-based software applications were developed to facilitate their utility, reverse auctions were unavailable to the federal buyer.

Within the framework of federal procurement a reverse auction is a pricing tool, the main goal of which is to drive purchase prices downward. It’s the type of auction in which the role of the buyer and seller are reversed. In a traditional auction, such as those conducted on eBay, buyers compete for the right to obtain a good. In a federal reverse auction, contractors compete for award of a contract. Today, reverse auctions offer the ability to conduct real-time price competitions within hours. The process allows the government to reveal to each offeror the prices offered by all other offerors (anonymously). Offerors then have the chance to continually revise their prices as each revision is revealed to all of the offerors. The process is repeated until all offerors stop "bidding" or until the auction closes. For more information on reverse auctions, visit Wikipedia®.

Notwithstanding the availability of the reverse auction pricing technique, its use within the federal sector is hardly widespread. The reasons for this are not well documented and may range from a lack of clear regulatory guidance to perceptions that the reverse auction process is too complex or onerous for contractors and the federal buyer.

In order to develop a clearer picture of the benefits and challenges associated with reverse auctions, OFPP has chartered an inter-agency work group to review the regulations, policies, and business considerations related to their use. Although the work group’s charter covers all types of commercially available online procurement services, their focus initially is on reverse auction applications. This was prompted chiefly by a mandate to OMB in the Conference Report for the National Defense Authorization Act for FY 2006 requiring such an analysis.

It is OMB’s position that reverse auctions offer potential savings to the taxpayer by increasing both government efficiencies and broader supplier participation. Other benefits related to spend analysis, a critical aspect to successful strategic sourcing, may also exist.

OFPP is eager to study the advantages and disadvantages of these services with the intent of developing helpful guidance as needed. The work group will, at a minimum: