Holiday on death row

So imagine what the August break is like for those running the 112 companies that have been accused of breaking competition law by the Office of Fair Trading. For a fair number of them, what happens between now and early next year, when the watchdog makes its final pronouncement, will be nothing less than a matter of life and death.

At present, the accused are forming a queue to give verbal evidence, knowing that the future of their firms may depend on what they say. We don’t know yet what level of fines the OFT will consider appropriate. The legal maximum is 10% of global turnover, although in practice this is reserved for those operating cartels and repeat offenders, neither of which is the case here. Instead the betting among the legal fraternity is on fines of 5% for firms that have been found guilty and denied leniency. The thinking is that the level set will be partly determined by the action against roofing firms a few years ago. Then the fines were about 2%, which evidently failed to act as a deterrent to cover pricing.

If the lawyers are right then it’s a fair bet that 60% of those found guilty will be driven out of business shortly afterwards by cash flow shortages. Of course, a good number of those accused will get a discount on the fines if they confessed their sins in time. But even then, it’s looking rather bleak and, in more than a few cases one imagines, it is also looking totally arbitrary. Unfair, even. Let’s say your firm turns over £100m, and you’ve given someone in the estimating department their head. Unbeknown to you, this individual has given a few covers and another firm has revealed that to the OFT. If you deny the charge – in good faith – bang goes any chance of a 50% cut in your fine. Then, once presented with the evidence, you say okay we admit it, leniency will bring you no more than a 25% discount. So a small firm in this position is still looking at a fine of £3.75m – more than a year’s profit even in the best of times on the back of a little bit of commercial development. But that avenue of earning money and raising margins is blocked for the foreseeable future and it doesn’t need any financial clairvoyance to see margins heading back to 2% rather than 5% – and that’s if work is plentiful …

The accused are forming a queue to give verbal evidence to the OFT, knowing that the future of their firms may depend on what they say

As we’ve all said before, cover pricing is against the law – and it shouldn’t play any part in industry practice. But there’s no evidence that anyone has actually made money out of it, nor therefore that the taxpayer has lost money. So surely it can’t be right for a firm to lose years of profit – and hundreds of people to lose their jobs – because someone empowered a rogue estimator? Sure, penalise the genuinely fraudulent. But as MPs on the Business and Enterprise select committee recently pointed out in their Construction Matters report, punitive fines would in the end be detrimental to competition. So let’s hope those now standing in front of the OFT get a fair hearing, and that common sense, natural justice and penalties commensurate with the crime all prevail.

Denise Chevin, editor