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OFT seem to think lowest price bidding is good competition?

Today saw OFT’s announcement of fines averaging 1.5% of turnover for around 100 companies caught in its two-year investigation of ‘bid rigging’. The coverage raised some interesting issues for me:

1. For once, the industry’s spokespeople did well. And much better than when the story first broke in April 2008. Specifically, I heard Stephen Ratcliffe, chief exec of the UK Contractors’ Group, on BBC Radio 4’s Today programme. The BBC’s line was that the fines could have been 10%, so why weren’t they, considering the tax payer had been ripped off “in every case”. More of this in a minute…. But Stephen did a good job of putting across the contractors’ case, whilst reminding the interviewer that even the OFT had led by saying that only a handful of cases involved collusion, the others were the lesser matter of ‘cover pricing’, in order “to stay sweet with the client”, he said twice. A ‘sticky’ phrase, so good work. All in all, great to hear a good spokesperson for the industry on prime time radio, even if in a defensive mode.

2. Cover pricing. We all strongly condemn all anti-competitive practices. Such activity is entirely incompatible with best practice and achieving best value. And it was hardly Ratcliffe’s strongest point when he said that the industry had worked with the OFT to produce a new voluntary code of practice. What? We voluntarily agree not to rip off our clients?? However, cover pricing is, in part, a symptom of poor client practice and is facilitated both by lowest price tendering practices and also rigid prequalification ‘rotas’ in which bidders are fearful of not putting in a bid for fear of being excluded from future work. Our evidence is that lowest tender price doesn’t even deliver lowest outturn price, let alone best value, leading more often than not to claims and an outturn cost greater than the tender price – data shows anything between 20% and 25% on average. Where’s the good competition in that?

3. By the way, by definition there can be little evidence that cover pricing cost anyone any money. Remember they were trying to ensure they lost! We do not know what price the company who sought the cover would otherwise have derived for themselves. It is quite likely that it would have been higher than the other, real, bidders. Therefore it would be hard for any lawyers to justify advising their clients to sue past contractors, or losing bidders, or to blacklist any of those fined by the OFT.

4. Any client who thinks lowest tender price is always best is vulnerable to this sort of thing, as well as other stupidities. The much better approach is collaborative working. The selection of integrated project teams requires much greater rigour and scrutiny at selection and award stages than does lowest price tendering. Selecting lowest price is likely to create a process where collusion is possible. Any fool can bid lower than the next person – and all can count the cost later. Open book accounting, and other commercial techniques of collaborative working, when established at the outset and used during the bid stages and beyond, reduce the risk of cover pricing and forms of collusion. The other need is for a greater focus on the value side of the equation, understanding the outcomes that end users actually need from the project.

So, a dark day for the industry, especially those companies who were fined of course, but “every cloud…”, and if it adds to the case for systematic collaborative working, then all praise the OFT.