Don’t be deceived: how to spot and stop bid-rigging

Illustration: Natalie Wood

Every year, billions of pounds are spent on procuring goods and services in the UK, including in the public sector where local government alone spends around £60bn annually. Where businesses compete to win contracts, purchasers get fair prices, good service and choice, including more innovative products or services. However, if companies collude when bidding for contracts – known as “bid-rigging” – purchasers end up spending more than they should.

Bid-rigging is a form of cartel activity and is a particularly serious type of anticompetitive behaviour. It removes the incentive for companies to compete to win a contract, which in turn means purchasers do not receive true value for money. On average, cartels inflate prices by 10-20%. In individual cases, the figure can be significantly higher – sometimes up to 70%.

Cartels have rigged public bids all over the world, from Germany and Italy to Canada. Expenditure categories have been as diverse as fire engines, insurance and funeral services. Worryingly, in the UK, research shows that more than 40% of businesses do not know that bid‑rigging is illegal.

There are many ways in which suppliers can go about rigging bids, and it can be difficult to detect. Common practices include:

● Undermining the award process

Suppliers take it in turns to make the most attractive bid on projects, thereby ensuring that they all have an agreed share of the market. This is usually done in conjunction with cover pricing and/or bid suppression.

● Cover pricing

Suppliers that do not intend to win the contract communicate with their competitors and agree to submit inflated prices. This creates a distorted idea of a fair price, meaning that another – often pre-arranged – bid from another company looks much better value.

● Bid suppression

Companies agree not to submit a bid at all, which means other firms face less competition to win the contract. This is normally done in exchange for some kind of payment, or as part of an arrangement under which the winning bidder then subcontracts part of the work to the non-bidding firm.

Public buyers have a difficult task, as they have to take numerous considerations into account – legal, political, environmental and social – as well as the need to achieve competition to get best value.

So how can purchasers protect themselves and the organisations they represent from bid-rigging? While bid-rigging can be tricky to detect, here are a few starting points.

1 Be aware of the high-risk areas

Bid-rigging is more likely to happen where the product is standardised and in markets that have small numbers of suppliers and customers. Sectors where suppliers are under pressure from falling demand or where there is a lack of entry into the market may also be at risk. Preferred suppliers lists can also be problematic, as suppliers may feel they need to bid to stay on a list

2 Look out for tell-tale signs

Signs of suspicious bidding patterns may include: bids received at the same time; different bids with identical prices; bids containing similar or unusual wording, or less detail than expected; likely bidders failing to submit a price; bidders suddenly dropping out; prices that seem much higher than underlying costs, or are higher than those in other bids although there are no logical reasons for cost differences; and prices that drop on the entry of a new or infrequent bidder.

You should also be suspicious if the lowest bidder does not accept the contract or the successful bidder later subcontracts work to a supplier that submitted a higher bid. In addition, be alert to last-minute changes, such as expected discounts disappearing. A bidder may also betray discussions with others or know more about previous bids than expected.

3 Specify to frustrate bid-rigging

Specifications can be written in a way that can help to disrupt cartels. Outcome-based specifications that test the capability and understanding of potential suppliers
mean bidders have to fashion their responses individually and make it difficult for cartels to achieve a coordinated response.

4 Be upfront and vigilant

When going out to tender, you might want to consider making a point of informing your suppliers that you are aware of competition law. Keep records of the entire tender process. Consider requiring bidders to sign non-collusion agreements. Avoid obligatory bidding but do seek objective justification for any failure to bid.

5 Obtain help

Bid-rigging can be difficult to detect and can arise when it is least expected. One way of detecting it is by analysing comparative tender information. The UK’s competition watchdog, the Competition and Markets Authority, is building a tool to help public procurers analyse tender data for signs of bid-rigging. The CMA is keen to talk to anyone willing to provide tender data to help it test the tool before it is launched in the spring – so do get in touch at [email protected]

6 Stay informed

A range of tools and advice on the CMA’s website (www.gov.uk/cma) can help purchasers identify different types of bid-rigging. These include a free bid-rigging e-learning tool, a 60-second summary with advice for procurers, videos explaining competition law and a guide on competition law and risk. The CMA is also running a series of workshops for public buyers to help them spot where contracts may be at risk of bid-rigging and advise on how to prevent this.

7 Report it

Competition between businesses can help you to achieve the best value for money. It is important to be alert to those who may be trying to cheat the system and to report anything that looks suspicious. Only then can you be confident that you are getting the best deal and making the best use of limited resources.

If you suspect a business of engaging in any type of illegal cartel behaviour, such as bid-rigging, you can report this to the CMA. Contact the cartels hotline on 020 3738 6888 or email [email protected].

Do

1. Be aware which areas have a high risk of bid-rigging
2. Look out for common signs of suspicious behaviour
3. Set out an outcome rather than a process in tender documents

Don’t

1. Forget to keep records of the whole process
2. See contract signing as the last step – analyse past tender information
3. Let them get away with it – report suspect activity