277. In April 2008, the Office of Fair Trading
(OFT) issued a 'Statement of Objections' (SO) against 112 construction
firms in England over alleged incidences of 'cover pricing'.
This is a practice whereby a contractor aims deliberately to lose
a tender by submitting an uncompetitive bid. They might choose
to do this because they have discovered late on that they are
not able to carry out the work, or because they wish to stay on
a client's preferred bidders lists. This practice is not illegal
in itself. However, the law forbids firms bidding for the same
contract from contacting each other during the process to gain
an estimate of what might represent a plausible bid, but which
would still not win the contract.
278. The OFT's inquiry, which began in 2004,
has focused on 244 infringements. In the case of 12 of these (involving
9 companies out of the 112), it is investigating more serious
potential incidents of a successful bidder paying an agreed sum
of money to the unsuccessful tenderer. The OFT's press notice
states that "no assumption should be made at this stage that
there has been an infringement of competition law by any of the
companies named in the SO".
Those companies concerned now have an opportunity to respond in
writing or orally to the OFT before it reaches a final judgement.
This is not expected until 2009.
279. The statement of objections is not publicly
available, so the only available information relating to the latest
developments has been the OFT's press notice and briefings it
provided to the media on the day of its release. The Construction
Confederation has stated publicly its concern at the "sensationalist"
reporting of the OFT announcement, which it believes has adversely
affected the public's perception of the industry.
The Construction Confederation believe that the practice of cover
pricing was mostly a symptom of inadequate procurement regimes
within the public sector. It also argues that the use of cover
pricing had all but died out in more recent years because of a
move away from procuring on the basis of lowest price.
280. The controversy has also potentially created
confusion among public sector clients about whether their own
contracts have been subject to cover pricing. If it has taken
place, it is not clear either whether the practice would have
cost the taxpayer. There were press reports that customers may
have overpaid by around 10%, although the Construction Confederation
argue that cover pricing itself did not give rise to higher prices
for clients. Given
the low average profit margins for the sectortypically
2-3%it seems unlikely that if clients did overpay, that
it was by the amount speculated.
281. The industry's low profit margins also have
implications for the OFT's final decisions on the case, once it
has completed taking evidence. The Office has the power to fine
a firm up to 10% of its worldwide turnover if it is found to be
a member of a cartel. However, this is not likely to apply for
any companies found guilty of cover pricing. Many have also applied
for leniency in exchange for cooperating with the investigation.
There is a risk, however, that highly punitive fines would send
those companies into administration, giving rise to the paradoxical
result of an inquiry into anti-competitive behaviour actually
reducing the competitive capacity of the market.
282. The current controversy
over 'cover pricing' can only have damaged the construction industry's
reputation, and is at odds with the drive to raise standards.
We cannot pre-judge the final verdict of the Office of Fair Trading's
investigation. However, we do believe that its outcome should
be to ensure that the practice of firms coordinating with each
other to lose tenders for public sector work, as well as more
serious instances of making compensatory payments, are both stamped
out. It must, however, achieve this without damaging the industry's
capacity. We also recognise that sensible clients should have
procurement systems which do not create incentives to engage in
cover pricing in the first place.