Research conducted on behalf of the Commerce Commission indicates that some construction businesses are not aware of competition law and this may be affecting competition for non-residential building projects.

The Commission investigates anti-competitive practices under the Commerce Act, and frequently takes enforcement action where breaches are found. However, the Commission is now taking a proactive approach to encourage better compliance with the Commerce Act. This approach places greater emphasis on education to avoid illegal behaviour as an alternative to taking enforcement action after breaches have occurred.

The low levels of awareness have been highlighted in research undertaken for the Commission by independent company Research New Zealand. The researchers interviewed participants in the non-residential construction sector in Auckland, Wellington and Christchurch.

"Our research indicates a low level of understanding of competition issues by those in the construction sector. In particular, the research indicates that a practice known as cover pricing is occurring," said Kate Morrison, General Manager of Enforcement, Commerce Commission.

Cover pricing involves builders talking to each other to come up with a believable but not genuine bid for a job. There are a variety of ways in which cover pricing happens, and reasons for the practice, however, the common feature is that the cover price is not intended to win the tender, but is meant to look like a legitimate bid.

"The purpose of this research was to test the sector's awareness and understanding of the competition provisions of the Commerce Act. The information the Commission received during this research was provided on the basis of complete confidentiality, and we have appreciated the candour of the research participants. We will not be launching an investigation as a result of the research," said Ms Morrison.

"We will use this knowledge to begin a targeted education campaign to help builders and those seeking tenders for construction jobs to understand our competition laws, and the importance both to them and their clients of not breaching the Commerce Act."

However, Ms Morrison said if specific complaints alleging anti-competitive conduct in the construction sector are laid with the Commission, and investigation reveals illegal behaviour, the Commission will take the appropriate enforcement action.

As part of the education campaign the Commission is drawing attention to its leniency policy, which encourages participants in anti-competitive arrangements to be the first to report the conduct, and gain immunity from prosecution in return for full cooperation.

A question and answer sheet which provides more information, and the summarised key findings of the research, are available on the Commission's website www.comcom.govt.nz/construction-sector

Background

Cover pricing is collaboration between tenderers to invent a believable but not genuine bid for a job. This 'cover price' is higher than the genuine bid, and is not intended to win the tender, but is meant to look like a legitimate bid.

In the construction sector there are several scenarios in which this might happen.

  • Builder A wants to put in a bid for a particular job, to be seen to be actively tendering, but he doesn't actually want the job. Builder A knows that by putting in a higher price he won't get the job. Builder A calls Builder B, who is genuinely bidding for the job and asks for a 'cover price'. Builder B provides Builder A with a figure which is higher than what Builder B will submit. Builder A submits this as his bid.
  • Builder A is preparing a genuine bid for a job, but he is worried there may not be enough tenderers and the job may have to be re-tendered. Builder A asks Builder B to put in a tender, at a higher price, to increase Builder A's chance of winning the tender and not having to re-tender. Builder B's tender is a 'cover price'.
  • An architect or project manager has a favoured builder who they want to get a particular job. They ask several builders to put in a higher bid for the job, just to show the client that the architect/project manager's favoured builder has given a good price. The favoured builder wins the tender.

While such bids give the appearance of a competitive tender process, cover pricing may undermine the competitiveness of the process, and may therefore have an impact on price. If this were the case, those builders would be at risk of breaching the Commerce Act.

Penalties under the Commerce Act The High Court can fine a company up to $10 million for each breach; or three times the value of any commercial gain or expected commercial gain resulting from the breach; or 10 per cent of the turnover of the business. Individuals can be fined up to $500,000.

Leniency policy The Commission's leniency policy explains how a company or an individual can apply for conditional immunity or formal cooperation if immunity is not available. Leniency is a key tool in detecting and deterring anticompetitive agreements. Conditional immunity from prosecution is offered to the first person involved in an anticompetitive agreement who informs the Commission and provides evidence to the Commission. The policy is available at www.comcom.govt/cartel-leniency-policy

Guidelines for procurers to recognise and deter bid rigging The Commission has recently issued guidelines to assist procurers (purchasers) to ensure open and effective competition and achieve best value for money by:

  • spotting and reporting potential bid rigging; and
  • designing tender processes that deter bid rigging.

Purchasers, such as architects or project managers, can reduce the likelihood of practices such as cover pricing by removing any obligation to bid as a condition of staying on a standing list of pre-qualified suppliers. For more tips on how to detect and deter bid-rigging, please refer to www.comcom.govt.nz/bid-rigging