Ripped OFT - bid-rigging in social housebuilding » Housing » 24dash.com

The Office of Fair Trading’s bid-rigging inquiry could unearth unprecedented claims by the public sector against guilty contractors. On the eve of the first wave of its findings next month, Ross Macmillan explains why the fall out from Black Wednesday is just beginning.

You’d be forgiven for thinking that folded notes in brown envelopes would be more akin to a Sopranos episode that the UK’s house building industry.

But on Wednesday 17 April 2008, all that changed.

News channels from Radio 4’s Today programme to News at 10 all led on a £3bn bid-rigging scandal implicating some of the UK’s biggest, most reputable, social house builders.

A-listers Balfour Beatty, Rok, Kier, and Keepmoat – all of whom appear regularly on housing association building programmes, were dragged onto a list of 112 construction companies accused of tampering with bids on more than 3,000 private and public sector contracts.

Now, as the OFT prepares to unleash its verdict, lawyers and procuring bodies are poised to recoup lost sums, unearthing what could be unprecedented claims by the public sector against contractors found guilty.

The five-year investigation has exposed a dirty, not so secret practice – labelled “endemic” by the OFT – as ingrained in the industry as woof whistling.

The firms stand accused, for the most part, of cover pricing, although the OFT also has evidence – in a minority of cases (understood to involve nine of the 112 companies) – of firms agreeing not to win contracts in return for bungs.

The industry insists cover pricing – whereby one or more contractors bidding for a job discuss each other’s bids, inflating the price to the client, and distorting true competition – has not cost the public purse.

Guilty firms face fines of up to 10 per cent of their turnover, but more concerning, will be the loss of public sector work, as housing associations and local authorities seek to protect their reputation by not using guilty firms.

“Public bodies have to be very careful about the people that they do business with,” says Julian Connerty, head of litigation at law firm Clyde and Co. The firm is set to represent up to five local authorities, should the OFT find their contracting partners guilty of breaching competition law. “If a particular company was found by the OFT to have fixed bids, the local authority would have every right to cancel contracts and not do business with them anymore,” he adds. “This sort of activity is a criminal offence now and a public body would have to think very carefully about doing business with those people in the future.”

Despite authorities being advised by the OFT that “no assumptions” should be made until it publishes its verdict – for most, it has been an anxious year.

Bromford Housing Group (BHG) wrote to all its framework partners named in the inquiry, ahead of awarding places on a five-year framework to deliver 10,000 homes nationwide.

Among them – Keepmoat, E.G. Carter and Co, Bullock Construction, Thomas Vale and Mansell Construction Services (whose parent company Balfour Beatty has been granted leniency by the OFT) – all stand accused of bid rigging by the OFT.

According to BHG each denied the allegations. A spokesperson adding: “Current schemes involving partners on the OFT investigation were revisited and checked thoroughly. If the investigation reveals any further cause for concern relating to any of our partners we would seriously consider recovering costs and termination of our contractual relationship if this course of action is found to be necessary.”

E.G. Carter and Thomas Vale declined to comment; Balfour Beatty and Renew Holdings, listed with subsidiary Bullock, insist all subsidiaries now comply with the Competition Act and the investigation relates to “historic tenders”.

The Keepmoat Group, which includes Frank Haslam Milan (FHM), and Bramall Construction, works with nearly 100 affordable housing partners nationwide. The OFT is investigating three of its tenders worth £4.5m.

Director Allen Hickling said before 2005, FHM in North East and Bramall Construction in Yorkshire used cover pricing as a way to “ensure they remained on procurement rosters”, and not for financial gain.

Unsurprisingly, most of the accused contractors maintain it was used in this way as not to upset the client by not competing for the work. In this case, company A contacts Company B, which is also bidding for the job, and asks for a “cover price”. Company B gives Company A, a price roughly between 5 to 10 per cent higher than its own bid. Company A submits this price to the client as its own, safe in the knowledge it will not win.

Paul Donlan, head of affordable housing for client adviser Davis Langdon, says this is probably the least serious offence being investigated. On a tender list of four contractors, the client would get three good prices and then one that is the cover price,” he says. “However, it becomes more serious when there are three or four cover prices and the lowest one is being over-inflated. That is when the public purse or client might lose out.”

24housing quizzed Gateshead Housing Company over a contract it awarded to FHM in 2004. It said the price it received was inline with a similar contract awarded to a non-OFT-named firm; and was happy it received best value for money.

Sheffield City Council, whose Almo, Sheffield Homes, has worked with Connaught, Henry Boot (no comment) and Keepmoat, said it would be bolstering its procurement processes where necessary, particularly with regard to pricing and benchmarking prices against known and substantiated pricing data.

Connaught says three of its tenders between 2000 and 2003 are under investigation, but that none of its current contracts are. It didn’t stop Matrix Housing seeking assurances that no malpractice took place in the award of its 10-year, integrated services contract to Connaught in 2008, worth £180m. Roger Taylor, head of asset management at Rooftop Housing Group on behalf of the Matrix Partnership, said: …we have sought reassurances from Connaught and we will continue to seek reassurances from them. We are currently awaiting the report by the Office of Fair Trading and we will then reassess our position.”

The advent of frameworks and partnering has made the bidding process more transparent and predetermined. However, those contractors on frameworks found guilty by the OFT could see their slice of work on a framework get thinner, warns Donlan. “It depends on how the framework and contract is written,” he says, “but most of the frameworks we’re involved in don’t guarantee you a set amount of work.”

Connerty foresees a number of follow-up claims by authorities to recover lost sums. He says authorities would be targets for no win/no fee litigation funders, because the odds of a successful outcome are high. “They are very keen on this sort of claim because breach of contract will already have been proved,” he says. “The remaining things that need to be proved are that the breach caused you loss, and the amount it cost you. They see them as solid gold winners.” It is understood insurance giant Allianz and Claims Funding International would be interested in funding claims.

Andrew James, partner at Harrison Clark, who is providing representation for contractors in the inquiry, says proving loss will be difficult. “They would have to show that one of the colluding tenderers was the successful one, and that their tender was higher as a result – often it will not be, because they have priced it competitively and it is the other tenderer who artificially inflates his price to avoid winning the job. Unless all the tenderers are in collusion (which is rare) there are normally several competitive tenders. Thus proving loss is not easy.”

The OFT will have to decide how far to punish a sector already on its knees in the recession. It will then be up to individual procurers to decide how to handle each case.

There are discretionary grounds within the Public Contracts Regulations 2006, to exclude bidders from the tendering process who have committed an act of grave misconduct. It could be argued that a breach of competition law is sufficient grounds. But due to the glut of firms facing allegations, excluding on the basis of anti-competitive behaviour may result in an equally uncompetitive process due to the lack of eligible bidders. As one contractor named in the inquiry wryly pointed out: “If they get rid of all of us, who’s going to build all the houses?”

Inquiry timeline

2004 – Inquiry kicks off after specific complaint in the East Midlands.

August 2005 – The OFT raids premises of 22 construction companies in the East Midlands and Yorkshire

March, 2007 – The OFT announces that it has 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.

April 2008 – The OFT issues statement of objections against 112 firms it accuses of bid rigging and anti-competitive behaviour. It says it has uncovered 240 alleged infringements up to 31 December 2006.

June 2009 – The OFT is expected to publish the first wave of findings.