The ACCC had a recent win in a “cover pricing” case against a construction company and its managing director: the Federal Court found the company broke the law in providing a cover price to a competing bidder. The director was personally liable as an accessory to the breach. This development is especially important in New Zealand because the Commerce Commission has signalled it is keeping a close eye on construction industry bidding practices. All construction companies, and their directors and managers, should be aware of the risks of cover pricing.
What is cover pricing?
Cover pricing occurs when a bidder wants to be seen to participate but does not want to win the job so asks a competitor for a realistic “cover price” and submits it as a genuine bid. A company may have a good reason to ask for a cover price so it can present a believable bid: it might get dropped from a tender list if it doesn’t participate; or it might lack capability or capacity for the job but want to attract future work from the same principal. Those motivations seem harmless.
But cover pricing involves a discussion with a competitor (usually in secret) about a tender price, and is a form of bid rigging. In many cases it effectively sets a floor on the bid price. Cover pricing thus presents a high risk of breaching the Commerce Act. A second type of risk arises if the tender conditions require a bidder to warrant it has not colluded with other bidders or breached any competition laws. So submitting a cover price after giving such a warranty is likely to be misleading or deceptive conduct and breach the Fair Trading Act.
What to look for
The New Zealand Commerce Commission recently conducted interviews with 12 medium-sized construction firms. All of them knew of instances of cover pricing, so it seems to be widespread. And the Commission warned that none of the companies were taking steps to avoid being a victim of (or a party to) cover pricing behaviour.
Here are some examples of conduct which might break the law.
WHAT THE LAW SAYS
- Price fixing arrangements between competitors are unlawful.
- Contracts, arrangements or understandings that have the purpose, or effect or likely effect of substantially lessening competition are unlawful.
- Misleading or deceptive conduct in trade is unlawful.
EXAMPLES OF WHAT MIGHT BE UNLAWFUL
- asking another bidder for a cover price
- giving a cover price to your competitor (or any other information about price)
- suggesting your competitors use “industry standard” pricing in future bids
- agreeing with your competitor(s) to designate a winner, and then each submitting a cover price to create the impression of competition
- agreeing with a competitor to submit a bid at a price which you know is uncompetitive, or which contains terms unacceptable to the procurer
- representing or warranting to the procurer that you have not colluded (or communicated) with other bidders in preparing your bid, and then submitting a cover price
- representing or warranting to the procurer that you have not breached the Commerce Act, and then submitting a cover price.
Why should you care?
- The courts can impose penalties of up to $500,000 for individuals, and, for companies, the greater of $10 million or three times the commercial gain resulting from the breach, or 10% of turnover of the company and its subsidiaries.
- In Australia, the ACCC successfully went after the managing director of a construction company as an “accessory” to the firm’s cover pricing conduct. He will be personally liable for a fine. That could happen here too.
SOME PRACTICAL SAFEGUARDS
Secret communications with competitors about price are always risky, and should generally be avoided. Here are some practical steps you can take when checking your company’s tender practices.
- Ensure your company has a policy of not giving or receiving cover prices. It doesn’t need to be formal or written down, as long as all staff are aware of the policy and “walk the talk”.
- Learn to recognise a request for a cover price, for example a competitor may ask you for “indicative pricing” or a “pricing methodology” to assist with the preparation of its bid.
- Identify the staff in your company with responsibility for bid preparation and tender pricing, and ensure they are aware of the risks of interacting with competitors.
- Ensure that any request for a cover price is communicated to management, and that managers know what steps should be taken.
- Keep a record of tender terms and conditions. A procurer, for example, may ask each bidder to warrant it has not communicated with any competitors. Always check the facts before your company gives such a warranty.