OFT special: The cost of a phone call

Something has gone awfully awry in the Office of Fair Trading with this cover-pricing affair. The OFT inquiry discovered industry-wide behaviour when on thousands of occasions, chief estimator A would ask chief estimator B for a cover price. That’s all. No fiddle, no backhanders, and no favours. Damn it, anyone of you could have told the OFT boys how ordinary that is.

Then the OFT showed us its muscle and imposed millions of pounds of fines on 100 or so of the contractors. That’s the penalty for chief estimator Tom having a five minute telephone call with chief estimator Jerry. “Hello Jerry, how are you doing? We’re too busy to bid for this job – give us a cover price.” And Jerry does. Tom puts in his bid. He doesn’t expect to win. And when big boy OFT finds out … wallop … massive fine.

Consider this alternative. Tom receives the invitation to tender. There, in the box, is the bumf … some drawings, a spec, perhaps a bill of quantity. Tom’s firm is glad to be on the tender list. They fought hard to get on. But if Tom sends that bumf back with a “no thanks” he will not be a popular guy. So come what may, Tom will bid. That’s a definite. In real life, Tom will put in a bid, even a guess, with enough margin to “fit the work in” – even if it means bringing in more staff, paying over the odds to finance the adventure, taking a chance on being able to cope. The odds are his price will be too high; he does it to save face. But notice that this time he hasn’t phoned any Tom, Dick or Gary. Instead, he used his experience to sniff a price, add his grannie’s age and fill in a piece of bid paper. And all that is legitimate, and just as ordinary as getting a cover price. The OFT can’t touch Tom for sniffing.

So, let me tell you the rules. Go read the Enterprise Act 2002 and Competition Act 1998, in particular section 2 (1). It prohibits “agreements between undertakings or concerted practices, which have as their object or effect the prevention, restriction or distortion of competition”. The mischief is Tom’s telephone call. It can’t be anything else.

Mind you, that’s not what the OFT says. The OFT says it is in breach of the Competition Act to put in an artificially high price. No it’s not. It is not wrong to think of an artificially high price by sniffing all by yourself. The wrong bit is the phone call. The OFT says a firm that bids not to win the contract is in breach of the rules. No it’s not. The wrong bit is to phone a friend. The OFT says it’s in breach not to submit a genuine bid. No it’s not. The wrong bit is to phone Dick or Gary. The OFT says it is in breach to mislead clients as to the real extent of the competition. No it’s not. If I whistle, stamp my feet, lick my forefinger, stick it in the air and bloomin’ well guess a price and will bloomin’ well do the job, if the customer says done, none of that is in breach of the Competition Act. The OFT can’t fine Tom’s firm one ha’penny, never mind millions of pounds.

Now let’s figure out the difference. Do it all by yourself and you are squeaky clean. Be idle, be lazy, and get a cover price – that’s all bogey-man territory. So, we have spotted the difference … yes folks, you phone a friend, and the OFT becomes a millionaire.

Let’s figure out the difference. Do it all by yourself and you are squeaky clean. Be idle, be lazy, and get a cover price – that’s all bogey-man territory

Look again at that test: it boils down to something called a “concerted practice” which has as its object or effect the prevention, restriction or distortion of competition. “A concerted practice” need only be an exchange of information between Tom and Jerry. It’s the effect that’s the crucial test. Is the effect of the phone call the prevention, restriction or distortion of competition?

As for Tom, if he wants to bid high, the phone call doesn’t have one jot of effect. He would have bid high if Jerry were missing or engaged on the day Tom phoned. Tom would have sniffed. And unilateral nature of the sniff means the OFT can’t touch him with a bargepole.

As for Jerry, even if he does give a cover price, so what? He is already breaking his neck to win the job. Is he going to up his bid because he realises one of his competitors isn’t interested? Oh do get real. He already knows – because it is the way of things – who is bidding. He already knows that most of his rivals are gagging to win the job. He knows that the odd one is not that enthusiastic … even without any telephone calls.

As for the customer, is it deprived of the competition, has it lost any chance of getting a lower price? No, not a hint. We all know that the market dictates price. Some will be too busy. That’s why we waste millions seeking half a dozen prices.

The OFT has to do one helluva lot more than show Tom phoned Jerry. It has to prove as a fact what difference it would have made if Tom had merely looked and sniffed, because that’s what he would have done anyway.