Cover pricing in the construction industry

In 2008 the Office of Fair Trading imposed fines of £129.2 million on 103 construction firms which it found had colluded with competitors when pricing building contracts. The fines resulted from what was, at the time, the OFT’s largest investigation under the Competition Act 1998. The practice known as “cover pricing” was found to be widespread within the industry. Given the press attention the case received at the time, the high profile names of some of the companies involved and the level of fines (even though a number were substantially reduced on appeal), there was an expectation that the industry would learn its lesson. That appears not to have been the case in light of a recent Competition and Markets Authority (“CMA”) decision. 

What is cover pricing?

Cover pricing occurs in competitive tenders and typically takes place when one company wishes to submit a tender that they know will result in them not being awarded the contract. The practice evolved to address a perception that a company that did not submit a tender following an invitation to do so, would not be asked to submit future tenders by that client. Typically cover pricing involves the company contacting a competitor who is also bidding to find out sensitive pricing information (the “cover price”) to ensure that if they exceed that cover price their bid will be unsuccessful.  

Engaging in cover pricing is an infringement of the Competition Act 1998 and offending businesses can be fined up to 10% of annual worldwide group turnover. In an industry such as construction with very low profit margins, such fines can have a devastating impact both financially and reputationally. 

Recent decision

In March 2019 the CMA issued a statement of objections following an investigation into anti-competitive arrangements in the supply of design, construction and fit-out services. Five companies admitted infringing competition law in relation to cover pricing for contracts involving fit-out, design and refurbishment of commercial and non-residential properties. As a result the companies involved agreed to pay fines totalling over £7million (which included a 20% discount for admitting the offences.) 

One of the companies involved agreed to pay a fine of over £1.7m, even though it only admitted one offence of cover pricing, which shows the levels that the fines can reach. 

Other issues

It’s not only cover pricing that construction companies need to be aware of. The CMA has also recently provisionally found that three major construction suppliers entered into a cartel in the rolled lead market in breach of competition law. It has also provisionally found that three suppliers of groundworks products to the construction industry have formed a cartel to reduce competition.  

The CMA’s position

In a CMA press release announcing the fines in relation to cover pricing, the CMA’s Chief Executive Andrea Coscelli, said:

“the CMA is concerned it is seeing a lot of evidence of anti-competitive conduct in the construction industry, and we have already taken a number of cases in this sector. Today’s fines reinforce the message that the CMA will not tolerate competition law being broken.
As shown by the total of £7 million in fines agreed today, we will not turn a blind eye to illegal behaviour and we will take action where we find laws have been broken. This can include seeking disqualification of company directors.”

Conclusion

Construction companies can therefore simply not afford to ignore their obligations under the Competition Act. Whilst cover pricing might once have been the norm within the industry, it is clear that is not an excuse for participating in the practice. The CMA will no doubt continue investigations in the construction sector. Companies that are found to have participated in anti-competitive behaviour risk very substantial fines and disqualification of their directors.