Taking a Cover Price or Collusion?

The Office of Fair Trading has fined 103 construction companies a total of £129.5m for colluding on building contracts for local authorities. The decision followed what was one of its largest ever Competition Act investigations. The OFT said that the 103 firms engaged in "illegal anti-competitive bid-rigging activities" on 199 tenders from 2000 to 2006, mostly in the form of 'cover pricing'.

The Guild of Builders and Contractors believe that all clients, whether private, government department or local authority, are entitled to expect fair and honest tendering for their construction projects. Construction companies invited to submit a tender for a building project should either price the work without collusion with other tendering contractors or ask the client to be excused from submitting a tender, perhaps due to pressure of work or some other legitimate reason. Clients should not prejudice building contractors from tendering for other or future works just because they acted openly and honestly in asking to be excused from tendering on that occasion. The practice of taking a "cover price" from another tendering contractor fails the integrity test for a number of reasons. Firstly, each cover price tender reduces the number of genuine tenders the client will receive. If the client is advised early in the tendering process that a particular construction company is unable or unwilling to submit a tender the client would have time to invite a replacement construction company to join the tender list. Secondly, the taking of a cover price from another tendering contractor means contact and provides information to the other tendering contractor that could result in a less than competitive price. Any collusion could result in bid-rigging.

The practice of taking a cover price results in companies submitting higher tenders knowing they will not be chosen but showing a continuing interest in tendering for further contracts. Clients, sometimes ultimately the taxpayer, received a false impression of the level of competition and could end up paying inflated prices.

Apparently the Office of Fair Trading uncovered six instances of bid rigging where the successful contractors had paid an agreed sum of money to the unsuccessful tenderers. In 11 instances, the lowest tenderer had no genuine competition because all other tenders were cover prices. The client probably paid a higher price than it should have for the construction work.

The illegal anti-competitive bid-rigging affected a series of building projects, including schools, hospitals and residential schemes, worth a total of more than £200m.

Members - any comments?

2 comment(s) for “Taking a Cover Price or Collusion?”

  1. cedar construction Says:

    this type of fraud goes on all the time but the little builder like me never get a chance as i would never carry out this type of price fixing let the indepedant builder have a chance!!

  2. graimaprainty Says:

    Fantastic, I didn't know about that up to now. Thanx.

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