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Construction firms collude to rig bids for contracts

The Office of Fair Trading (OFT) has just announced the imposition of £129.5 million in fines on 103 construction companies in England, which it found had colluded with competitors on building contracts.

 

The OFT concluded that the firms engaged in illegal anti-competitive bid-rigging activities in a total of 199 tenders between 2000 and 2006. The process was mainly carried out under what is referred to as ‘cover pricing’. This is where firms put in bids for a building contract where a number of the bids are not set at a level to win the contract. The organisation which has requested the tenders will take the lowest bid, but assumes that all the organisations tendering are making the best bids possible. The reality was, however, in many instances, that construction firms had reached agreements between themselves as to who was to ‘win’ the contract.

The OFT found that in 11 tendering rounds, the lowest bidder faced no genuine competition because all other bids were cover bids, increasing the risk that the client would have paid a higher price than necessary, without realising it. The OFT also found six instances where successful bidders actually agreed to pay sums of money known as ‘compensation payments’ to the ‘unsuccessful bidder’. They found payments of between £2,500 and £60,000 being facilitated by the raising of false invoices.

 

Altogether these infringements affected building projects worth over £200m and included schools, universities, hospitals and numerous private projects.

 

Such collusion resulted in a clear example of market failure. The price mechanism will only allocate resources efficiently if market participants enjoy perfect information. As a result of the collusion between building companies a situation of asymmetric information was created illegally, with the result that both public and private organisations were inadvertently left paying ‘over the odds’ for their building projects. The free market was therefore distorted. The OFT was set up to remedy such anti-competitive practices and has the power to fine firms up to 10% of turnover and to jail company directors for price fixing.

 

In summary, OFT director Simon Williams said: “Our investigation has uncovered significant infringements of competition law on nearly 200 projects across England. Bidding processes designed to ensure clients and in many cases taxpayers receive the best possible choice and price were distorted, creating a real risk of increased prices. This decision sends a strong message that anti-competitive and illegal practices, including cover pricing, must cease.”

 

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Posted in market failure, Office of Fair Trading

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