Looking back on one of the biggest anti-competitive investigations in the construction industry…

First published by Admin on May 19, 2017 in the following categories: Investigations and tagged with price fixing

Nearly 100 companies were fined up to £130 million for cover pricing back in 2009.

Back in November 2004, the now closed Office of Fair Trading (OFT) opened up their investigations into more than a hundred companies suspected of foul play in the infrastructure industry, mainly for cover pricing. Cover pricing is an illegal activity under the Competition Act in England and Wales where participants warp the tender process of bidding for a job.

In total, their investigation resulted in fines being issued to over 100 companies totalling nearly £130 million.

What is cover pricing?

A bidder will obtain an artificial and excessively high price from a competitor company. Under the Competition Act, companies are supposed to bid for work fairly, without first scheming with their competitors. Any arrangements like agreeing to artificially elevate prices are illegal.

One company may agree to bid a high price for certain work in the pretence that it is genuinely as low as they can go. Under a pre-arranged agreement, a competitor can pretend that they can’t bid lower. The person requiring the work will have no choice but to use the first company and pay them the high price.

The second part of the agreement will likely be the same arrangement for the competitor to bid the high winning price next time. This way, both companies will gain more money for jobs that should have cost less for the individual. The individual does not benefit from competitive pricing; they only end up paying more money than they should have in the first place.

This manipulation of the market is anti-competitive behaviour.

The investigation

Following the OFT’s investigations, the construction companies were found to have altered the prices for constructing “schools, universities, hospitals and numerous private projects from the construction of apartment blocks to housing refurbishments”. The anti-competitive behaviour engaged in was worth over £200 million for the above projects.

The OFT also found 6 cases of ‘compensation payments’ between the construction companies where the successful winner of a contract would pay the unsuccessful bidder a pre-agreed sum of money. The payments ranged from £2,600 to £60,000.

The OFT concluded their investigations and found that 103 construction firms were guilty of colluding with their competitors to inflate building contracts. For their anti-competitive behaviour, the OFT issued a fine totalling £129 million to over the 103 companies. 86 of these companies had a reduced fine for admitting their illegal behaviour and working with the OFT in their investigations.

9 companies that were originally looked into escaped the OFT’s multi million fine as there was insufficient evidence to pursue further investigation. Kier Regional Limited, along with its parent company ROK PLC, received the largest share of the fine, totalling £17,894,438. J. Harper & Sons Limited and its parents company Harper Group PLC received the smallest fine at £712. The companies who had admitted their guilt received large discounts; John Cawley Developments Limited received a 65% leniency.

On average, the liable companies received a hefty £1.25 million fine.

A big problem

Cover pricing is a widely discussed topic with many individuals claiming that it happens on a daily basis within millions of businesses. Some argue that in a contract bid “a bidder is likely to include a high contingency element unless they have confidence that there is a reasonable chance of winning.”

However, to prevent companies from partaking in cover pricing, when concluding their successful investigation, the OFT drafted a guidance note with plenty of warnings to procurers of contracts against engaging in anti-competitive behaviour by distorting the tender process. With so many companies affected nationwide, there is the need to remind companies how the tender process should be, breaking any image that the cover pricing could be common practice.