Blowing their cover

On 20 November the Office of Fair Trading published its full decision on cover pricing in the construction industry. In some quarters there has been a “storm in a teacup” response to the investigation (see Tony Bingham’s article on 9 October). That teacup has now been drained and the tea leaves can be examined for what they can tell us about the future in this area.

The key message is that bidders should not engage in cover pricing; that is, they should not obtain an artificially high price from a competitor. Cover pricing constitutes a serious infringement of competition law that can attract hefty fines. The OFT’s full decision explains in detail why the practice is anti-competitive and why the OFT did not need to show an actual effect on competition.

Bidders’ associations must also not facilitate cover pricing. The OFT uncovered considerable evidence of two trade associations promoting the exchange of information (primarily by providing a list of other bidders for a job) and thereby facilitating the exchange of cover prices. One of its members noted that “the secretary of the trade association used to phone around everyone on a weekly basis to gather intelligence. So if you needed assistance on a particular job, whether it was at the beginning or halfway though the tender you had to phone the secretary, get a name, get a cover price, get on the bike, and get out and get the tender in."

If a potential bidder cannot submit a competitive bid – for example, because of lack of resources – it should refuse to submit a tender and be prepared to tell the purchaser the reasons for this. Many of those punished by the OFT argued that they did not want to risk not being invited to tender for future contracts.

However, the OFT received very little evidence of the removal of contractors from tender lists because of a refusal to bid. In any event, the bidder’s motivation is irrelevant. The aim should be to foster openness between a bidder and the purchaser.

Bidders should also have a workable competition law compliance programme – those contractors that had such policies in place received a reduced fine.

QSs, consultants and others acting for purchasers must avoid encouraging cover pricing – in one example, the purchaser’s managing agent phoned contractors asking them to submit cover bids, claiming it was aware of the reluctance of the contractors to tender for the project, but wished to attract the requisite number of tenders to satisfy its client.

Any purchaser in the public sector considering excluding contractors from future procurements (discouraged by the OFT) should ensure that any policy of exclusion is applied openly and to all, that contractors are treated equally and that their response to any contractor breaches is proportionate – for example, taking into account the gravity of the infringement, including such matters as whether there was a “compensation” payment to the losing bidder, which, as the OFT says, is a particularly serious form of bid rigging.

Purchasers will, however, also want to ensure that there is a sufficient number of bidders to ensure genuine competition to deliver best value on future contracts. The possibility is that, given the limited scope of the OFT’s investigation, other contractors may also have been involved in cover pricing. One contractor told the OFT that it estimated that cover pricing involved some 186,107 companies, and another noted: “[Cover pricing] is considered to be endemic within the industry. It would be unlikely for there to be more than a handful (if any) of contractors who did not participate.”

Purchasers could explore the use and effectiveness of non-collusion clauses and self-certification by the contractor to say it has not colluded with others.

Purchasers may also wish to consider competition damages claims against contractors. However, expert evidence would be needed to establish any loss. The OFT reveals that some of the contractors were concerned about the possibility of damages actions and argued that this had a deterrent effect such that any fine did not also need to include a deterrent element.

The OFT has stated that an effective system for private actions is a useful additional tool for encouraging businesses to comply with competition law and it rejected the arguments for a reduction in the level of fines.