Construction companies cover pricing case in 2008

First published by Admin on November 21, 2016 in the following categories: Latest and tagged with cover pricing

Our Competition Lawyers take a look back at this huge cover pricing case from 2008.

In 2008 the Office of Fair Trading named 112 construction companies who they believed had been engaging in cover pricing. Cover pricing is where artificially high bids for contracts are made with no intention to win the bid, therefore increasing the final bid price by distorting the look of the competition.

Construction companies involved in this case were found to have worked together illegally to increase the cost of a large number of contracts, including bids for the developments and extensions of schools, universities, and hospitals.

i.e. – public sector ventures, meaning taxpayers money was used to fund these projects!

The Investigation

An investigation took place between 2000 and 2006 by the Office of Fair Trading  where it discovered that companies had secretly been working together by agreeing prices which allowed for certain companies to win bids for tenders. The companies involved submitted really high bids which would make other lower bids look more competitive to tenders. It caused an increase in prices for tenders, but also created a misleading image about the competition.

The companies taking part in cover pricing included large businesses such as Balfour Beatty, Kier Group and Carillion as well as smaller, family run business. The smaller family run businesses could have been the companies that were most affected by taking part in cover pricing due to being smaller and potentially black listed as a result of what happened.

By taking part in these illegal activities, the construction companies have been found in breach of the Competition Act 1998, and the Functioning of the European Union.

What was the outcome?

Once the five year investigation had been completed, the Office of Fair Trading (who is now basically the Competition and Markets Authority – CMA) fined the companies where there was evidence supporting them being involved in cover pricing. Under the Competition Act 1998, and the Functioning of the European Union legislation, the companies could have been fined up to 10% of their annual global profit.

However, most firms received a fine of 1-2% of their annual global turn over due to contractors admitting their involvement, which reduced the amount they were fined. On average, parties have been fined £1.25 million, and there has been a recommendation that companies are not to be blacklisted due to taking part in the cover pricing, which could have sent small contractors out of business.

How did they breach competition law?

The act of being involved in the cover pricing is what breached competition law. Companies involved secretly agreed in advance how much they will bid for a tender, with one submitting a really high amount, while the others submit lower bids, making the lower bids look more reasonable even when they are inflated. By doing this, the company submitting the lower bid can look more competitive and more likely to win the tender. This can give clients a warped idea about the competition and can result in exaggeratedly high prices for tenders. It was also found that companies that won the tender may have also paid other companies who had put in the really high bids as a way of ‘thanking’ them for ‘losing’ the bid.

By doing this they would have breached competition law as they made agreements which directly fixed purchases and selling prices. With the construction companies working together to set high prices to make the competition look artificially competitive, it arguably raised the price for tenders which it should not have done, and ultimately affected the consumer.

As consumers in this case included the public sector, we, the taxpayer, have likely been affected by this as well.

Under the Competition Act and the treaty of the functioning of the European Union companies can be fined up to 10% of their annual worldwide turn over. Compensation payments and cover pricing is outlawed under the Competition Act 1997.