Paying the high price

The construction industry has taken some hefty blows in the months following the Office of Fair Trading (OFT) investigation into cover pricing, which resulted in millions of pounds in fines. The latest estimate is that the 103 firms, who were fined £129.5m for breaching competition laws between 2000 and 2006 will have to generate more than £4bn of work to cover the costs of the fines.

While firms, including Kier, Apollo and Renew Holdings have already begun an appeal against the amount of the fines, the investigation is already believed to have claimed its first victim.

South East building contractor Concentra (formerly known as Durkan Pudelek) received a £3.3m fine, went into administration on New Year’s Eve, with half of the 40 staff made redundant on January 4 and work on all its sites suspended. Sources close to the company said the reason for the administration was the OFT fine.

This is the first reported case of fallout from the OFT investigation and parent company Durkan, which held a 51 percent stake in Durkan Pudelek until 2007, may still be pursued by the OFT for the fine.

The Federation of Master Builders (FMB) has already expressed its concern at the news and has speculated that Concentra will not be the only company to be affected. There are also rumours of organisations whose projects were subject to cover pricing pursuing damages against the construction companies involved.

In the midst of recession, it’s feared by industry stakeholders that other companies fined may face an uphill battle, as their reputations have been brought into question by the investigation. In the eyes of the public, the investigation has reinforced the image of building firms conducting underhand deals in back rooms and fixing prices to defraud their clients.

In reality, the majority of those fined were accused of the less serious practice of ‘cover pricing’. Whilst the practice of cover pricing is wrong and breaches competition law, in all but a few cases it would be difficult to prove that a client paid more for a project.  

Essentially, cover pricing describes the previously widespread practice of a contractor asking a fellow contractor what its tender price for a project was so that it could put in a slightly higher price so as to ensure it was not awarded the contract. 

It would do this because it wanted to “show willing” and remain on clients’ tender lists for future projects, but did not want to win the contract for the project in question, usually because it had too much work on at the time.

Despite the fact that in these cases the companies had no intention of acting in an anti-competitive way. It is sufficient that the object or effect of the conduct is capable of preventing, restricting or distorting competition.

In fact, in a few instances parties were fined where a cover price had been submitted and the client had decided not to proceed with the project.

Had the parties involved just submitted a high price and not spoken to other companies, they would not have faced the OFT investigation, but it is the act of speaking to a competitor which prompted the investigation.

The fallout from the OFT probe has been substantial, not just from fines but through the damage to the reputations of all the companies involved. Those companies feel aggrieved because they know most other contractors engaged in cover pricing but escaped investigation by the OFT because the OFT did not have the resources to investigate all companies involved, limiting their enquiry to companies in a fairly small geographical area.

Even those businesses who were investigated but didn’t receive fines have faced several years of intense scrutiny, which has impacted on the morale of all those involved as well as using up time and resources. The significant legal costs involved in defending these allegations are also not recoverable and in some cases may come close to the level of fines imposed.

Those who were fined face the task of restoring their reputation – a challenge when there is already talk in the media about damages claims from clients and ‘blacklisting’ of the companies from tender lists.

But will the OFT’s investigation have long term ramifications for the industry and the use of cover pricing? And will there be more transparency in pricing and tendering?

In the current economic climate the chances of any companies cover pricing is limited as the competition for work is fierce. But when the economy picks up and work once again becomes plentiful, many suspect that cover pricing is likely to be used again, although it may not be as commonplace as it once might have been.

To try to prevent its reoccurrence and to show clients the industry is “cleaning up its act”, a code of conduct has been launched by the UK Contractors Group and the Federation of Master Builders. The UK Construction Industry Competition Law Code
of Conduct lays out the way the construction industry should comply with competition law, looking specifically at pricing and tendering.

Moving forward it provides a good foundation stone for businesses to base their best practice on and if observed should avoid any further OFT investigations. And for an industry hit by some of the toughest trading conditions in memory, this code could prove to be a fresh start in an industry which, in the eyes of its clients and the public, desperately needs one.

Other lessons to be learnt impact on both sides of the tendering process; for contractors, implementing a compliance policy, including training all staff involved in the tendering process is essential.

In the case of future tenders, the advice is very clear. Never disclose price sensitive information to a competitor in any instance and do not summit cover prices; either return the tender or put in an inflated price without reference to anyone else.

For organisations requesting bids, the question should be asked if suppliers should be selected purely on the basis of cost. Value for money be a stronger driver than the cheapest price. If both sides of the process adopt this stance, future cases investigations can be avoided.

Andrew James is head of construction at Harrison Clark solicitors. Contact Jenni Fryer on Tel: 0121 238 2871 or visit: harrison-clark.co.uk.