So now we know. The OFT inquiry into bid rigging in construction has found that it may have affected as much as 20% of council contracts over six years. Here Building looks at just how bad the mess is and what the industry can do to clean it up
Last Thursday at 7am, after a four-year investigation, the Office of Fair Trading accused 112 construction firms of bid rigging. There were a wide range of reactions.
The 38 firms that had been notified that they were under investigation, but were not charged, were delighted. Much of the national media put the story at the top of its news list and construction’s official spokespeople did their best to explain to journalists why things weren’t as bad as they looked. The general public was no doubt gratified to find its prejudices about cowboy builders validated, and many clients must have felt something similar.
And the firms named? For a few, the news came as a bucket of iced water down the neck. One source says the OFT broke the news to it in an email a few minutes before its Thursday announcement. He says: “We received very little notice, which we understand is to minimise the disruption to share prices, but by 10am the phones were going mad. We had calls from clients asking for reassurance. There were also calls from the media since the story broke at seven. We’re now just trying to keep a low profile as we’re worried that our logo will be unfairly associated with the worst accusations.”
But for many of the accused, which include some of the industry’s best-respected names, the feeling must have been a strange mixture of anxiety and relief. The anxiety is the result of the damage done to their good standing, the size of the fines they may face and the long and expensive fight they will have to endure if they try to defend the charges. The relief because the OFT’s war of nerves is over. Now everyone knows where they stand.
How did we get here?
The war broke out in an office in Nottingham in 2004. An accountant conducting an internal audit on a £30m construction project for the Queen’s Medical Centre in the city noticed some irregularities in the bidding. The hospital’s board held an inquiry and then referred the case to the OFT, which began looking into refurbishment contracts awarded to a contractor in Derby. Over the following years, that investigation grew into the biggest in the watchdog’s 35-year history.
A chronology of the inquiry is given in the timeline below. The way it moved in sudden escalations is explained by the OFT’s method of investigation, which is calculated to apply psychological pressure to senior managers. If they come clean at an early stage, and inform on companies that do not, they may be forgiven their trespasses and escape with only reputational damage. If they fight and lose, they may face a fine of 10% of turnover, which would snap the spine of many firms. So every chief executive that cracks casts suspicion on many others, some of whom will have been involved in other trades and will be part of other commercial networks – and the investigation widens to accommodate them.
In the end, the OFT amassed enough evidence of anti-competitive behaviour between 2000 and 2005 to proceed against 112 firms, including Balfour Beatty, Carillion, Kier, Rok and Willmott Dixon.
What is the OFT’s case?
The competition authority’s initial findings are contained in a 1,755-page document called a “statement of objections”. They cover about £3bn worth of tenders, mainly on local authority work. The gravity of the situation is apparent when you consider that English councils let work worth £14.5bn in the six years concerned; this means that about 20% of all council contracts by value may have been tainted. And by tainted, the OFT means inflated by as much as 10%. The contractors in the dock range from £7.5bn-turnover Balfour Beatty to local contractors. All stand accused of collusion, but for some the charges are more serious than for others.
Most firms are being charged with cover pricing. This is when a company gets together with a rival to find out its price for a contract, then submits a bid that is higher. The company making the bogus bid does not want to win the scheme; it just wants to stay on the client’s tender list for future projects. For obvious reasons, cover pricing is illegal under the Competition Act (1998).
The allegation that contractors have been profiteering from bid rigging is graver. The distinction between that and cover pricing is brought out by Stephen Ratcliffe, chief executive of the Construction Confederation. “Let’s be clear, in cover pricing there is no intention to make a single penny at the taxpayer’s expense, just an attempt by busy contractors not to win work without upsetting the client.”
Of greater concern is the allegation that a about nine firms have been involved in a form of cover pricing that involves making compensation payments to losers. This means that a group of firms can carve up the work in a region between themselves.
Is it still going on?
In addition to the struggle that firms now have to enter into with the UK’s competition authorities (of which more overleaf) the industry has to fight a propaganda war to win over public opinion. The general line is given by Ratcliffe, who says: “In recent years, the industry has gone to great lengths to stamp out the practice.” Others point out that it tends to occur in simple lump-sum contracts, and that the use of more complex procurement routes, such as two-stage bidding and PFI, have made it obsolete.
