Construction industry in England: bid-rigging
Office of Fair Trading (OFT) closed Competition Act 1998 case.
No. CE/4327-04
The OFT has imposed fines totalling £129.2 million on 103 construction firms in England which it has found had colluded with competitors on building contracts.
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The OFT has concluded that the firms engaged in illegal anti-competitive bid-rigging activities on 199 tenders from 2000 to 2006, mostly in the form of ‘cover pricing’.
Cover pricing is where one or more bidders in a tender process obtains an artificially high price from a competitor. Such cover bids are priced so as not to win the contract but are submitted as genuine bids, which gives a misleading impression to clients as to the real extent of competition. This distorts the tender process and makes it less likely that other potentially cheaper firms are invited to tender.
In 11 tendering rounds, the lowest bidder faced no genuine competition because all other bids were cover bids, leading to an even greater risk that the client may have unknowingly paid a higher price.
The OFT also found six instances where successful bidders had paid an agreed sum of money to the unsuccessful bidder (known as a ‘compensation payment’). These payments of between £2,500 and £60,000 were facilitated by the raising of false invoices.
The infringements affected building projects across England worth in excess of £200 million including schools, universities, hospitals, and numerous private projects from the construction of apartment blocks to housing refurbishments.
Eighty-six out of the 103 firms received reductions in their penalties because they admitted their involvement in cover pricing prior to the OFT’s decision.
The OFT also informed nine companies originally listed in its Statement of Objections that it will not pursue allegations of bid-rigging against them as it considers it has insufficient evidence to proceed to an infringement finding.
Related guidance issued by the OFT in conjunction with the Office of Government Commerce (see Information Note link above) cautions procurers against excluding the infringing firms from future tenders, as the practice of cover pricing was widespread in the construction industry and those that have already faced investigation can now be expected to be particularly aware of the competition rules.
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Notes
- In April 2008 the OFT issued a Statement of Objections (SO) against 112 firms in the construction sector in England. See press release 52/08.
- Cover pricing arrangements have previously been found by the OFT and the Competition Appeal Tribunal to be illegal and in breach of the Competition Act 1998 due to the restrictions on competition that arise. (See press notices 46/04, 48/05, 126/05 on five OFT decisions in the roofing sector between 2004 and 2006 and press notices 36/05 and 32/07 describing appeals of the first and last of those decisions.)
- Under the Competition Act 1998 and Article 81 of the EC Treaty bid-rigging is prohibited. Businesses found to have been involved in such conduct can be fined up to 10 per cent of their worldwide turnover. In calculating financial penalties, the OFT takes into account a number of factors including seriousness of the infringement(s), turnover in the relevant market and any mitigating and/or aggravating factors. The basis of the OFT’s considerations are set out in the (PDF, 145KB).
- 33 parties benefited from discounts on the levels of fines of 35-65 per cent under the OFT’s leniency programme and 41 others received up to 25 per cent discount under the March 2007 ‘fast track’ offer. In total fines have been reduced from a pre-discount level of £194.1 million. A further 12 parties received smaller reductions in fines for admissions after receiving the Statement of Objections.
- The parties have on average been fined £1.25 million, representing on average 1.13 per cent of their annual worldwide turnover.
- Penalties are normally payable in full within two months of the decision, but given the current economic climate affecting this industry and that the OFT would otherwise face a large number of requests for special payment terms, the OFT is exceptionally offering all parties in this case the option of payment by instalments over three years.
- The OFT informed nine companies originally listed in its Statement of Objections that following representations it will not pursue allegations of bid-rigging as it considers it has insufficient evidence to proceed to an infringement finding. The nine parties are: Adonis Construction Limited, Chase Norton Construction Limited together with its ultimate parent company, Chase Midland plc, E.G. Carter & Company Ltd, Frank Galliers Limited together with its former ultimate parent company Frank Galliers Holdings Limited, George Law Limited together with its ultimate parent company Bosworth & Wakeford Limited, J. Guest Limited, Piper Construction (Midlands) Limited together with its ultimate parent company Piper Securities Holdings Limited, Robert Bruce Construction Limited and Spicers (Builders) Limited.
- The OFT’s investigation originated from a specific complaint in the East Midlands in 2004, but it quickly became clear from the evidence that the practice of cover pricing was widespread. The range of infringements therefore spans the East Midlands as well as neighbouring areas including Yorkshire and Humberside and also elsewhere in England. The OFT has also received evidence of cover pricing implicating many more companies on thousands of tender processes, but focused its investigation on the alleged infringements included in the Statement of Objections.
- In response to the OFT’s investigation, the UK Contractors Group and National Federation of Builders jointly launched a competition law code of conduct, on 20 August 2009, to help avoid breaches of competition law by the construction industry.
- The table of Parties and Fines linked above lists the 103 parties and sets out the fines imposed, after all discounts including for leniency. Note that some fines apply to two or more companies that formed part of the same infringing undertaking. In those circumstances, all named companies will in general be jointly and severally liable for the full amount of the penalty but where this is not the case, the division of liability is set out under the total penalty.