In September 2009, the Office of Fair Trading (OFT) handed out fines totalling almost £130 million to a number of construction companies in the UK. The OFT found that these firms had engaged in “illegal anti-competitive bid-rigging activities” on 199 tenders from 2000 to 2006, mostly in the form of ‘cover pricing’.
For those who previously thought that a ‘cover price’ was the cost of a glossy magazine, it made fairly damning reading.
Reaction in the construction industry has been mixed. This is probably because the OFT’s interpretation - in which construction firms secretly agreed the prices they would submit during a tender process - was not widely understood. In some instances this meant arranging to submit a price that was too high. In the worst cases, the successful bidder would then reward them with payment.
It has generally been accepted that cover pricing is not uncommon. The difference here is that historically, the understanding was that a cover price is submitted where a tenderer is too busy, but doesn’t want to offend the client by not tendering. The difference here is that tenderers were found to have colluded, and in some cases money had changed hands.
As a general point, we should perhaps look at what encourages cover pricing. Why are some jobs more attractive than others, even in times when work is scarce?
It may be an uncomfortable fact, but contractors usually know, or can work out, which jobs are going to cause them problems. There is plenty of anecdotal evidence that if the design or specification is believed to be incomplete, the tender documents are confusing or contradictory or there is evidence of below par contract supervision and document administration, then contractors will be less likely to tender for certain projects – or even designers or clients!
It is perhaps fair to say that, the effect of the latter on tender response is diminished when work is scarce, but it will never disappear altogether.
On the other hand, there is always the possibility that a poorly documented job will attract low bids but the cost of the extras will be disproportionate. Surveyors, for example, are happy to point to the reduction in use of Bills of Quantities as one of the reasons that discrepancies occur – and without the means to value them properly.
Either way, it has never been more important to ensure that specifications, document and contract management procedures are at their best. In tough financial times, clients are even more determined to achieve cost and programme certainty; contractors will not be slow in volunteering advice as to what could have made the job run more successfully, and with the hope of securing repeat business, consultants will not want to find themselves being the subject of any criticism in that respect.
In summary, it isn’t rocket science. Jobs where the contractor is best able to assess quickly and clearly what is required, and how to apportion the risk will always be the most attractive, and lead to the fewest disputes. And that is what everyone in the project team is aiming for, after all.