Thursday, April 17, 2008

OFT Investigation into Bid Rigging

People may be shocked that 112 firms have been accused of bid rigging, but my guess is that the practice is so widespread, that it’s almost universal. It’s certainly just as common down at the smaller end of the building game as it appears to be up amongst the big boys, and I can remember it going on on a casual basis all over the place when I was involved in the jobbing building market.

Here’s what the current edition of the Housebuilder’s Bible currently has to say on the topic:

One practice which is now becoming prevalent is for busy builders to get together and divide up the work in a way (and for a price) that suits them – it’s called covering. It works like this. A job is put out to tender – typically by an architect – to four or five local builders. Some of them are so busy that they simply don’t want to take on any more work. Architects tend to regard refusals to quote rather badly and the builders feel that, rather than risking losing the possibility of quoting for future work, they would like to put in some price, any price. So the next step is to chat with the competition – it’s not hard, it happens naturally anyway – and soon an informal cartel is in place.

Reg: ‘Have you been asked to quote for the old Rectory Job at Chipping Butty?’
Charlie: ‘Yes. I like the look of it.’
Reg: ‘I really can’t see any way we could do that one – could you do us a favour and cover us.’
Charlie: ‘Sure – I’ve no doubt you’ll be able to return the favour soon.’

So Charlie puts in his price and tells Reg to put in a price maybe £20,000 higher. Reg knows he won’t get the job but he hasn’t spent any time or money quoting for it and he hasn’t upset the architect so he’ll stand a chance next time around when he does want the work.

Occasionally the builders know all the other tenderers on any given job – in matters like this the grapevine works extremely efficiently – so that there are cases where every builder on the tendering list has been in on the scam. They all know who is providing the lowest quote and, consequently, the lowest quote is in reality quite a high one. Such a complete stitch-up is perhaps rare but frequently two or three of the quotes will be for show purposes only.

Partly this problem stems from the way building work is procured in the first place. And in particular the practice of builders quoting for free causes a lot of problems. It sounds too good to be true and of course it is. It takes a good deal of time to generate an accurate quotation and most builders simply send tender documents off to a quantity surveyor who carries out the work for them (for a scaled fee, depending on the size of the job). Now builders often end up quoting for five or six jobs in order to win one so the overheads of quoting for jobs they don’t get becomes a significant business expense in itself. Anything that helps to ease the load of having to quote for jobs is manna from heaven for builders so you can see the attraction of any informal price fixing arrangements they might concoct.