It would be near impossible to avoid the recent press coverage over fines imposed by the Office of Fair Trading (“OFT”) as a result of their multi million pound inquiry into bid rigging which began in 2004. For those unfamiliar with the term, bid rigging, largely in the form of cover pricing, is a type of fraud where one or more bidders arranges for competitors to submit an artificially high bid. This bid is not intended to win the contract but is submitted as a genuine bid to give a misleading impression to clients about the level of competition. This form of collusion is illegal in the UK under the Enterprise Act 2002. It almost always results in economic harm to both the client seeking the bid and to the public who ultimately bear the cost as taxpayers. Contracts involved in the OFT inquiry included public authority work as well as private tenders.
The OFT uncovered evidence of cover pricing in over 4000 tenders involving more than 1000 companies leading it to conclude that it was a ‘widespread’ and ‘endemic’ practice throughout the construction industry. Fines were imposed on more than 100 construction companies and the key message resulting from the inquiry was that bidders should not engage in cover pricing in any form. If a potential bidder is unable to submit a competitive bid then it should refuse to submit at all and be prepared to tell the purchaser the reasons for this.
Those found guilty of offences claimed that cover pricing is a historic and industry wide practice not understood to be illegal and for the most part, its purpose was to enable a company to provide a bid that appears plausible and be close enough to the winning bid that the firm would be considered for any future tenders.
Crucially, they argued, during the tender process there would always be a number of competing tender bids so the winning price would be a competitive price anyway, thereby rejecting the claims that the practice was either fraudulent or anti-competitive. Controversially, and contrary to the OFT’s intention to send a ‘strong signal’ that this type of behaviour was unacceptable, critics have argued that the construction firms who were found guilty managed to escape with fines averaging only 1.1% of their turnover.
The OFT inquiry has concluded and the fines have been imposed but still the issue refuses to go away. Bid rigging continues to make headlines around the world. In Australia, cover pricing is being investigated by the Australian Competition and Consumer Commission with a view to imposing hefty fines of up to 10% of a company’s turnover on guilty parties. In Japan, bid rigging is both a violation of Japanese criminal law and their anti-monopoly law but remains common practice.
A number of academic research studies carried out both in Japan and in the USA revealed it to be a system which inflated the cost of construction projects estimated to waste billions of Japanese Yen a year in tax-payers money. Despite thirteen high profile lawsuits concerning bid rigging in local government contracts being ongoing since the 1990s, the resignation and conviction of a high profile governor and years of negotiations by the Japanese government in trade talks, bid rigging appears to continue unabated. In the USA, the practice is a criminal offence under the Sherman Act and in Canada under The Competition Act but this has not prevented its practice nor widespread investigations taking place.
The intention of the OFT inquiry in the UK may have been for the construction industry to clean up its act but it is impossible to predict to what extent this will happen. However, it has served to highlight what is and what is not acceptable practice and to warn firms who have already faced investigation that they will now be expected to be particularly aware of the competition rules. If they fail to do so, they will face severe penalties.
For advice and assistance in relation to bid-rigging please contact your usual contact for details of Morton Fraser’s fraud and financial crime team.