“Benign”, eh?

Today the Office of Fair Trading has filed a press release accusing 112 construction companies of price-fixing. Estimated to be hundreds of millions of pounds, this will dwarf the previous record fine of £121.5m on BA last year and the £116m penalty on supermarket milk price-fixing. Some of the biggest names such as Balfour Beatty and Carillion have been accused, and shares in the construction sector generally dipped in London today.

The construction sector allocates contracts in a process called tendering. This is an auction where each of the competing firms submits a sealed bid. The contract is awarded to the firm who submitted the lowest bid under the expectation that they will be the most cost-effective and efficient firm to undertake the project. However, as with any sealed-bid auction, a requirement is that each bidder does not know how much the other bidders are bidding.

Here is where it starts to break down. In “cover pricing”, firms collude with competitors to allocate each project to one “winner”. Other firms will then artificially inflate their bids so that the winner can raise their bid without fearing of being undercut by a competitor. The losers benefit either from a cut of the winner’s spoils or by an agreement that they will be the winner next time. The real loser is of course the project planner who will have to pay a higher premium in construction costs. It is currently unknown whether the customers will be reimbursed, since victims include schools, hospitals, even council tax payers.

The defence from the Construction Federation is laughably feeble. “Companies involved in cover pricing may have been too busy to want to win a contract or have lacked the capacity to tender on it, but still wanted to keep a foot in the door to get work in future from the client,” says Kurt Calder. “In the vast bulk of cases it was benign. A lot of companies did it purely so they would not upset the client.”

The interesting thing about this press release is that despite all the evidence the OFT has collected, it is only an accusation, nothing has been confirmed yet. That does mean that some companies have been painted with the dirty brush despite being innocent, and it’s hard to see how the OFT would compensate them. At the time of writing, 40 firms have pleaded guilty while a further 37 have applied for leniency. The OFT’s big push at the moment is to incentivise whistle-blowing and cooperation so as to drag more skeletons out of the closet.