Public AdministrationWritten evidence submitted by Stephen Ratcliffe, UKCG (PROC 29)

I am writing about evidence given to your inquiry by Colin Cram on 22 January. He made reference to the operation of a construction cartel that had cost the taxpayer some £300 million. This is a gross mis-representation of the OFT’s construction inquiry and I want to set the record straight.

The OFT inquiry focussed on the practice of “cover pricing”. Cover pricing occurred when a bid was entered for a job that a contractor did not wish to win. In essence, the contractor would try to price the job too high to avoid being awarded the work. This, in itself, is not an infringement of competition law. Covers were submitted to avoid upsetting a client and avoid the risk of not being invited to bid for future contracts.

However, if this artificially high tender was then discussed with another contractor who was also bidding for the work—for example, to confirm it was high enough not to win—it would breach competition law. The clear motivation for this practice was to avoid getting work rather than inflating prices. During the investigation OFT certainly did not suggest there had been a cost to the taxpayer of £300 million.

It is fair to say that over 15 years ago the practice of cover pricing appears to have been widespread in the construction industry. This was at a time when the vast majority of business was undertaken through single stage competitive tendering where contracts were awarded at the lowest price. Over the past 15 years or so we have seen significant changes in the way construction is procured, including the advent of “best value”, more collaborative forms of working and longer term relationships developing between contractors and clients. Thus the opportunity for cover pricing has significantly diminished and the practice is largely historic.

As a consequence of the OFT investigation, which had been ongoing for the past five years, construction companies now have a clearer understanding of the fact that cover pricing is deemed to infringe competition law and have put in place strict competition law compliance policies and procedures to ensure that they do not become involved in this practice or any other similar practices in the future.

With the encouragement of the OFT, the UKCG has also launched a Competition Law Code of Conduct which has been widely supported throughout the industry. I hope this sets the record straight. Please let me know if you require any further information.

February 2013