Why is the OFT so unfair?: Coverpricing vs bid-rigging

Giving a “cover price” is now called “bid-rigging”. Bid-rigging is a criminal offence. Nobody, in real life construction, regards giving a cover price as a criminal offence. Everyone in real life construction regards bid-rigging as one. Next month more than 100 contractors accused of giving cover prices will receive a letter from the Office of Fair Trading (OFT) demanding a whopping big cheque. Come on, OFT, you have made your point. Don’t cripple our industry. Make it a little fine for cover pricing; make it a whopping fine for bid rigging.

It all started one bright spring morning in April 2004, when a manager at the Queens Medical Centre in Nottingham had a word in the ear of the OFT. It triggered the longest investigation in the office’s history. The suspicion was that one outfit was combining with others to bolster the price of their bids, then sharing the profits so accrued. The inquiry soon spread. Someone said that the Competition Act’s wording for bid-rigging could also apply to cover pricing. Eventually the OFT thought it had evidence of “bid-rigging” by construction companies in some 4,000 tenders involving 1,000 parties. I bet it was not bid-rigging at all; I bet it was cover pricing. Bid-rigging heaves with dishonesty. Cover pricing has not the slightest hint of dishonesty. And if you don’t understand the difference, you don’t understand the construction industry.

The OFT has already fought a court battle with Crest Nicholson over all this. The court decided that the way the OFT dealt with that company was unfair (Crest Nicholson vs Office of Fair Trading, 24 July 2009). And if next month’s fines hurt, the queue outside the High Court will be twice round the block.

The thing to realise about the OFT is that it is a law unto itself. It’s a government department with frightening powers. It can act like a police force, the Crown Prosecution Service, a judge and a jury. It decides the sentence and can also do deals. Frightening.

So, having stumbled into our building world and gathered 750 lever-arch files, the OFT invented something called “the fast-track offer”. This is where the OFT gives you the hint that it has spotted collusive tendering in your enterprise. It tells you that it can fine you 10% of your worldwide turnover and ban you from public works for five years … but, come on chaps, if you co-operate you can get a leniency discount … admit it and get 25% off! Thirty companies immediately caved in and 45 wilted a bit later. Some of those said they didn’t know what the case against them was, but made a commercial decision to “accept liability”. They wanted the discount. Happy in the possession of an acceptance of liability, the OFT then began to compile its cases against more than 100 companies.

Credit: Simone Lia

Eventually it published a statement of objection explaining the ways the Competition Act was breached. It ran to 1,755 pages. It said bid-rigging (meaning cover pricing) was endemic. So the OFT then invited each of the 112 companies named to make oral and written representations in response to its accusations.

It seems that the courts regard all this as okay, since bodies such as the OFT are “entrusted to a public service task” and “can set their own priorities when those priorities have not been determined by the legislative”.

In the case of Crest Nicholson, it was a former subsidiary called Pearce Midlands, that was targeted. Pearce was subject to a management buyout in 2003 then ceased trading. Crest had no documentation or access to staff, and therefore nothing to go on when the fast-track offer was made. So it sought a judicial review of the OFT’s actions.

Now then, if anything hooks the attention of the courts it’s the notion that one party has behaved unfairly. Crest was seriously disadvantaged and the OFT ought to have made an exception said the judge. So Crest will be made an offer.

I can see a raft of claims of unfairness coming after the OFT hands down the fines. But the real heart of the unfairness is that the OFT has not understood why cover pricing has been used for generations. It is ever so unfair to call it bid rigging or collusion; it’s not. It’s cover pricing. Know what I mean?

Bear in mind that the fast-track offer was made well before the OFT set out its case. Odd. The idea is to broadly indicate the error of your ways, let you fathom your position, save the OFT the bother and huge expense of an inquiry and let you stew on the idea of a discount.