Eagle-eyed auditor raised construction firm price-fixing alarm

Published by Jon Land for 24dash.com in Communities and also in Central Government, Local Government

It was an eagle-eyed auditor in Nottingham who first raised the alarm on a trail which would lead to the biggest investigation to date by the the Office of Fair Trading (OFT).

Concerns over irregularities in the bidding for construction deals at the Queen's Medical Centre in 2004 have ballooned into a probe in which more than 100 firms - large and small - are facing allegations of uncompetitive practices.

Over the past four years, the OFT has considered evidence of suspect tendering on construction projects in the public and private sector worth a mammoth £3 billion, before focusing on 240 specific instances.

The bulk of its allegations relate to cover pricing - where some "competing" firms in the bidding for contracts will put in an artificially-high tender because they do not want the work.

This, the OFT argues, is illegal and could lead to more inflated prices and give the client a false impression of the level of competition in the market.

Fines of up to 10% of a company's turnover are potentially available for competition breaches, although construction industry representatives claim such penalties would be draconian.

The Construction Confederation points out that although cover pricing is a technical breach of competition law if firms discuss their intentions with each other, there would usually be no extra cost to the client as the "winning" bid would be a fair price.

Often cover pricing for a big local client such as a council is seen as a more acceptable alternative for busy firms than the risk of upsetting a regular source of work by refusing to tender altogether.

Chief executive of the Construction Confederation Stephen Ratcliffe is keen to avoid players in an industry employing three million people being disproportionately penalised.

He said: "Cover pricing was symptomatic of a time when work was won on lowest price and short-term relationships were the norm. Culture in the industry has since shifted significantly and single-stage competitive tendering based on lowest price is declining.

"In recent years, the industry has gone to great lengths to stamp out the practice."

The more serious allegations highlighted, however, involve a minority of firms winning bids and paying "compensation" payments to other companies - effectively paying them to stand down from the running, according to the OFT.

These illicit payments - anything up to £50,000 in the watchdog's previous experience - are made to cover the cost of tendering by losing firms and covered up by false invoices for work never carried out to create an audit trail.

The OFT has levelled these charges after using forensic IT experts to examine companies' computers during the course of the probe, which involved 57 site visits in the East Midlands, Yorkshire and Humberside.

The 112 companies at the centre of the claims have around two months to reply to the OFT's formal statement of objections today, with a swathe of fines across the sector the most likely outcome.

Around two thirds of the firms admitted participation in some bid-rigging to lower the possible penalties.

A previous OFT probe into roofing firms led to 13 companies being fined £1.6 million between them in 2006, although this dealt with firms fixing artificially-high prices for clients.

But today's case has raised few alarms across the City, despite quoted construction firms such as Balfour Beatty, Carillion and Kier being named in the investigation.

Numis Securities analyst Howard Seymour, who predicts fines of up to £3 million for the larger companies, said: "The investigation into cover pricing is likely to make a lot of headlines, but in our view due to leniency arrangements and the fact that this is an investigation of regional offices it should not be overly material in financial terms."

Construction firms should not rest easy, however, as the competition watchdog is unlikely to relent in its pursuit of the sector.

OFT chief executive John Fingleton said: "This investigation will hopefully send out a strong message to the construction industry about the seriousness with which we view suspected anti-competitive behaviour.

"Businesses have no excuses for not knowing and abiding by the law."