Clampdown on the framework fiddlers

9 February 2010

New regulations have been introduced to give contractors more remedies to deal with uncompetitive practices. Peter Gracia reports 

After the Office of Fair Trading revelations last year that price fixing was a “widespread and endemic practice in the construction industry” many contractors have been named and shamed in the best of British tabloid traditions.

But at the same time as it expresses its shock and horror, the public sector has been facing up to its own failings in procurement. Two recent cases in Northern Ireland (Henry Brothers v Dept. of Education and McLaughlin & Harvey v Department of Finance & Personnel),
plus Letting International’s claim against the London Borough of Newham, are examples where the public sector has not quite managed to run an open and transparent procurement exercise.

Following the government’s advocacy of framework agreements, many public sector clients rushed to set them up, safe in the knowledge that contractors had limited “remedies” for breaches of a framework under the Public Contract Regulations 2006. If action was taken before the award of a contract, the remedies were damages and/or an injunction preventing the award. If made after, but within a tight timescale, only damages were available. But the use of these remedies was restricted when contractors were only told about the award on the day it was made or a few days before.

Call-off contracts under frameworks are awarded in one of two ways: by using the terms of the framework agreement itself; or, in certain circumstances, by re-opening competition between all those framework members that can deliver the service. The agreement should therefore contain the criteria that will be used to award call-off contracts and which will also to be applied if there is to be a mini-competition.

But with the market downturn, employers are back in the driving seat and the temptation is there to misuse framework agreements. There is a fine line between pushing something to fit under a framework agreement and the need to use a fresh public procurement exercise, and there should be no renegotiation of the terms of the framework once established. While many contractors naturally worry about taking public sector employers to task for fear of being rejected from tenders in future, they should have confidence that one of the main aims of the Public Contract Regulations is to prevent any such bias.

From 20 December 2009 the long-awaited New Remedies Directive came into force in the UK as a series of amendments to the regulations. These amendments include clarification of the information to be provided to contractors at pre-qualification questionnaire (PQQ) and award stage and provide further or enhanced “remedies” against employers that breach the regulations. Where the actual construction contract is not yet awarded, the courts can set it aside, or if it has been awarded, it can be designated as “ineffective” and its duration shortened.

A contract will only be deemed ineffective in limited circumstances, for example where there should have been a public procurement exercise but there was not. This could occur where a project is awarded on the terms of an inapplicable agreement, such as a framework to build social housing used to build offices. The courts may also impose fines, referred to as “civil financial penalties” and the size of which are at the courts’ discretion. A contractor may claim for “loss or damages” caused by the breach.

There are many examples of rule bending, but in particular contractors should look out for clients running mini-competitions under frameworks for projects outside its scope, introducing new forms of contract, or alternative methods of pricing. Check that the mini-competition is being run using the same criteria as stated in the agreement. A client enquiring about your technical or financial standing again in a mini-competition is also a no-no, as is seeking further references. All that should have been sorted in the original PQQ.

Also look out for new marking sub-criteria, or breaking the marks down into smaller categories under headings you were unaware of at tender. Be suspicious of “dummy projects” in mini-competitions where the client uses an imaginary or past project to test if the prices you provided to get on the framework deliver the lowest price. A dummy project can be built up to ensure a certain contractor does not appear competitive by using elements for which its pricing is known to be higher.

If you suspect foul play, or just plain incompetence, make your complaint early and preferably within the 10 or 15-day mandatory shutdown period between a decision to award a contract and it actually being awarded. You must be explicitly told when this time period will expire. Where appropriate, your lawyer can issue court proceedings which will automatically halt the award process. A general time limit for starting proceedings is three months from when you were informed of the decision.

The Remedies Directive is a complex amendment to the current regulations with the added twist of only applying to contracts let or frameworks created after 20 December 2009. The UK government seems to have given the public sector a big breathing space because a four-year framework agreement, concluded before this date would not be covered. Unfortunately, it just reflects the fact that the public sector is still a long way from understanding the rules of the game. cm

Peter Gracia runs Gracia Consult

Back to basics: Competition law

In September 2009 the OFT fined 103 construction companies £129.5m for colluding on building contracts. The practice that concerned the OFT was cover pricing – one or more bidders submitting an artificially inflated price.

While the OFT’s investigation might be over, there is always the possibility that a competitor or former employee – disgruntled or not – might make a whistleblower disclosure that could lead to an investigation. It would be wrong to assume that the cover pricing is yesterday’s issue.

Cover pricing in itself is not an infringement of competition law. The breach is colluding with another contractor to inflate the price. That said, care should be taken when engaging in unilateral cover pricing. Construction managers must be sure that there have been no discussions with others bidding for the work, even if those discussions are entirely innocent.

Being investigated for a competition breach is hugely damaging, time consuming and costly, even if you are subsequently cleared. Procurement practices have progressed since 2006 and genuine cover pricing is a much less frequent issue, but in some respects this is the danger – when it happens it is far more likely to be noted.

Managers should also consider whether to carry out audits of historic practices. Wrongdoings identified and disclosed to the OFT will result in lenient treatment. But many managers will be reluctant to look into practices that may never be detected. There is no legal obligation to audit historic practices, and the consequences can be serious, so it is advisable to discuss it at board level before a decision is made.

By partner Steven Francis and trainee solicitor Lisa Jones from Reynolds Porter Chamberlain. RPC is running a masterclass on regulatory and criminal investigations in construction. Email [email protected]

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