08 Jun 2010

(by Andreas Stephan) The OFT have published  suggesting greater awareness of competition laws in the construction industry following enforcement, but not the sea change we would hope to observe in an industry recently subject to significant cartel fines.

The totalling almost £130 million in 2009, on 103 construction firms found to have been involved in bid-rigging and cover pricing. The OFT had commissioned a study to be carried out by Europe Economics in two parts: an initial survey was completed in 2008 before the OFT had issued its statement of objections; a second survey was carried out in 2010. The main findings are:

  • 44% of contractors perceived a drop in cover pricing since 2008
  • 76% now aware of competition law penalties, compared to 49% in 2008
  • 65% have introduced compliance mechanisms in the last two years
  • 75% had heard of the OFT decision; 80% of those cited media reports as the main source

The study certainly makes for interesting reading. However, it is perhaps a little disconcerting that the OFT’s investigation has not made an even bigger impact. As the study acknowledges, respondents may have been more likely to suggest increased compliance, in the knowledge that the survey was being funded by the competition authority. We cannot say with any certainty how prevalent cartel practices are in the economy, but most of us would probably agree that at least some infringements will go undetected. In this context, it is a little worrying that only 44% of contractors perceived a drop in cover pricing following the imposition of such high fines. One possible explanation is that the construction industry is characterised by a very large number of small contractors – many of whom run what are essentially family businesses.

A particularly interesting finding is that media reports played a far greater role in disseminating information about competition law and the OFT’s investigation, than did industry channels such as trade associations. Indeed, only 18% were aware of any recently adopted codes of conduct in relation to competition, while 30% claimed to be members of trade bodies who recently adopted such codes. This finding highlights the importance of competition authorities attracting positive media coverage. Unfortunately, competition law – like many other areas of white collar crime – is not naturally newsworthy and often competes with headlines more likely to have a populist appeal.

Finally, there should be a severe warning attached to any survey addressing illegal activity. For example, most respondents described bid-rigging practices as very rare or non-existent in 2008. This is despite the OFT’s subsequent decision which claimed that practices such as cover pricing* had been endemic in the industry. Might it be that some firms still do not see ‘cover pricing’ as ‘bid-rigging’?

*‘Cover pricing’ is where a bid is entered in a tendering process which is not designed to win the contract but is intended to give the appearance of competition. This generally involves asking a competitor what they intend to bid and entering a higher bid. Motivations for doing this might include being too busy to carry out the work while not wanting to appear as ‘small fish’. It may also occur where a contractor is worried they will be taken off the tender list (and therefore not invited to bid for future contracts) if they do not bid for the present one.