What is a reverse auction, and how does it work in procurement?

What is a reverse auction?

A reverse auction is a bidding event in which suppliers compete to sell to one buyer by lowering their prices in real time. It runs online, for a set time, after the buyer has checked that every bidder can deliver. When the auction closes, the buyer awards the contract on the final bids.

It is called reverse because it turns an ordinary auction around. At an art sale, many buyers bid for one seller’s painting and the price rises. In a reverse auction, many sellers bid for one buyer’s order and the price falls. Because it almost always runs in software, buyers also call it an e-auction, an electronic reverse auction or a reverse e-auction.

US federal rules give a short definition. The Federal Acquisition Regulation (FAR 2.101) describes a reverse auction as a process for obtaining prices, usually with an electronic tool, in which offerors see competing prices without learning who the competitors are, and can submit lower offers until the auction closes. The EU public procurement directive describes electronic auctions in a similar way: a repeated electronic process in which tenderers present new, lower prices, or better values for some features of their tenders.

A simple case: a hospital group buys 40,000 boxes of nitrile gloves a year. The size, the standard and the delivery terms are fixed in the specification. Five suppliers pass the quality check. Instead of comparing five sealed quotes once, the buyer invites them to a one-hour online auction. Each supplier can lower its price as often as it wants, and the hospital awards the contract to the lowest compliant bid when the auction ends.

A reverse auction is one way to run competition in strategic sourcing. It sits next to the request for quotation, where each supplier sends one sealed quote, explained in what is an RFQ. Many buyers run an RFQ first, to qualify suppliers and collect starting prices, then an auction among those who qualified.

How does a reverse auction work, step by step?

An e-auction is short, but most of the work happens before it starts. The buyer must fix everything except the price before suppliers bid, because nothing else can be negotiated once the bidding is live.

1. Write a precise specification. Describe the item, quantities, quality standard, delivery terms and contract length so that every bid means the same thing. If two suppliers could offer different products at the same price, the auction compares prices of different things.
2. Qualify the suppliers. Check that each bidder can deliver: certificates, capacity, financial standing, samples. Only suppliers who pass are invited. Public buyers evaluate the tenders in full before the auction.
3. Set the rules. Choose the format, the starting or ceiling price, the minimum step between two bids (the decrement), the duration, whether the end time extends when a late bid arrives, and what each supplier sees during the event.
4. Tell the suppliers and train them. Send the rules, the date and the lots in writing. A short practice event on the same software helps suppliers who have never bid online.
5. Run the auction. Suppliers log in and submit bids. The software shows each one its rank, the best price or both, depending on the rules. Supplier names stay hidden from the other bidders.
6. Close and check. The event closes at the set time, or after a period with no new bids, or after the planned number of rounds. The buyer checks the winning bid, for example that the price is not abnormally low.
7. Award and contract. The buyer awards on the stated basis, signs the contract and tells the other suppliers the result.

The worked example below shows the last ten minutes of a fictional English reverse auction for one lot of office paper, with a ceiling price of €100,000, a minimum decrement of €500 and a two-minute extension for any bid placed in the last two minutes.

What types of reverse auction are there?

Reverse auctions differ by how the price moves and by what each supplier can see. Sourcing software lets the buyer choose these settings for each event. SAP’s training for its Ariba sourcing product, for example, calls the standard reverse auction, also named the English auction, the format most companies use, and describes the Dutch and Japanese formats as options.

In a Japanese reverse auction, as SAP describes it, a supplier who does not accept a price level becomes inactive for that item. The item closes when the number of active suppliers falls to the minimum the buyer set, or when the price reaches the buyer’s target. In a multi-attribute auction, every supplier must know the ranking formula before bidding; the EU rules are set out below.

What is a reverse Dutch auction?

A reverse Dutch auction starts at a low price and raises it step by step until the first supplier accepts. That supplier wins at that price, and the event ends. It is the mirror of a Dutch flower auction, where the price falls until the first buyer accepts.

SAP’s training advises setting the starting price just below the lowest price a supplier would likely accept, so that the price rises only a little before someone takes it. The format suits events where cost is the main concern and there are few prequalified suppliers. For example, a buyer with three approved carriers for a weekly transport lane can open at a price slightly under the last contract and let it rise every few minutes. The first carrier to accept takes the lane, and none of them sees the others bid.

When should a buyer use a reverse auction, and when not?

Use a reverse auction when three things are true: the need can be described precisely, several qualified suppliers can meet it, and price or a few measurable values decide the award. US federal guidance (FAR 17.802) says the same in its own words: auctions may be appropriate when market research shows a competitive market, several offerors can meet the requirement, and the requirement encourages repeated bidding.

