OMB to issue new rules on reverse auctions

The Office of Federal Procurement Policy at the Office of Management and Budget plans to issue new rules next spring to regulate a new method some agencies are using to buy goods and services: reverse auctioning.

A departure from the age-old method of submitting sealed bids for government orders or contracts, reverse auctions allow companies to bid against each other in real time.

"This started being popular maybe two or three years ago as the Internet became popular," said Kenneth Oscar, acting deputy administrator of OFPP. "The technology wasn't really there before to make this feasible."

Oscar said the practice helps foster competition by encouraging more businesses to step into the ring.

"If you are a company making fax machines or something, and you want to bid on a government contract, well, how much do you bid?," Oscar explained. "So, you pick a point and it's a sealed bid and you write that down. Maybe you win and maybe you don't."

With reverse auctions, bidders don't know who they are competing against, but they can see bids as they are made.

"You bid, say $50, and all of a sudden somebody else bids $45 and you say 'Maybe I can still make a little money at $42,' " Oscar said. "It encourages people to go down a little on price."

Agencies that have experimented with the tool have met with considerable savings. When the Naval Inventory Control Point (NAVICP) conducted the federal government's first reverse auction over the Internet in May, it saved nearly $1 million on a purchase of ejection seats. NAVICP's next reverse auction, on shipboard berthing, saved $2.8 million.

Oscar said the practice has netted savings from 5 percent to 40 percent more than what agencies had previously paid. Reverse auctioning works best, he said, when it's clear what product or service is needed.

"We do buy a lot of routine things--fax machines, computers, chairs and tables--and on those items it could do very well," Oscar said.

Currently, the Federal Acquisition Regulation has no policy regarding auctions. Oscar said comments from government, industry and academia are needed to craft regulations for the practice.