Press Release
05 June 2010
A leading Yorkshire lawyer has warned public authorities they continue to risk paying inflated prices on building projects unless procurement procedures are tightened up.
Speaking at the annual National Housing and Building Seminar hosted by the Association of Public Sector Excellence (APSE) on Friday (July 2), Jonathan Sinclair of Stewarts Law in Leeds told delegates that the illegal practice known as cover pricing continued to be a threat in construction tenders and was potentially costing the tax payer millions of pounds.
Mr Sinclair, an expert in competition disputes, was invited to speak to an audience of elected councillors, service directors, operations managers and procurement officers from around the UK about the scandal which erupted over cover pricing last year when 103 construction companies were fined a total of £129.5 million for colluding on tender bids.
In a four-year investigation, the Office of Fair Trading (OFT) found evidence of more than 4000 infringements of competition rules relating to bids on contracts worth some £3 billion.
"Roughly three quarters of the 199 offences ruled on by the OFT involved contracts for public sector bodies, charities, housing associations and education establishments," said Mr Sinclair. "The legal position is clear - cover pricing is illegal because it involves an exchange of bid information between competitors, which inherently misleads clients by distorting the competitive nature of the tender process.
"Cover pricing occurs when companies that do not genuinely wish to bid on a particular contract nonetheless get involved in the tender process by submitting a bid at an inflated level - providing a "cover price" - which they know would be unsuccessful. This is done in collusion with other companies and sometimes involves offers of financial incentives. This clearly has the tendency to inflate the final price because it reduces the number of genuine bids, encourages genuine bidders to pitch at a higher level because know they have less competition, and involves a deception which carries the temptation for outright fraud."
Mr Sinclair warned that despite last year's fines, evidence suggested that cover pricing remained prevalent. "A follow-up survey published by the OFT in June indicated high levels of awareness of the OFT investigation but the findings overall are very contradictory and suggest that there is still a very long way to go to ensure all companies achieve compliance. Clearly there is a huge cultural challenge - cover pricing is so prevalent in the industry it has even been described in text books. Many companies have sought to excuse the practice of submitting a false bid at an artificially high price as preferable to not bidding at all because it means they are not risking being excluded from future tender processes.
"All public bodies are currently under enormous pressure to make efficiency savings within tight budgetary constraints, so clearly it is in their interests to take steps to avoid cover pricing and be sure they are getting the best price possible. Practical steps such as carrying out an independent assessment of costs before a contract is put out to tender, inserting 'no collusion' clauses in the tender documents and inviting as many potential contractors as possible to bid are all advisable. I would also advise offering assurances that companies will not be excluded from future tenders if they choose not to bid, and always asking for a complete breakdown of costs so in-depth comparisons can be made."
Commenting on the appeals against the OFT fines lodged by 25 construction companies, the first of which, including an appeal by the Kier Group, were heard in court this week, Mr Sinclair said: "Only one of the appeals expressly denies any wrong doing. The Kier Group, along with 18 other companies, is appealing against the size of the fine imposed, i.e. not contesting that it did anything wrong. There has always been a widespread acknowledgement by the companies involved of the facts as alleged by the OFT. In total, 86 out of the 103 companies fined had their penalties reduced for admitting bid-rigging and giving incriminating evidence to the OFT."
APSE's National Housing and Building Seminar was held at the Crowne Plaza in Manchester on Thursday and Friday (July 1-2). It included a series of talks and workshops aimed at sharing best practice and discussing latest trends in public housing and construction.
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