Two warning signs show that an auction is the wrong tool. The first is a specification that suppliers keep asking questions about: if the need is still unclear, the bids will not be comparable. The second is a buyer who does not intend to award on the result, for example because the incumbent will be kept anyway. Running an auction only to put pressure on an existing supplier wastes the other bidders’ time and damages the buyer’s name in the market.

Category managers decide where auctions fit as part of the category strategy; see what is category management for how that strategy is built.

What rules apply to reverse auctions in public procurement?

Public buyers may use reverse auctions in the EU and in US federal procurement, under written conditions. The common thread: suppliers are checked first, the rules are announced in advance, bidders’ names stay hidden during the auction, and design work that cannot be scored by a formula is excluded.

European Union. Article 35 of Directive 2014/24/EU allows electronic auctions in open and restricted procedures and in the competitive procedure with negotiation, when the procurement documents, in particular the technical specifications, can be set out precisely. They are also allowed when competition is reopened among the suppliers of a framework agreement and for contracts under a dynamic purchasing system. The auction comes after a first full evaluation of the tenders. Contracts for intellectual work, such as the design of works, are excluded.

• The contracting authority must announce the auction in the contract notice, and the procurement documents must give the details listed in Annex VI: the values that will be bid, any limits, the information suppliers will see, the bidding rules such as the minimum step, and the technical set-up.
• All admissible tenderers are invited at the same time, and the auction may start no earlier than two working days after the invitations are sent.
• The invitation gives the result of the first evaluation and the formula that will re-rank bids automatically.
• During the auction, every tenderer must be able to see its rank at any moment; the authority may share other information if it said so in advance, but never the tenderers’ identities.
• The auction closes at a set date and time, after a set period with no new bids, or after the planned number of phases. The contract is then awarded on the results.

United States, federal. FAR subpart 17.8 covers reverse auctions and the companies that run them for agencies. Contracting officers still follow the normal procedures, such as simplified acquisition or negotiated contracts. Offerors’ identities stay confidential until award, offerors may keep lowering their prices until the close and may withdraw before it. If only one offeror takes part, the contracting officer may cancel the auction or accept the offer when the price is fair and reasonable. Reverse auctions may not be used for design-build construction, certain architect-engineer services, sealed bidding or certain personal protective equipment. When an outside service provider runs the auction, its fee, which may be added to the winning price, must be evaluated and checked against the winning offer.

These rules, in force since August 2024, answer two reports by the Government Accountability Office, from December 2013 (GAO-14-108) and July 2018 (GAO-18-446). The first found that the Army and the Departments of Homeland Security, the Interior and Veterans Affairs awarded about $828 million through reverse auctions in 2012, and that over one third of auctions in fiscal year 2012 had no interactive bidding, meaning suppliers did not bid against each other. The FAR is now being rewritten under the 2025 FAR overhaul: agencies apply a reorganised Part 17 through class deviations, and some of the reverse auction guidance is expected to move to a guidance document called the FAR Companion. Check the version your agency applies.

Other countries have their own rules, and many public e-procurement portals include an auction feature. A public buyer outside the EU and the US should check its national procurement law before announcing one.

How do reverse auctions affect supplier relationships?

Reverse auctions put suppliers under open price pressure, and suppliers remember how they were treated. Research by Sandy Jap at Emory University, reported in MIT Sloan Management Review in 2002, studied six auctions worth about $100 million run by one automotive parts maker. Sealed-bid and open-bid auctions produced similar potential savings, but suppliers in open-bid auctions looked at the buyer with more suspicion afterwards.

In practice the risks look like this. A long-standing supplier that helped solve quality problems is suddenly asked to bid against newcomers on price alone, and it reduces the extra service it used to give. A supplier that wins at a very low price recovers its margin later through change requests, slower deliveries or cheaper materials. Suppliers that lose several auctions stop answering the buyer’s invitations, and the market gets thinner.

• Use auctions only where they fit, and explain to key suppliers why some categories are auctioned and others are not.
• Publish the rules before the event and never change them during it.
• Award on the announced basis. If the lowest bid will not automatically win, say so in advance.
• Check very low bids before award, and keep the quality and delivery terms in the contract.
• Give each supplier its result and rank after the event, so it knows how far it was from winning.
• Manage strategic suppliers through supplier relationship management, not through auctions.

Do you need reverse auction software?

Yes, an online auction needs a platform, but rarely a separate one: most e-sourcing tools and source-to-pay suites include reverse auctions alongside requests for quotation and proposals, and some public buyers use a shared government platform. Check that the tool supports the formats and rules you plan to use: rank or price visibility, minimum decrements, extensions, lots, multi-attribute formulas and a full audit trail of every bid.

How to compare these tools, and the test events to run before choosing one, are covered in procurement sourcing software. A guide to e-sourcing, the wider practice of running sourcing events online, is in preparation.