Anxiety builds as industry anticipates verdict on cover-pricing inquiry within the next week

Small contractors accused of anti-competitive practices are preparing to close their businesses rather than pay fines imposed on them by the Office of Fair Trading.

The plans have emerged as the industry braces itself for the final outcome of the OFT’s inquiry into 112 contractors accused of cover pricing and, in some cases, bid-rigging. The decision on fines is widely expected next week.

Firms are expecting to be given up to 48 hours’ notice of the decision, although no details will be released in advance of the announcement.

The maximum fine they face is 10% of turnover, although precedent suggests something closer to 2% is more likely, and contractors may be given up to two years to pay any fine.

However, a number of firms on the list said they would consider shutting their businesses rather than paying the fine. The managing director of a small contractor on the list said: “If the fine is as much as 2% of our turnover, depending on what time period we have to pay it over, we will consider whether it’s worth paying or better to shut down.

“We’ll have to look at how much of a struggle it’s going to be because we’ll be talking about a couple of million and it may not be worth doing.”

Contractors fear the impact of fines may be compounded by public clients shunning those found guilty. The head of one firm said more than 90% of his firm’s work was from the public sector, and feared clients would turn their backs on the company: “I don’t know where we would go from there; it would probably close us down,” he said.

It is understood that the OFT will issue guidelines for public sector clients at the same time as it delivers its verdicts on the 112 firms. This will advise procurers against striking the contractors found guilty off their suppliers’ lists.

However, it is not clear how effective this will be, as a report this month by the Organisation for Economic Co-operation and Development found that 76% of procurers would not use a firm found guilty by the OFT.

Last week Building revealed that up to a dozen firms have already had their charges dropped, and at least six others are set to have fines reduced.

… And there’s more to come

Further fears have been raised that clients may attempt to sue contractors for losses they believe to have resulted from cover pricing. Rudi Klein, chief executive of the Specialist Engineering Contractors’ Group, said: “If local authorities can prove they could have got a contract at a cheaper price, they’ll want to recover their losses.” He added that larger firms could be targeted as they are seen as more likely to pay up.

He said: “There’s a fear in the industry that councils might try and reclaim costs lost as a result of cover pricing.”

It is understood that US legal firms have approached clients offering advice on how to reclaim money from contractors found guilty by the OFT. A spokesperson for Local Partnerships, which advises UK local authorities on procurement, said: “Councils always need to be alert to the risk of contractors trying to carve up deals.”

The investigation

  • The OFT had evidence against more than 1,000 construction companies in connection to 4,000 contracts worth £3bn in total
  • It pursued its case against only 112 companies (for which it had the best evidence)
  • 64 of them were “dawn raided”
  • At least 10 of them have since gone into administration
  • Of the 112 companies:
    • 38 have applied for leniency and will have 35-65% cut from their fine as a result
    • 45 accepted the “fast track offer” (that is, admitting the breach) and will get a discount on the fine of up to 25%
    • The remaining companies will receive no reduction in penalty.