The OFT sent a message to the industry by enforcing huge fines over cover pricing. A simple warning would have been enough
Interclass plc is, what I call, a nice size building company; £25m turnover; wins prizes for quality; is a chartered builder. Been around since 1976. Got nabbed for doing what we all, for decades, accepted as a “norm”, ordinary and legitimate. And for decades it was. It got a cover price. It’s now a crime. The fine was £619,207 less 25% for caving in.
That’s what the Office of Fair Trading (OFT) said. And eight years on, this determined company has fought the OFT all the way to the Court of Appeal. Last week the fine for the crime was reduced to £202,000. Still hurts. And I blame you. How come? Ah, well, the fine on Interclass is designed to teach you, yes you, a lesson. It’s a deterrent. The system is designed to make an example of one person to frighten the hell out of you. Interclass has been keel hauled. Mind you, it is in good company. So have other contractors.
Let’s get it absolutely straight. All those years ago the OFT sniffed a crime. It yelled, “bidrigging”. It should have yelled, “cover pricing”. I bet what you like that no one in the OFT had a clue about our building world. None had read those estimators textbooks, which told all budding estimators and budding managing directors that cover pricing was completely legitimate.
Then in 1998 the Competition Act crept up on us. Its intention is to marmalise anyone whose behaviour has, at its object, “the prevention, restriction or distortion of competition within the UK”. So, being straight: don’t phone a friend for a cover price. Like speeding, but unlike adultery; it’s a criminal offence!
The OFT thought cover pricing is when estimators from competing companies sit down in a smoke-filled room and agree which of the bidders will win the next school building
The OFT made a big fat fuss over all this. It thought “cover pricing” is when half a dozen estimators from competing companies sit down in a smoke-filled room and agree which of the bidders will win the next school building.
The winner consoles the other five smokers by filling envelopes with a few pennies. That is conspiracy, fraud and worth prison. So in 2004 the OFT began the largest ever investigation into the Competition Act. It involved the examination of 4,000 tenders and over 1,000 building companies. What fun. “Cover pricing” then was ordinary. The OFT then decided to pursue those fi rms they found had used “cover pricing” on three occasions. It went for the ankles of 112 construction companies. By 2009 it had imposed fi nes of £129.2m on 103 of them. The OFT had gone miles over the top. I reckon it confused bid-rigging with cover pricing.
The Court of Appeal describes cover pricing as such: “It occurs when a bidder in a competitive tender submits a price for the contract which is not intended to secure the contract.” Then it adds this gloss: “These objectives are achieved by a process of collaboration between tenderers under which the companies who do not wish to win the contract fix the amount of their tenders by reference to the amount bid by the undertaking which does wish to win the contract. It therefore involves the disclosure between the tenderers of what should be commercially sensitive and confidential price information and the produce of deception on the party awarding the contract who is given the impression that a competitive tendering process has taken place.”
That gloss is too heavy. In real life, the chief estimator phones the competitor chief estimator and asks “for a cover”. The answer will be a ballpark price somewhat higher than a competitive price. “Go in at £5m.” The half-hearted bidder who doesn’t want the job will then go in even higher. There is no “disclosure” as between tenderers. And if the competing chief estimator is out of the office that day you can bet your bottom dollar that the firm not wanting this particular job will still be able to make a fair stab at a ballpark price for the school job. When a firm doesn’t want this building work they bid high regardless. It doesn’t need a cover price at all.
The OTT OFT fi nes were massively reduced by the Competition Appeal Tribunal. Millions were swiped off the millions imposed by the OFT. It didn’t need such high fines to be the industry deterrent. All we needed was to be told, reminded, nudged that what was once lawful is now unlawful and a crime. So Interclass and a whole raft of other contractors have had their fines reduced. On top of that, the huge legal fees of the builders who stood up to the OFT have to be very largely paid by the OFT … anything up to a cap of £200,000 per company. Out of the public purse.
The episode embarrassed the building industry. If you ask six builders to bid, two or three of the six will not be all that enthusiastic once it sees the drawings and spec and sniffs a half-designed basket of trouble. All hell breaks out if you send the invite back, believe me. The customer frequently has to get six prices. Cover pricing is not a deception played by bidders. It’s actually the way of things, or at least it was. Interclass shelling out £202,000 is intended to teach you a lesson. It’s the OFT who ought to be keel-hauled. Warnings would have done the trick; that’s all it needed.
Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple