OFT Construction Case

In March and April 2011, every one of the 25 firms that appealed against their fines from the OFT for alleged ant-competitive behaviour, had the amounts of their fines drastically reduced by the Competition Appeals Tribunal (CAT) or, in some cases, dismissed altogether.

The firm originally in receipt of the largest fine (Kier Group plc; Kier Regional Ltd) led the way in March and saw their liability fall by over 90% from £17.9M to £1.7M. Meanwhile, two firms (GMI and AH Willis & Sons) had their fines wiped out after the CAT felt the OFT had not proven liability. Overall, fines to these 25 firms originally totalling £79M have now been reduced to £13M.

The CAT agreed with the OFT that cover pricing is in breach of competition law, but felt the practice was less serious and very different from that of ‘bid rigging’. The CAT felt that the fines imposed were ‘excessive and disproportionate’ and did not accept the OFT’s method of calculation. In particular, the year in which turnover was be taken into account, the application of a ‘minimum deterrence threshold’ and the OFT’s assessment of how serious the offence.

Interestingly, the majority (78) of the 103 firms originally named by the OFT, and fined a total of £50M did not lodge an appeal. This was because many did not have the resources to fight the OFT and had accepted a 'fast-track offer' from the OFT to reduce their fines if they accepted liability and did not fight their decisions.

On the 27th May 2011, the OFT confirmed that it would not be challenging the judgements of the Competition Appeals Tribunal.

Since the case, the OFT has pointed to a report prepared for it by Europe Economics in June 2010 (Evaluation of the impact of the OFT’s investigation into bid rigging in the construction industry [OFT 1240]) which suggests a significant improvement in the behaviour of construction firms since the Case and an increased awareness of competition law.

It has also pointed to the UK Construction Industry Competition Law Code of Conduct that was produced in response to the Case by the UK Contractors Group and the National Federation of Builders in 2009.

Background to the Case

The ‘Construction Case’ investigation by the Office of Fair Trading (OFT) started after the receipt of a specific complaint in the East Midlands in 2004. Over the next five years it was to spread throughout England and Scotland to become one of its largest ever Competition Act investigations, involving 250 of its staff.

The investigation covered projects for a wide range of clients, including tenders submitted to local councils, schools, universities and hospitals before the 31^st December 2006. It centred on claims of collusion during such tendering processes which allegedly resulted in bid-rigging and, in particular, the submission of cover prices.

It involved more than 3,000 ‘suspect’ contracts, each valued between £30,000 and £25M; and in total at around £3bn. It was suggested that the issue was so common that for example, it may have affected as much as 20% of contracts let by councils over a period of six years. We understand that at one point more than 1,000 firms were involved but, as the OFT did not have the resources to pursue them all, it was decided to focus on around 100 for which it had the most robust evidence.

Early Infringement Decisions and Fines

In February 2006, the OFT fined 13 roofing contractors around £2.3M in total (reduced to around £1.6M by leniency) after they agreed to fix the prices for flat roofing and car parking contracts in the South East, Midlands, London, Edinburgh and Glasgow through collusive tendering. The work included two local authority contracts for a swimming pool and a car park, and work on the new Bull Ring in Birmingham.

In three cases a contractor had paid compensation to ‘losing’ contractors for withdrawing from the tender process or for providing cover prices. It was noted that one of the 13 firms had their fine of £328,264 ‘waived’ because they had been the first party to apply for leniency and volunteer information in connection with the investigation.

This was the fifth infringement decision by the OFT involving flat roofing firms and the penalties brought the total fines to approximately £4.3M (reduced to £2.5M by leniency). Previous decisions had been published by the OFT as folows :-

March 2004: Nine West Midlands firms fined a total of £300,000 for rigging bids for repair maintenance and and improvement services.

March 2005: Two decisions concerning collusive tendering practices for mastic flat roofing contracts in Scotland and for felt and single ply contracts in the North East of England. Ten firms involved in these investigations were fined a total of £830,000;

July 2005: Six firms alleged to be involved in collusive tendering arrangements for felt and single ply roofing contracts in Western-Central Scotland were fined around £250,000 in total.

Full details of the above decisions are contained in the CA98 Public Register Decisions Section on the OFT’s website.

Statement of Objections [April 2008]

In April 2008, the OFT issued a Statement of Objections against 112 construction firms, alleging that they had been party to one or more agreements and/or concerted practices that infringe the Chapter I prohibition of the Competition Act 1998. In particular, that they had engaged in various bid rigging activities and, specifically, cover pricing.

While the Statement itself was not published, the OFT did release the names of the firms concerned which included six public companies (Balfour Beatty, Rok, Galliford Try, Connaught, Kier and Interserve).

While the majority of the allegations concerned the issue of ‘cover prices’ the OFT alleged that a minority of the construction companies (9 No.) had made ‘compensation payments’ (ranging from £2,500 to £60,000) to rival firms in return for them submitting inflated bids or for withdrawing from the tender process altogether. It was reported that this was thought to have happened in 12 of the 240 cases examined by the OFT and that these “more serious forms of bid rigging” were facilitated by the raising of false invoices.

The OFT confirmed that it had received evidence of cover pricing implicating many more companies on thousands of tender processes, but has focused its investigation on approximately 240 alleged infringements which it was now pursuing. During the course of the investigation, the OFT carried out site visits at the premises of 57 firms and received 37 applications for leniency (‘confessions’) in exchange for penalty reductions of up to 50%.

Full Decision [September 2009]

The OFT published its full decision [dated 21 September 2009] on the 20th November 2009. It named the 103 construction firms against whom it had imposed financial penalties totalling £129.2M for alleged anticompetitive collusion as a result of findings of illegal bid-rigging activities. The full decision outlines the detailed evidence and findings on each infringement, representations made by the construction companies and details of the OFT's calculation of the fines imposed.  The OFT also published a Summary of Infringement Findings which provides details of the 199 tenders involved during the period 2000 to 2006.

The OFT stated that cases had been dropped against 9 of the 112 firms named in their Statement of Objections, due to insufficient evidence.

The OFT said that in 11 tendering rounds, the lowest bidder faced no genuine competition because all other bids were cover bids. It confirmed that discounts had been given to 86 of the firms because they had admitted their involvement.

Information Note to Procuring Entitites

At the time of publishing its Full Decision, the OFT also released an Information Note to Procuring Entities which contained its views on steps procurers may be considering as a consequence of the OFT’s decision. In particular, excluding firms from future tender exercises.

At the time, there was concern that public sector clients would react the wrong way to the OFT findings. In this respect, a report by the Organisation for Economic Co-Operation and Development in December 2008, had indicated that 76% of procurers would exclude a firm found guilty of bid-rigging from future tenders, 58% of them for more than 5 years.

The Information Note also drew attention to the following guidelines:

 ‘Making competition work for you’, a general guide for public sector procurers prepared by the OFT and OGC, which includes guidance on mitigating the risks of anti-competitive behaviour.

‘Guidelines for Fighting Bid Rigging in Public Procurement’, ‘Designing tenders to reduce bid rigging’ and ‘Detecting bid rigging in public procurement’, are three best practice guidelines prepared by the Organisation for Economic Cooperation and Development (OECD) with input from the OFT.