Bid-rigging and cover-pricing in the construction industry – an infamous case

First published by Admin on December 22, 2017 in the following categories: Investigations and tagged with cover pricing

The Office of Fair Trading (the predecessor to the CMA) found that between 2000 and 2006 the construction industry was rife with anti-competitive behaviour with over 100 companies engaging in bid-rigging and cover-pricing in nearly 200 cases.

The original fine was £129.5 million, but on appeal, the companies were eventually fined £63.6 million.

The OFT that the construction companies involved had engaged in cover-pricing and compensation payments. The compensation payments were found to be between £2,500 and £60,000, as a way to say “thank you” for losing the tender. This was one of the biggest cases of cover-pricing that arguably set the bar in terms of putting a stop to such practices being engaged in the future.

Schools, universities and hospitals were some of the building projects affected by the companies engaging in anti-competitive agreements. The Office of Fair Trading found that this took place across all of England after starting their investigation in the East Midlands in 2004.

Some of the companies that had been involved in the anti-competitive agreements were Interserve and Kier Group, who received the two largest fines.

The outcome of the investigations

The outcome of the Office of Fair Trading’s investigation into the companies found they’d breached competition law. The companies were fined an average of £1.26 million, with Kier receiving the largest fine of £17.9 million and Interserve receiving a fine of £11.6 million.

Due to the Office of Fair Trading’s leniency policy, 86 of the companies received a reduction in their fines because they admitted to being a part of the anti-competitive agreements before the Office of Fair Trading came to their final decision. The Office of Fair Trading’s leniency policy can allow companies who come forward and admit to taking part in anti-competitive behaviour to avoid fines or receive discounts on their fines.

Nine companies that were considered to be have agreed to anti-competitive behaviour were not investigated due to a lack of sufficient evidence against them.

How did they breach competition law?

The companies breached competition law by engaging in two types of anti-competitive agreements; cover-pricing, and compensation payments.

Cover-pricing is the practice of submitting artificially high bids for a contract where the bidder has no intention to win. This can distort competition by inflating prices to an artificially high level and leaving the consumer with little to no choice as to who to award the contract to, therefore potentially leaving the consumers paying more money.

In some circumstances there could be no competition when it comes to bidding for tenders if all those involved are cover-pricing for one bidder to then win the contract. This can also mean that companies will be bidding knowing that they will not win the tender, but in at least bidding for the contract they can allow themselves to remain on potential clients’ lists of companies they may invite to bid on any future tenders. In this case there were arguments that this was done intentionally with good faith in order to price themselves out of a contract they did not want without outright refusing the contract. However, this could also prevent other firms being invited to bid on them, and therefore keep potential competitors out of the market.

Cover-pricing can reduce the access that clients have to fair competition, which can lead them to unknowingly paying more.

The second agreement that was made during the six-year period on six separate occasions was paying money to the companies who deliberately lost the tenders in the form of compensation payments. Compensation payments are where the winning company of a tender makes a payment to the losing companies who engaged in cover-pricing as a way to “thank” them for losing and essentially gifting them the contract.

It was these agreements that the companies engaged in that resulted in them breaching competition laws. It set somewhat of a precedent for the future to ensure this kind of behaviour could not be engaged in again.