Insight

Is bid-rigging still blighting construction?

25 March 2019 | By Neil Gerrard

The CMA will be reinforcing its work to stamp out bid-rigging in construction

The latest fines for bid collusion in the fit-out market have prompted a new CMA campaign, targeting construction. By Neil Gerrard

The construction industry’s bidding activities will be put under the spotlight once again after five fit-out firms were hit with fines totalling £7m last month for collusion offences.

The Competition and Markets Authority (CMA) said the companies – Fourfront, Loop, Coriolis, ThirdWay and Oakley – had admitted cover pricing offences between 2006 and 2017. Another fit-out firm, JLL, had blown the whistle and escaped a fine.

And CM understands that the CMA is now preparing to scrutinise the behaviour of the wider construction industry. The authority also plans to educate and raise awareness about competition law among contractors.

The fit-out fines provide an uncomfortable reminder of the huge penalties handed out 10 years ago by the CMA’s predecessor, the Office of Fair Trading. In 2009, it fined 103 construction firms in England a total of £129.2m – including big names like Kier, Balfour Beatty and Carillion – for colluding in bid-rigging activities on 199 tenders over the course of a six-year period. Most of those offences were in the form of cover pricing.

Bid-rigging and cover-pricing explained

Bid-rigging is where bidders create the illusion of competition while secretly agreeing which one of them will win a tender.

This drives up prices and leads to clients paying over the odds. For example, three bidders collude and between themselves agree that one will bid £1m, another £1.2m and a third £1.4m.

The job goes to the bidder with what looks to be the lowest bid, at £1m, but the competition was an illusion. The price could have been lower if they had been genuinely competing to win the business.

Cover pricing is where one or more bidders in a tender process obtains an artificially high price from a competitor. Such cover bids are priced so as not to win the contract but are submitted as genuine bids, which gives a misleading impression to clients as to the real extent of competition. This distorts the tender process and makes it less likely that other potentially cheaper firms are invited to tender.

Source: CMA

One senior estimator in a major contractor told CM the scandal changed the industry. “Previously, if we didn’t want the job but wanted to stay on a tender list, we simply submitted bids we knew were too high after checking what the competition was bidding,” he said. “But after the 2009 scandal, we had to price all tenders properly.”

But it seems bid-rigging is back – if it ever went away completely. Nearly half of Chartered Institute of Building (CIOB) members in a 2013 survey said they thought corrupt or fraudulent business practices were a common feature of life in construction.

And Tom Green, associate at construction law specialist Kennedys, suspects collusion is still prevalent.

“Given the covert nature of the practice it is probably impossible to know for sure how widespread the practice of cover pricing is in the construction industry,” Green said. “Cartel activity is notoriously difficult to detect, and customers are unlikely to know that they have been victim to anti-competitive practice.”

He believes that bid-rigging comes either from a lack of understanding or, more cynically, firms taking a calculated risk that the benefits are greater than the risk of being caught. “Given that the practice can result in fines of up to 10% of global turnover, disqualification as a director and imprisonment, that is a considerable gamble,” Green told CM.

The construction industry is, in many respects, the perfect breeding ground for collusion. “Factors such as a lack of product differentiation and complexity, geographical and regulatory limitations and transparent bid procedures can, when taken together, encourage anti-competitive behaviour between firms, whether intentional or
not,” Green said.

That contractors and subcontractors can sometimes be competing with each other and sometimes working together also makes collusion harder to detect.

The CMA has incentivised cartel members to tip it off about illegal activity by giving them immunity from penalties or prosecution, in a bid to increase the detection of anti-competitive behaviour. This encouraged JLL to come forward.

Meanwhile, its research has identified a need for better education and more awareness of competition law. According to the Competition Law Research 2018 report, conducted on the CMA’s behalf by ICM, only 19% of UK construction firms consider themselves familiar with the rules (see box below). And the CMA is continuing its campaign to encourage people who may have been involved in cartel activity to “be safe not sorry” and report it.

But Green warned: “If we are to see any real industry-wide improvement, individual firms are going to have to have more senior-level discussions about cover pricing and other competition law concerns and make provision for internal training sessions on the subject for its employees.”

David Barnes, public affairs manager at the CIOB, said: “Bid-rigging is a corrupt and unethical practice and it’s worrying to hear that it’s still occurring in the industry. Past research by the CIOB has indicated corruption is widespread across the infrastructure, construction and engineering sectors.

“Despite the Bribery Act and the CIOB’s repeated warnings on ethics and professionalism, it still seems to be a major problem. We advise all members to be wary and report anything that could be considered corruption.”

CM also contacted Build UK, which represents over 40% of the industry, to ask whether it considered bid-rigging was still a concern in construction, but it declined to comment.

Competition law awareness

On average, competition law awareness among UK businesses is 23%. In the construction sector in 2018, it was just 19%.

A majority of businesses in all sectors are aware of key anti-competitive behaviours, for example, that price fixing with other companies can lead to imprisonment (60%) and that it can be illegal to attend a meeting where competitors agree prices (59%).

Only 32% of construction firms are aware of there being financial sanctions for breaking competition law.

Just 18% of businesses in all sectors are aware that they can gain immunity from admitting to participation in a cartel.

79% of construction businesses reported having contact with other businesses in their own sector in 2018, down from 85% in 2014.

Among different sectors, construction businesses are most likely to view their activities as “at least medium risk” of breaching competition law (47%).

Source: Competition Law Research 2018 report by ICM on behalf of the CMA

Comments

The term "cover pricing" is a misnomer when applied to bidders getting together to fix a bid price. This is fraud and as such deserves all the punishment the law provides.

Cover pricing is when I, as a contractor, am unable/unwilling to submit a bid on a given project, and this can be for many legitimate reasons. Its to big for me to finance; to small for me to be competitive; my estimating department does not have the manpower; I am to busy and cannot possibly do the work at the time requested; this is not the type of work I am geared up to undertake; the schedule is to tight; i cannot complete with contractor X; etc etc etc. I am sure that others can think of many equally compelling reasons to want to decline.

And theres the rub. We want to decline for very genuine reasons, most of which would affect our ability to successfully complete the project and result in a lose/lose situation, but on the other hand we cannot afford to upset the client, especially if he has been a good client in the past and there is the prospect of future work

So what to do? Depending upon our relationship with this client, we should either write or have a senior person, preferably one with a personal relationship with someone from the client explain exactly why we wish to decline, showing our estimating load, our work load, our financial situation etc or whatever is pertinent and pointing out that it is to avoid a potential lose/lose situation. This should be done immediately upon receipt of the enquiry, so the client has the opportunity to invite a replacement contractor.

You may argue I am being naive to believe contractors would do this, but I believe any responsible client would appreciate this and not penalize the contractor for his honesty and openness, and would not jeopardize the prospect of future work. At least the contractor will not be breaking the law and can sleep easy at night!

JOHN PORTER, 26 March 2019

Bid-rigging is wrong as it is straightforward collusion. Cover pricing is not in the same category and often helps hard pressed contractors. It can also help employers with sufficient prices. Pity the baby has to be thrown out with the bathwater. These days everything has to be squeaky clean and so PC. A sign of the times I guess.

N J Everett, 26 March 2019

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