A more aggressive variant of this argument is run by Don Ward, the chief executive of Constructing Excellence, who says: “In part, cover pricing is a symptom of poor client practice. It is facilitated both by lowest price tendering and by rigid prequalification ‘rotas’, where bidders are fearful of not putting in a bid for fear of being excluded from future work.”
These points are made by John Samuel, group finance director of Renew Holdings, which is parent of Allenbuild and the former owner of Bullock Construction. Both companies were named in the inquiry. Renew’s turnover is £500m and Allenbuild’s is £180m. He says: “There is no question that cover pricing was widespread during the period the OFT investigated, but we, like other firms, tightened up procedures to stop it. The move away from fixed price to negotiated work ends the need for this type of tendering. We had lawyers look at our procedures in 2006 and what was needed to be changed was changed.
“We believe the OFT’s objective isn’t to levy fines that will damage a business critically, but we don’t know for sure.”
What happens now?
Contractors’ first response to the statement of objections has been to go to their lawyers. “Competition lawyers will be taking time to digest the contents, analyse the evidence, and look at the nature and the level of the penalty that is likely to be imposed,” says Alan Davies, competition partner at Pinsent Masons.
We believe the OFT’s objective isn’t to levy fines that will damage a business critically, but we don’t know for sure.
John Samuel, Renew Holdings
Companies have until the end of June to submit a written response to the statement of objections, and have until the end of July to discuss it directly with OFT investigators. The watchdog will then take all of these responses into account, a process that could take as long as six months.
In early 2009, it will publish its verdict, naming and fining the companies it believes to be guilty of bid rigging. Contractors will then have a further two months to launch an appeal to the Competition Appeal Tribunal. This process, says Adam Aldred, competition lawyer at corporate law firm Addleshaw Goddard, could take years. “The tribunal typically deals with cartel investigations within one to two years. But given the number of companies caught up in this, I don’t think we’ll see companies paying fines until 2011 or 2012.”
Not only that, says Aldred, but there are questions as to how the tribunal will administer the appeals. “Potentially, there will be so many people appealing that the tribunal might not have the resources to deal with it,” he says. “It will be an enormous headache for it if people decide to appeal.”
In theory, companies found guilty of cover pricing could be fined 10% of their turnover, but will the fines necessarily be that large? OFT deputy cartels director Deborah Jones says that if the industry is able to prove that cover pricing is no longer used, the fines need not be so punitive. “If it’s the case that we don’t need a deterrent because the industry is already cleaned up, then that would be a factor we would take into account. But we’d certainly want some hard evidence of that, backed up with fact.”
However, the information the OFT has is that cover pricing is still common practice in some areas. “We’re hearing statements from industry representatives that life has moved on and we would very much hope that that is the case,” says Jones. “But at the same time we have people saying this is still rife.”
For their part, contractors insist they are maintaining their sang-froid. John Dodds, chief executive of Kier, says: “Shares haven’t plummeted, but why should they? What evidence has the OFT actually got? The answer is none. The news, despite its sensationalist coverage in the media, has not had any significant impact on us. I saw one explanation on the BBC breakfast programme of what cover bidding was and it was complete rubbish.”
Garvis Snook, chief executive of Rok, adds: “It was a big story for the media but the City has known about it for years.”
How many firms will fight?
Lots, according to Aldred. “People are really up for a fight. There is likely to be a protracted legal battle.”
This assertion is backed up by the number of companies that have rejected the OFT’s “fast track” leniency offer. Aldred says: “Of the 75 or so companies offered leniency in exchange for a guilty plea, only 40 accepted it. Plenty look ready for a fight, and for its part the OFT does not look hungry to settle. And there will be plenty to argue about over the next few months; before the OFT comes to a final decision sometime in 2009, and then on appeal to the Competition Appeal Tribunal. Don’t expect closure before 2011.”
Then there is the question of whether firms that admit guilt can be sued by their clients for the money they spent on rigged bids. Aldred again: “Where there has been simple cover pricing, it’s unlikely that contractors will be successfully sued by their clients, because the client would be hard pressed to prove they’ve suffered loss. However, on the handful of contracts where compensation payments are said to have been paid, legal action might be more likely. “
What do clients make of it all?
The reaction of local authorities who have been dealing with these 112 companies has been eagerly awaited, but they have remained tight-lipped so far. Snook says: “We’ve had some questions from some clients, but they have just been asking us about the level of our involvement.”
