OFT bid rigging investigation: Cleaning up construction

Office of Fair Trading (OFT) officials running construction's biggest ever bid-rigging investigation are playing an intriguing game of bluff and counter bluff with contractors caught up in its three-year probe.

The sheer scale of dodgy bidding across the industry has stunned OFT investigators, who are now struggling to cope with the number of contractors implicated.

More than 3,000 suspect contracts worth £3bn have been examined, with values ranging from just £30,000 right up to a major £25m design-and-build job.

The OFT investigators discovered that 'cover pricing' has been endemic across the industry for years and are now looking to launch a series of prosecutions in 2009 following an operation that first began back in 2004.

But the OFT simply hasn't got the resources to fight all the cases and is banking on contractors owning up to wrongdoing in a bid to get any future penalties reduced.

Leniency scheme

The offer has proved attractive and 38 companies have already come forward under the leniency scheme to confess to cover pricing. Those firms hope that putting their hands up will lead to a reduction in fines of 50%.

That could be a substantial saving with industry experts predicting fines of "hundreds of millions" because penalties for bid rigging can be as high as 10% of a company's turnover.

The OFT is also offering a 'Fast Track' scheme up until its full case notes - known as the Statement of Objections - are published next spring.

Firms can own up to bid rigging on individual tenders under this scheme in return for a 25% cut in fines.

But legal experts are warning contractors not to dive in. "I have never heard of this sort of Fast Track system being used before and it seems to be a sign that the OFT is struggling to cope," says David Harrison, head of EU & Competition at Berwin Leighton Paisner.

"Firms are being asked to own up to something they don't know the full details of. You just get the basic details of the tender involved then have the option of admitting guilt.

"It's a bit like a poker game where the bluffing starts. The OFT will have much less work if everyone owns up but people should be careful. Making written admissions at this stage could also put you in a weak position if any of the cases are pursued in the civil courts by parties who believe they are due compensation."

The OFT has a 20-strong team working on the investigation, which has involved dawn raids on 57 contractors.

Famous names

A host of famous names including Kier, Galliford Try and Rok have already been forced to admit to their shareholders to being caught up in the probe.

The OFT's deputy director of cartels Deborah Jones says the investigation phase is now 95% complete. Companies under investigation will have a chance to look at the OFT's file of evidence early next year before the full range of allegations is published.

The operation first began following allegations from a public sector client in the east Midlands in 2004. A number of roofing firms were prosecuted, but evidence uncovered led to the investigation widening countrywide with the main focus still on the East Midlands, North Yorkshire and Humberside.

Contractors in those areas are worried that they are being picked on by the OFT. One local contractor says: "It's obvious they discovered a big problem, but it must have been going on all over the country.

"We are being targeted because we were discovered first. There's no way the OFT has the resources to investigate other areas as carefully as they have our region."

The OFT's Jones says: "We have not limited this to one area - the investigation has spread and we have every reason to believe that this practice was widespread across the UK.

"If people report it is still going on, it will be added to our file and taken into account."

Culture change

Construction leaders are confident that the OFT investigation and a change in culture across the industry is gradually stamping out corrupt forms of tendering such as cover pricing.

"With cover pricing, there has been the feeling that 'everyone is doing it'," says Chartered Institute of Building chief executive Chris Blythe. "But everyone knows it is wrong and now there's a real drive for the industry to clean up its act.

"Stamping out this and other forms of corruption is now a massive challenge and we need a cultural change like the one that has gone on in health and safety.

"I'm confident that will happen because a lot of people in this industry want to do the right thing."

More unscrupulous firms agree cover pricing deals then pocket the extra cash they have screwed out of the client.

The lowdown on Cover pricing

What is cover pricing?

Cover pricing is when a contractor bids for a job with no intention of winning the tender.

How does it work?

Companies work in collusion with each other so they know the levels of each other's bids. Company A will price a job at £1m and confer with company B, which prices the job at £1.2m knowing it won't get the job at that price.

Why would they do that?

There are two common reasons:

1) Company B is keen to stay in favour with a valued client, but has no interest in this particular job. It doesn't want to be seen to snub the client's latest contract race and a cover bid allows it to take part in the contest safe in the knowledge it won't win.

2) Company A wants to get more money out of the client so it puts in an inflated bid and then asks Company B to put in an even higher tender. Both sides then split the extra cash they have screwed out of the client.

Why is it illegal?

In example 2, the client is obviously being defrauded. Things are a little less clear in example 1, when the contractor is simply trying to keep in its client's good books. But the OFT still views it as offence whatever the reason because it distorts fair competition in the construction market.