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Caught in the tender trap

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The Office of Fair Trading (OFT) has fined 103 construction companies, including big names Balfour Beatty and Galliford Try, over cartel activity.

But the number of guilty parties runs into thousands. A lack of resources means that the OFT could not go after all those builders it suspects of engaging in anti-competitive practices.

Behind closed doors, it found construction companies were agreeing to enter inflated bids for public sector contracts to help guarantee contracts for other companies.

This is known as ‘cover pricing’. In 11 of 199 contracts investigated, this malpractice ensured that only one party submitted a genuine bid, while in most of the others it removed sufficient competitive tension to ensure the winner was not providing the best possible value for money.

There were even six examples of winning companies providing compensation of up to £60,000 to those submitting the cover prices.

The fines, totalling £129.5m, were issued last month following an 18-month investigation that showed the extent to which local and central government were being ripped off by the construction industry.

Councils are now considering their options in the wake of the scandal, from incorporating more rigorous procurement policies to taking legal action.

Considering suing

Several authorities, including Leeds City Council and the YORbuild consortium of councils in Humberside and Yorkshire, are known to be considering suing firms.

However, Paul Henty, corporate finance solicitor at lawyer Speechly Bircham, says that although councils might have been wronged under the terms of the Competition Act 1998, it might be difficult to successfully sue.

“You have got to be able to establish the exact loss,” says Mr Henty. “This is very difficult to do in the circumstances of cover pricing because it has to be proved that the costs were higher than under competitive market conditions.”

For example, if two out of five bids involved cover pricing, it could be that there was sufficient competition between the remaining three for the submission to be at
around the market level.

“In the views of the OFT and [procurement agency] the Office of Government Commerce (OGC), it is not really the job of the local authorities to punish the construction companies any further,” adds Mr Henty.

Blacklist

Deborah Jones, deputy director of cartel investigations at the OFT, seems to confirm this point. She says that as there was initial evidence against more than 1,000 firms, it would be unfair to punish those that have been fined.

Given that most companies co-operated with the investigation, she thinks it would be unfair even to blacklist those named.

“This is not a list of those guys who are still at it [cover pricing], so excluding them might mean that councils end up with a distorted situation,” says Ms Jones, meaning that others might be cover pricing when these firms are no longer doing so. “The information we gathered showed that this was a much wider problem.”

LGC and Construction News are conducting a joint survey of decision makers in local authorities following the OFT decision. Take part by clicking on the link: LGC/Construction News survey 

In the OFT guidance note that accompanied last month’s announcement, the body added that the fined parties “are more likely to be compliant” to competition rules and essentially advised that the companies had, colloquially, served their time.

Peter Cunningham, chief executive at the Construction Clients’ Group, admits that there is already “anecdotal evidence that companies are being rejected from the supply list” of councils’ preferred contractors.

Mr Cunnngham believes councils that only occasionally procure construction work are the most likely to remove fined firms from their tender processes, as they do not have the resources to identify signs of cover pricing.

Avoid bid rigging

Since the investigation started in April 2008, the OFT and OGC have produced guidance on how to avoid bid rigging. For example, bids submitted to councils in person can avoid last minute negotiations between the companies.

David Sharp, head of construction services at Richmond upon Thames LBC, says getting rid of any hint of collusion is nigh-on impossible. “Construction is a veryincestuous industry - contractors do speak to each other,” he says.

“Some construction companies might put in a cover price, as they are worried that if they don’t price this job they might not get on the next list.”

However, Mr Sharp says the investigation has made council procurement officers much more aware of the issue, and they have been more rigorous in their checks as a result.

For example, in the spring Richmond LBC put out a tender for a £500,000 refurbishment contract and Mr Sharp was concerned that the returned bids were so similar. Although no wrongdoing was found, the current environment of suspicion meant that he felt that there was no choice but to change the contractors list and re-tender the job.

And there’s the rub: with so many companies involved in this malpractice, even the innocent are likely to find councils dubious of every tender they submit.

Mark Leftly, business correspondent, The Independent on Sunday

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