Procurement in a nutshell – bid rigging

Yet, last year the Competition and Markets Authority (CMA) commissioned research which demonstrated that 40% of the UK businesses surveyed did not know that bid-rigging was an illegal practice.

In June this year, the CMA made a further effort in its bid-rigging awareness campaign by launching a free e-learning tool, writing an open letter to procurers to explain the issues, and producing a 60-second summary and video to provide further information and advice.

This week’s update seeks to provide an insight into the practice of bid-rigging, explaining what it is, outlining why it is a problem and highlighting some of the preventative measures that contracting authorities (CAs) can take.

Bid-rigging explained

There is a variety of forms which bid-rigging can take. Some of the most common forms are:

Bid rotation
Suppliers may take it in turns to submit the lowest bid. Possible rotation criteria include project size, project location, participant size, or chronological order.

Cover pricing or complementary bidding
Suppliers could agree to submit artificially high bids, or bids that do not meet the tender criteria or will in some other way make them almost certain to be excluded from the tender.

Bid suppression
Suppliers might agree – or get forced into – not submitting a bid, to ensure that a predetermined bidder “wins”.

Subcontracting (risk sharing agreements)
Subcontracting arrangements may form an integral part of different bid-rigging schemes. The successful bidder will agree to subcontract to their ‘competitor’ at a later date as compensation for ‘losing’ the bid.

A bid-rigging example: galvanised steel tanks

A number of the CMA’s investigations have uncovered bid-rigging practices. One recent example is a case involving suppliers of galvanised steel tanks used for water storage in schools, hospitals and other commercial and public buildings.

Five suppliers had agreed to share the market between them, to fix prices and to rig bids for contracts over a period of seven years.

The companies involved paid fines totalling £2.6 million. Click here for more information.

Preventative practices

Due to the collusive nature of bid-rigging agreements, the activity can be difficult to uncover. However there are indicators which CAs can use to identify suspicious bidding patterns:

• Concurrent bids or bids with similar or unusual phrasing.
• Different bids with identical prices.
• Bids with less detail than expected.
• Failure of a likely tenderer to submit a bid.
• The lowest bidder opting not to take a contract.
• Withdrawal of bids on the entry of new or infrequent bidders.
• Subcontracting of work by a supplier to one of their ‘competitors’ which had submitted a higher bid.
• Sudden removal of expected discounts or other changes made to bids with little notice.
• Suspiciously high bids with no logical differential cost.
• A bidder which discloses discussions with other or has knowledge of previous bids.

Keeping accurate records of tender processes will aid CAs to track the behaviour of bidders and detect bid-rigging. Another advisable step for CAs is to inform suppliers of their awareness of competition law when going out to tender.

Non-collusion clauses can be used in tenders, which give CAs the right to disqualify bidders where bid-rigging is detected. Cooperative practices amongst CAs such as sharing experiences can create a pool of common knowledge and practices which are effective in the fight against bid-rigging activity.

In its open letter the CMA encourages procurers to report any suspected bid-rigging activity by contacting its ‘CMA cartels hotline’ by emailing cartelshotline@cma.gsi.gov.uk or calling 020 3738 6888.

Why is this important?

Many CAs continue to feel the pressure on their budgets as they strive to meet the needs of millions of users in their provision of services.

The CMA has reported that in 2013/13 the UK public sector spent £242 billion on procurement of goods and services, of which around £60 billion is spent by local government.

According to the CMA, evidence suggests that cartels – including bid-rigging – overcharge by up to 20%. This evidence is based on the information garnered from activity which has been detected.

Indeed, the true extent of the harm caused may never be known since, as competition law experts suspect, we may only be detecting the “tip of the iceberg” in illegal cartel behaviour, and therefore bid-rigging collusion.

This notion puts into focus the importance for CAs to put into practice preventative measures in the fight against bid-rigging, which can ultimately cost taxpayers and consumers many millions of pounds.

How can I find out more?
If you have any queries on the issues raised or on any aspect of procurement, please contact us via our procurement hotline on 0191 204 4464.