Cartels in Construction? The Economic Costs of Rigged Contracts for Schools

When it rains in Britain, it pours. And sometimes, the leaks are not just from the roofs but also from the foundations of the economy. The UK Competition and Markets Authority (CMA) recently announced an investigation into alleged bid-rigging among British roofing and construction firms. The allegations centre on companies colluding to manipulate contract bids for essential school repairs

Graham Watson's insight:

It seems as though the Competition and Markets Authority has found evidence of collusion in the market for school roofing contracts, with a number of companies and individuals rigging the market.

It would seem to be ripe for collusion: there are few participants in the market, but to me this also indicates why in a case like this existing penalties are not strict enough. In effect, collusion in such a market is defrauding the taxpayer, and in my eyes that merits prison terms for the executives involved, rather than just fines and being disqualified as a director.

Economics of Bid Rigging: A Primer

Bid rigging is a classic form of collusion—when companies cooperate, rather than compete, to rig the market in their favour. In this case, the alleged collusion targets contracts funded through the government’s Condition Improvement Fund (CIF). This fund is designed to fix schools with crumbling infrastructure, ensuring that students have safe and compliant learning environments. However, if bids are rigged, the winners aren’t the taxpayers or the students—it’s the firms gaming the system.

When firms collude in public procurement, several economic distortions occur:

1. Higher Costs for Taxpayers: Instead of competitive pricing, rigged bids inflate costs, misusing limited public funds.
2. Inefficient Allocation of Resources: Contracts may go to less capable firms, leaving taxpayers with subpar outcomes, like poorly constructed roofs.
3. Reduced Innovation: Collusion eliminates the pressure to improve services or cut costs, stifling innovation in the sector.

Why Public Procurement Is Vulnerable

Public procurement—a staggering third of the UK’s public spending—is especially prone to anti-competitive practices. Why? For one, governments often rely on complex tendering processes, which cartels can exploit. Evidence from around the world shows that industries like construction, where contracts are high-value and projects are often unique, are fertile ground for cartels.

The Role of the CMA: Economics Meets Accountability

The CMA’s investigation showcases how economics and regulation intersect. By examining physical and digital records from firms, the CMA is looking for evidence of illegal agreements to manipulate CIF contracts. If wrongdoing is proven, the economic consequences could be severe for the firms involved:

• Fines and Penalties: Last year alone, the CMA fined companies £60 million for bid rigging.
• Debarment: Under a new regime starting in February 2025, firms breaking competition law may be banned from bidding for public contracts altogether.
• Director Disqualifications: Leadership could face personal consequences, ensuring accountability extends to the decision-makers.

The Economics of Incentives: Whistleblowing Rewards

To combat collusion, the CMA offers powerful incentives for whistleblowers. Firms or individuals involved in cartels can receive immunity or reduced penalties for coming forward. In some cases, the CMA even offers financial rewards of up to £250,000. This approach taps into game theory—a cornerstone of economics—where the threat of being betrayed by a co-conspirator can deter collusion in the first place.

The Hidden Costs of Collusion

Bid rigging doesn’t just harm taxpayers and students; it undermines trust in public institutions. Schools are particularly sensitive as they represent investments in the future. The £450 million allocated annually through the CIF is meant to ensure safety and opportunity for students—not to line the pockets of unethical businesses.

Moreover, when firms rig bids, they distort the market structure, shifting it from competitive toward oligopolistic or cartelized. This results in higher barriers to entry for new firms, further entrenching inefficiency and inequality in the economy.

The CMA’s investigation is a real-world case study of several key economic concepts:

1. Market Failure: Collusion is a prime example of market failure, where firms’ self-interest undermines social welfare.
2. Regulatory Intervention: Markets sometimes need regulators to enforce competition and correct inefficiencies.
3. Public Goods and Externalities: Public procurement is aimed at providing public goods (like safe schools), and anti-competitive behaviour creates negative externalities by reducing societal benefit.

As the investigation unfolds, the CMA must tread carefully. While no assumptions of guilt have been made, the case underscores the need for vigilance in public spending. For students of economics, this is an opportunity to see how abstract concepts—like market structures, collusion, and regulation—play out in the real world.

In the end, ensuring fair competition is about more than economics; it’s about fairness, accountability, and ensuring that public funds serve the public good. Because whether it’s a classroom roof or an economic system, we all deserve structures we can trust.

Glossary of Key Economic Terms

• Bid Rigging: A form of collusion where firms coordinate their bids to manipulate the outcome of a competitive tendering process.
• Collusion: An agreement between firms to avoid competition, often to fix prices or rig markets.
• Condition Improvement Fund (CIF): A UK government fund used to improve school buildings in poor condition.
• Market Failure: A situation where the free market fails to allocate resources efficiently or fairly.
• Public Procurement: The process by which governments and public sector organisations purchase goods, services, and works.
• Cartel: A group of firms that agree to act together instead of competing, often to fix prices or rig bids.
• Debarment: The exclusion of a firm from bidding on public contracts due to past misconduct.
• Game Theory: A branch of economics studying strategic decision-making, often applied to analyse collusion and incentives.
• Externalities: Costs or benefits that affect third parties not directly involved in a transaction.