Builders fined £129m for rigging contract bids

Kelly Macnamara,Press Association
Tuesday 22 September 2009 13:00 BST

Some of the UK's largest construction firms were hit with multimillion-pound fines today after illegally rigging contracts at the expense of the taxpayer.

The Office of Fair Trading (OFT) issued penalties to 103 companies worth a total of £129.5 million after an investigation into bid-rigging in England, but warned that the practice had been "endemic" in the industry.

It said companies colluded with competitors on building contracts and this meant customers were at risk of being overcharged.

The biggest fine - £17.9 million - went to Kier Group, while Balfour Beatty was fined a total of £5.2 million relating to the actions of its subsidiary Mansell. Carillion has been asked to pay £5.4 million due to contracts tendered by Mowlem, which it bought in 2006.

Contracts involved in the investigation included public authority work on schools and hospitals, as well as private tenders for apartment blocks.

The OFT said most of the offences involved so-called cover pricing, where one or more bidders arranges for competitors to put down high bids. These bids are not to win the contract but are submitted as genuine and give a misleading impression to clients about the level of competition.

Firms were fined an average of £1.26 million, or 1.14% of global turnover, although this was substantially less than the maximum 10% fine available to the OFT.

The fines relate to 199 tenders between 2000 and 2006 but the OFT warned that its investigation suggested "that cover pricing was a widespread and endemic practice in the construction industry".

The investigation was sparked in 2004 by a complaint from an NHS auditor in Nottingham, but it quickly spread as the watchdog realised the scale of the problem.

It uncovered evidence of cover pricing in more than 4,000 tenders involving more than 1,000 companies but said it had to focus on the companies and instances where the cases were strongest.

The Local Government Association (LGA) expressed outrage at the construction firms.

LGA chairman Margaret Eaton said: "There are simply no excuses for collusion or cover pricing, which leaves the public and councils to pick up the tab.

"It will come as a shock to residents that some construction companies have rigged bids for contracts at taxpayers' expense.

"Local authorities strive to ensure that any new building which they pay for is delivered at the best value for the taxpayer, but it appears that some firms have failed to abide by the law."

A legal expert said councils had grounds to consider seeking redress.

Scott Campbell, of law firm Hausfeld & Co, said: "Bid rigging unlawfully inflates pricing, and in the case of local authority building projects, overcharged the taxpayer millions of pounds through the councils' construction procurement process."

The OFT did not try to calculate how much extra customers had paid for the work as a result of cover pricing.

Simon Williams, the OFT senior director on the case, said: "Bidding processes designed to ensure clients and, in many cases, taxpayers receive the best possible choice and price were distorted, creating a real risk of increased prices.

"This decision sends a strong message that anti-competitive and illegal practices, including cover pricing, must cease."

Incidents covered in the investigation are mainly focused on the East Midlands, Yorkshire and Humberside regions.

In 11 instances, the OFT found the lowest bidder faced no genuine competition at all as all other companies involved in the tender had put down cover bids.

And in six instances money had changed hands between the firms, with the successful bidder paying "compensation" up to £60,000 to its unsuccessful rivals by raising false invoices.

The companies involved in today's ruling will be able to pay back their fines in instalments over three years, a relaxation of the normal requirement to settle within two months.

They were given the "exceptional" option to reflect the extent of the damage on the industry by the housing downturn and recession.

The UK Construction Group (UKCG), which represents 29 contractors, called the decision to penalise the firms "unfair" and said bid-rigging was a thing of the past.

UKCG director Stephen Ratcliffe said the industry was already reeling from the economic conditions.

"Everybody knows - including the OFT - that cover pricing was widespread in the industry in the past," he said.

"It is perverse and unfair to impose such disproportionate penalties on a small number of contractors selected by geographical sampling."

Of the firms fined today, 86 received a reduction in their fines because they admitted their involvement in cover pricing.

The OFT has recommended that both public and private authorities putting projects out to tender should not automatically exclude the listed firms from bidding for future contracts.

But it warned: "It should not be assumed that the OFT would take a similar view in future cases."

Stephen Blake, a project director on the OFT case, welcomed a code of practice drawn up by the industry to ensure the message is reinforced.

But he said those tendering for contracts should also be aware of the potential for unscrupulous practice.

"Clearly procurers need to be vigilant to the possibility of the tender process being rigged, as the NHS was in this particular case, and report if they have suspicions, if they think anything untoward is going on," he said.

Alan Ritchie, general secretary of construction union Ucatt, said: "The cover pricing scandal demonstrates why the construction industry cannot be trusted to police itself.

"If companies are prepared to corrupt the bidding process for public sector contracts, what else are they prepared to sanction in the quest for profits?

"The issue of bid rigging is very serious and has undoubtedly led to local authorities and the public sector paying over the odds for contracts."

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