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Client Update: Collusion in the construction industry

29 September 2009

In brief: In the wake of recent allegations that some Queensland construction companies have colluded on project prices on some government tenders, Partner Ren Niemann (view CV) and Senior Associate Jenny Lyons report on measures to deal with collusive behaviour.

Introduction

The Australian Competition and Consumer Commission has recently alleged that three Queensland construction companies colluded on project prices before submitting tenders for State Government rail and school projects and a local government airport project.

In the UK, the Office of Fair Trading has also just completed an investigation into bid rigging, and concluded that cover pricing is a widespread and endemic practice (Office of Fair Trading press release, 22 September 2009, 'Construction firms fined for illegal bid-rigging') in the construction industry.

The recent media reports surrounding the prosecution of Queensland and UK construction companies for engaging in cover pricing on school building projects have highlighted the difficulties in ensuring competitive tender processes achieve value for money.

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Collusion – can it be avoided?

While it is not realistic to expect collusive behaviour to be removed entirely, there are a number of steps that can be taken to reduce the likelihood of, or minimise the impact of, cover pricing and other forms of collusion occurring in the tender process, as outlined below:

  • There should be consideration as to how the costs of tendering can be reduced without undermining the quality of the bids. This might include:
    • prequalification of potential tenderers, whereby the tenderers accept certain core requirements and agree key terms and conditions that will apply to all future projects;
    • standardising documentation for certain types of projects;
    • streamlining the bid process and adhering to timetables;
    • requiring tenderers to use a pool of nominated subcontractors for various disciplines of work; and
    • in more limited (and, typically, exceptional) cases, refunding some of the costs of bidding.
  • The terms and conditions used to undertake expressions of interest or requests for tender should deal clearly with collusive conduct. This would include:
    • all tenderers being asked to sign a statutory declaration (as part of a conforming tender) that the bidder has not engaged in any collusive tendering, anti-competitive conduct, or other similar conduct, with any competing tenderers;
    • requiring appropriate deeds of confidentiality and probity to be executed by tenderers and, where necessary, related entities (again, as part of a conforming bid);
    • providing for evaluation criteria that require compliance with the project's probity requirements; and
    • including in the tender and contract documents appropriate warranties and indemnities regarding collusive conduct, and allowing for the exclusion from tenders and the termination of a contract should such conduct have occurred.
  • An experienced and well-briefed evaluation team will assist both in reducing bid costs and identifying possible collusive conduct. It is important that the evaluation team stays close to the market, understanding who the tenderers and suppliers are likely to be, and the other projects in the market in which they may be tendering, as those other tenders will increase pressure on the tenderers' resources and time.
  • Make it known that companies will not be disqualified from future tenders or removed from a panel if they fail to submit a bid when invited and there is a satisfactory reason for it. This can be highlighted in the tender documents or industry briefing.
  • Look for possible suspicious patterns and conduct, and ensure that tender conditions and pre-qualification documents allow you to rely on previous conduct. Such suspicious conduct might include:
    • bids being received from competitors at the same time and with similar wording;
    • bids containing less detail than expected;
    • higher bids without obvious costs differences;
    • the same supplier often being the lowest bidder; and
    • only one bidder contacting wholesalers for pricing information prior to a final bid submission.1

If you would like more information about this, or on any other construction matter, please contact any of the people below.

Footnote
  1. Office of Fair Trading (UK), 'Making competition work for you: A guide for public sector procurers of construction'. OECD, 'Guidelines for fighting bid rigging in public procurement'.

For further information, please contact:

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