Construction industry adopts Competition Code of Conduct

Updated October 2009

On 22 September 2009, following one of its largest investigations into anti-competitive conduct, the Office of Fair Trading (OFT) fined 103 construction companies a total of £129.5 million for bid-rigging. The UK Contractors Group and the National Federation of Builders has responded to the OFT investigation with a new Code of Practice aimed at improving competition law compliance across the industry. In this note, we summarise the OFT's findings, comment on the new 'Construction Industry Competition Law Code of Conduct' and suggest how to reduce the risk of a breach of competition law.

The OFT's investigation
The OFT found that the companies concerned were engaged in "illegal and anti-competitive bid-rigging activities" on 199 tenders from 2000 to 2006, mainly by means of 'cover pricing' (see below). The illegal arrangements affected building projects worth in excess of £200 million, including schools, universities, hospitals and numerous private projects.

The OFT found that in 11 tendering rounds, the lowest bidder faced no genuine competition because all the other bids were 'cover bids'. In six instances, the parties that were unsuccessful in winning the tender received 'compensation payments' ranging from £2,500 to £60,000. The fines imposed by the OFT average £1.26 million per guilty party. The fines of 86 of the 103 companies were reduced because they admitted their involvement early on in the investigation.

What is bid-rigging?
The Competition Act 1998 (CA) prohibits anti-competitive agreements, practices and conduct. This includes a prohibition on bid-rigging (also known as collusive tendering). There are four main types of bid-rigging:

• Cover pricing - when a bidder submits a tender price for a contract which is not intended to win the contract;
• Bid suppression - where suppliers agree to either abstain from bidding or to withdraw their bid;
• Bid rotation - where a pre-selected supplier submits the lowest bid on a rotating basis;
• Market division - when suppliers agree not to compete in a designated geographic region or for a specific customer or contract.

The OFT may impose fines of up to 10% of worldwide group turnover on firms that act anti-competitively. Directors of infringing companies, (whether or not they knew of the infringement), may be disqualified from acting for up to 15 years. The Enterprise Act 2002 makes the most serious forms of anti-competitive behaviour (this includes bid-rigging) a criminal offence, punishable by unlimited fines and/or up to five years imprisonment.

The Code of Practice
In August 2009 the UK Contractors Group and the National Federation of Builders jointly launched the 'UK Construction Industry Competition Law Code of Conduct' (the Code). The OFT has welcomed the introduction of the Code. The Code sets out the industry's commitment to ensuring the highest standards of competition law compliance and encourages the adoption by contractors of internal procedures to prevent anti-competitive practices. It requires construction companies not to enter into agreements or arrangements with their competitors which are likely to restrict competition in the tendering process, not to exchange commercially sensitive information, but to bid for contracts independently. Although it is not mandatory for companies within the construction industry to follow the Code, compliance with it is a way of reassuring customers that a firm is competing fairly and minimises the risk that the firm will inadvertently fall foul of competition law.

TLT comment
TLT competition associate, Nicola Kingaby, says: "The OFT's decision underlines the importance of ensuring compliance with competition law and, in particular, highlights the consequences of failing to do so. It also signals a more robust approach by the OFT to anti-competitive conduct. Contractors should ensure that they understand the contents of the Code and that their business practices are compliant. The OFT has made clear that future infringements are likely to lead to criminal prosecution".

How can TLT help?
We can help you to implement the Code and to ensure competition compliance. We are able to:

• review your business and identify sensitive areas;
• undertake a compliance audit to uncover potential problems;
• provide training to frontline staff;
• prepare a compliance manual;
• limit the damage which may be caused by a past breach; and
• help you to defend an OFT investigation and/or damages claim.

As well as the benefit to your business, by taking these steps, company directors significantly enhance their own position in the event of an OFT investigation. Whatever the size of your business, compliance with competition law is an essential element of good corporate governance.

If you would like further information on implementing the Code or on any other competition matter, please contact Bill Hull.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2009. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.