As Building went to press, the Construction Confederation sent a letter to every council to clarify the situation. In it, Ratcliffe called them to adopts a measured response to the OFT’s announcement. He wrote: “It should be noted that last week was the first time that companies had seen the evidence against them and they will now be given a proper opportunity to defend their position. Just because a company has been named in the press release does not mean that they will eventually be found to be in breach of competition law.
“Many companies are concerned that they might be removed from public sector tender lists. However, the OFT has already gone on record to say that it is not its intention that this should happen and has issued a guidance note for public sector clients. Indeed, it would be likely to contravene the EU public procurement rules to discriminate against companies who have been named by the OFT in the recent press release.”
Most councils have confirmed that they will be conducting investigations, and Peter Bishop, director of the Local Government Task Force, has called for them to consider carefully whether to continue to do business with companies proven guilty.
Building reported last week that the Highways Agency, the government body that spends more than £1bn with the industry each year, was investigating whether its contractors were involved in the inquiry.
The problem the industry faces now is that it has to prove a negative, and the only way it can do so is by keeping its nose clean for a long, long time.
Worst and best-case scenarios
If the harshest punishment is inflicted on the 112 companies named by the OFT, they will be fined 10% of their global turnover. At the other end of the scale, any fines could be restricted to the division in which any offence is found to have taken place and could be around 2-3% of that division's turnover. To put that into context here are the details of what three of the largest companies involved stand to lose based on either outcome:
Balfour Beatty posted a turnover of £7.5bn for 2007, so 10% of that is £750m. If the OFT decides to be focus instead on the company’s UK subsidiaries that were named in the investigation – Balfour Beatty Construction, Balfour Beatty Refurbishment and Balfour Beatty Group – then, according to the last accounts posted at Companies House for the year to the end of 2006, the turnover in question would be £2.4bn. The maximum Balfour Beatty could therefore lose based on the 2006 accounts of these three subsidiaries would be £240m. However, as the contractor has applied for leniency from the OFT, a more likely figure is 2-3%, which would be £48-72m. Subsidiary Mansell is also named in the OFT investigation. Its most recent accounts for the year to 30 December 2007 show a turnover of £850m.
Kier Group had a total turnover for the 12 months to 30 June 2007 of £2.065bn. The maximum possible penalty would therefore be £206.5m. Accounts for Kier Regional, the division mentioned by the OFT, were last published on June 30 2007 and its turnover was listed as £124m. A fine of 2-3% on Kier Regional would be £2.48m or £3.72m.
Carillion JM, formerly known as Mowlem, is a subsidiary of Carillion. Its last recorded turnover was £938m at the end of 2006. A maximum fine would be £93.8m, but the company hopes it will be granted leniency as the alleged bad practice occurred before it bought Mowlem in February 2006 for £313m. A fine of 2-3% would therefore be £18.76m or £28.14m.
How the four-year investigation grew and grew
2004 The OFT begins inquiry into construction industry.
27 July 2005 The OFT says it has searched the premises of 22 Midlands firms for evidence of collusive tendering.
March 2006 Bluestone and Mowlem become the largest companies to be raided as part of the inquiry.
22 March 2007 The OFT announces that it may have uncovered £3bn of rigged construction bids across the country and issues an appeal to companies not yet inspected to come clean in exchange for a reduced penalty.
25 May 2007 Kier becomes the first quoted company to reveal that it is under investigation. It says 20 of its tenders are being looked into as part of the OFT investigation.
30 May 2007 Rok admits that it, too, is under investigation. Galliford Try follows suit less than four hours later. The companies are followed by more quoted firms in the following days, including Balfour Beatty, Interserve and Renew.
June 2007 It emerges that the Construction Confederation is to lead a joint representation to the OFT to appeal for leniency.
August 2007 The OFT says it is unlikely to be able to issue a list of those firms that it is accusing of collusion until next year.
April 2008 It emerges that public sector clients may avoid firms involved in the inquiry. The Highways Agency is thought to be asking whether its suppliers are likely to be named, creating concerns that if they are, they will be dropped from future tender lists.
17 April 2008 The OFT issues a statement of objections against 112 firms it accuses of bid-rigging and anti-competitive behaviour.
Go to www.building.co.uk/oftinvestigation for a full list of firms affected, and the latest comment. You can also add your comments at www.building.co.uk/forum