Anti-competitive tendering

Earlier this year, the Office of Fair Trading (OFT) concluded an investigation it had been carrying out since June 2002 into the tendering practices of flat roofing contractors in the West Midlands. The OFT's findings will serve as a warning to many businesses in the construction industry to maintain effective internal company policies to ensure compliance with UK and EU competition law. The sanctions that can be imposed for breach of the various regulations are draconian.
The Competition Act 1998 prohibits agreements, practices and conduct that have a damaging effect on competition. The Act provides for fines of up to 10% of a company's turnover for each year of infringement, subject to a maximum of three years. Additionally, under the Enterprise Act 2002, individuals found guilty of such practices may face criminal penalties, including up to five years' imprisonment.
The OFT has indicated that it regards cartels as a particularly damaging form of anti-competitive agreement. Their purpose is to increase prices and, as a result, they cause harm to the consumers of the goods or services concerned. Any business found to have engaged in cartel activity is likely to face a particularly high financial penalty.
Anti-competitive practices
The whole investigation started when Briggs Cladding and Roofing, acting through its parent company Ruberoid, notified the OFT of the anti-competitive practices that were prevalent within the region, and applied for leniency in accordance with the OFT's leniency scheme. As the first party to approach the OFT before it had started its investigation, Ruberoid and its subsidiaries were granted 100% immunity, conditional upon it co-operating fully with the OFT throughout its investigation.
Having decided that there were reasonable grounds for suspecting price fixing or market sharing, the OFT began formal investigations by obtaining warrants from the High Court to enter and search the premises of a number of companies. Unannounced visits were also made to a number of other businesses under the powers available to the OFT to enter premises without warrant to seize relevant documents.
Nine flat roofing contractors were found to have been involved in individual agreements or concerted practices with the object of fixing prices for repair, maintenance and improvement works for flat roofs in the West Midlands.
When a client wished to undertake flat roofing works in the area, in order to have competition for the individual contract, it typically invited a number of suitably qualified roofing contractors to submit tender bids detailing the price at which they could undertake the work specified. Clients included both public and private sector entities over a wide range of projects, including a number of schools, a community library, a shopping centre and a car park.
The OFT investigation found that a number of flat roofing contractors working within the region were colluding to eliminate competition among themselves. A large number of faxes between the companies revealed that they had agreed to return token bids that were inflated to allow other firms to win the contracts. The lowest bids were not being determined by market forces, but by the suppliers themselves.
Cover bidding
There were generally three types of arrangement that could result in a pre-determined supplier winning a contract. First, it was found that 'cover bidding', also referred to as cover pricing, was widespread. This occurs when a supplier submits a marginally higher price that is not intended to win the contract. This is a price that has been decided upon in collusion with another supplier that has been secretly nominated to win the work. Cover bidding gives the client the impression of competitive bidding but, in reality, suppliers are agreeing to submit token bids to pave the way for one firm to win the work.
The OFT was unimpressed with the contractors' contention that they were often under intense pressure to submit bids, failing which the client authority might strike them off a pre-qualified panel of approved contractors. That did not amount to a sufficient explanation or excuse for cover pricing, which was viewed as a particularly serious infringement of the Competition Act.
Another type of arrangement found was 'bid-suppression', when suppliers agreed among themselves either to abstain from bidding or to withdraw bids.
Rotating bids
A third arrangement described by the OFT was 'bid-rotation', a process whereby the pre-selected supplier submitted the lowest selected bid on a systematic or rotational basis.
Fines totalling more than £330,000 were imposed. Briggs, which had committed more infringements than any other company, had its fine reduced to zero as it kickstarted the investigation. Another firm, Howard Evans Roofing, also co-operated with the investigation and had its fine reduced by half.
It is clear that the OFT regards anti-competitive practices as widespread, particularly within the construction industry. It will pursue such investigations with vigour whenever it can, acting upon tip-offs encouraged by its leniency policies. Under newer regulations it will also have powers to eaves-drop on communications if it suspects foul play. Unannounced searches of company premises are an equally powerful way of getting to the evidence. Criminal prosecutions are likely where directors and management knowingly engage in such practices. Perhaps these powerful measures, originating primarily within the EU, will eventually eradicate these damaging practices.