Don't ignore the warnings from the OFT cover pricing investigation


 The unprecedented fines levied by the Office of Fair Trading on the 103 building companies declared guilty of involvement in cover pricing has sent a shockwave through a construction industry already reeling from the worst recession in memory. With individual fines up to £18m the firms involved have been hit hard.

Predictably the general media and their readers have latched on to the investigation and decided that the size of the fine represents the measure of guilt but closer examination shows that it isn't quite so straight forward. An unusual formula that includes the last three jobs involved in cover pricing and the proportion of that market sector in the turnover in the business means that one firm might have a million pound firm and another might have a hundred thousand even though the offences appear the same. On top of that some firms received leniency providing that they actually knew that they could apply before deadline expired, unlike Kier who at the time of writing is still 'considering its position'. We might not have heard the last of this affair.

But what about the other firms? Cover pricing is, or at least was, standard practice throughout the construction industry simply because contractors want to remain on clients and project managers tender lists. So in a way the OFT investigation has highlighted fundamental problems within the clients procurement process. The OFT has not been able to quantify any loss yet they are encouraging clients to sue the 'guilty' contractors. Controversially, the investigation was geographically and time limited meaning that those outside the area or a day past the deadline weren't included in investigations or sanctions. Contractors on the west of the Pennines escaped investigation while those on the east did not. This raises an obvious and deeply ironic point about the OFT actually creating an unfair market.

In their note to procurers the OFT themselves state that;
the endemic nature of the practice within the industry suggests that many other companies are likely to have been involved in bid rigging, even though such activity remained undetected. For this reason, it cannot be assumed that the Parties are the only companies that may have engaged in cover pricing.

Don't assume that those that received a fine were any more guilty than those who did not. They are now more likely to have strong internal procedures to avoid future problems. It might go against their natural inclination but clients and contract managers must take care when considering tender lists to ensure that firms aren't excluded without a valid reason. The OFT and Office of Government Commerce have been very clear.

Check the guidance issued by the OFT, OGC and and OECD and ensure that tendering contractors know that they can say no without fear of being excluded from the next tender list. A transparent and equitable contract procurement process should ensure that all parties get the best price, performance and ongoing relationship well into the future.