Friday, April 18, 2008

Dodgy Contractors

Keep a tight grip on your wallet

The only real surprise over all those contractors rigging their bids for public sector work is that anyone should be surprised. The construction industry has never been famed for fastidious business practices, which is why sensible informed buyers always take a great deal of care to ensure they're not being ripped off. Caveat emptor, my son, caveat emptor.

But of course the Simple Shopper doesn't operate on that basis. The Shopper operates on the basis of The Official Book of Boxes to Tick. And as long as the ticks are placed in the right boxes, it will pay whatever price is demanded.

In the case of construction projects, the Book says there must be at least three bidders, so as to maintain "competitive tension". But all the construction firms know that, so they simply make sure the Shopper gets three bids. Job done.

And now the OFT has discovered the wholesale use of so-called "cover pricing":

"...where one or more bidders collude with a competitor during a tender process to obtain a price or prices which are intended to be too high to win the contract. The tendering authority, for example a local council or other customer, is not made aware of the contacts between bidders, leaving it with a false impression of the level of competition and this may result in it paying inflated prices."

So the Shopper gets its three tenders all right, but two of them are deliberately pitched high. Which means that there is no competitive tension, and the Shopper ends up paying too much.

How much have we lost? We will never know for sure, but with £3bn of contracts under OFT investigation, and with a typical mark-up on such scams being around 10%, we could easily be looking at £300m.

Yes, the construction firms are culpable - no doubt. Which is why they're throwing themselves on the mercy of the OFT, hoping to earn a reduction in the maximum potential fine of 10% of annual turnover, or hundreds of millions for the larger operators.

But Tyler reckons it's the Shopper who must shoulder most of the blame. Because cover pricing is nothing new. It's a long-established and widespread scam in construction bids.

The chart above comes from a survey conducted by the Chartered Institute of Building a couple of years back. It asked over 1,000 respondents from the construction industry for their views on industry corruption, so it's an insider's view.

About half the respondents said corruption is common, or fairly common. Which ought to be a big red flag for anyone thinking of ordering construction work.

And cover pricing is so widespread only 18% of survey respondents reckoned it to be something that is "very corrupt". Even though cover pricing is specifically illegal!

Surely that ought to have warned the Shopper. Especially since the OFT published some I-Spy guidance notes at the start of last year, spelling out how the Shopper might spot dodgy bids. Here's the summary:

So the Shopper really has no excuse. Only somebody suffering a total reality by-pass would imagine you could trust the builder's tender.
The underlying problem is one we've come across many times on BOM. The staff who represent taxpayers in these negotiations are simply not up to the task. They are commercially naive; they are unable to identify, spec, and independently price what they're seeking to procure; and worst of all, they are driven by top-down political priorities rather than value for money (eg see this blog on the hare-brained Great Leap Forward which is rebuilding thousands of schools).
So are we surprised?
Are we angry?
You bet.
PS The major construction firms have clearly become much more circumspect about cover pricing. But that doesn't mean everything's now fine. In the case of the 2012 Olympics, as we blogged here, both the main stadium and the Aquatics Centre ended up with just one bidder. So the ODA was faced with take it or leave it. And as we know, in the case of the Aquatics Centre, costs have trebled from the original estimate. The sole bidder? Balfour Beatty, one of the firms now on the OFT hit list for cover pricing.
PPS Another stunning chart from that survey is the following, which shows how repondents view the degree of corruption involved in bribing local councillors and officials to get planning permission. 27% think it's perfectly OK! Despite T Dan Smith etc, you have to guess it happens all the time.

PPS Talking of builders, Tyler has developed a most unfortunate guttering problem. That is to say, an entire section of his guttering has dropped off. Just like that - smashed on the ground. So, yellow pages... my God, there are a lot of guttering and roofing contractors. And they're all members of the Ancient Guild of Master Gutterists or the National Federation of Roofing Excellence, or both, and they're all local authority contractors, and they were all established in 1863... how do you possibly choose? And what's a fair price? Having read all this stuff, he's even less confident he can decide.

1 comment:

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