03 Dec 2009

Cover pricing: A dangerous practice

by Kirsten Webb, Sian Ooi

Cover pricing in the construction industry is illegal and the practice is currently under close scrutiny by regulators, both in Australia and overseas.

Cover pricing is illegal

Cover pricing is a practice that competition regulators are actively investigating here and overseas. The ACCC issued a news release on 21 September 2009 in which it stated that "cover pricing involves one company colluding with another during the tender process to obtain a price that is intended to be too high to win the contract for the project on price alone. The company then submits this price as a genuine tender".

Cover prices are obtained when a company does not want to win a particular contract for various reasons, but still wants to be seen as tendering for the project.

Collusion of this sort is illegal under the Trade Practices Act 1974 (Cth). It misleads the client about the real extent of competition, artificially distorts the tender process, and reduces the odds that other companies will be invited to tender.

While this conduct may have been difficult to detect in the past, companies should be aware that the ACCC now has the power to tap phones and intercept email communications in the investigation of both civil and criminal cartel offences (in addition to its existing powers).

Serious penalties can be imposed

Conduct that rigs a bid constitutes a cartel provision under the Act. It is illegal to make, or give effect to, an agreement that contains a cartel provision. Recent amendments to the Act have drastically strengthened the potential penalties for cartel conduct.

A company that is involved in cover pricing faces a penalty that is the greater of $10 million per contravention, or three times the gain from the contravention, or 10 percent of the turnover of the corporation and all of its interconnected bodies corporate.

An individual who is involved in cover pricing faces a penalty of up to $500,000 if civil action is taken. If criminal liability is sought, the maximum penalty is a maximum term of imprisonment of 10 years and/or a maximum fine of $220,000.

The ACCC has cover pricing in its sights

Companies should be aware that the ACCC is actively investigating possible instances of cover pricing. In recent legal proceedings, the ACCC claimed that four Queensland projects were targeted between 2004 and 2007 - the Rockhampton airport refurbishment, the construction of a Gold Coast state school, the expansion of the Jilalan Rail Yard, and construction of a rail facility at Callemondah near Gladstone. As an example, the three companies allegedly involved were said to have discussed tender prices for the Rockhampton airport project by phone, with two of the companies agreeing to keep their prices higher than the "cover price" of the third company.

The ACCC has also made claims of misleading and deceptive conduct against the companies under section 52 of the Act. This is because the companies told clients that they had not collaborated or discussed their tender with other companies tendering for the projects, when they had in fact done so by exchanging a cover price.

Two senior managers are also in the firing line for allegedly aiding, abetting or being otherwise knowingly concerned in conduct in breach of the Act.

The remedies being sought by the ACCC include financial penalties against each of the companies and individuals concerned, injunctions preventing the parties from similar conduct in the future, orders requiring the companies to publish corrective notices in a prominent industry publication, and legal costs. If the Federal Court finds that cover pricing occurred, the companies and individuals face damage to their reputation and there is a significant risk of loss of customer goodwill and, in the longer term, fewer customers. If third parties have suffered loss or damage because of the cover pricing conduct, they may also seek damages through the court system.

While the ACCC proceedings in this case are being conducted under the old section 45 provisions of the Act, it is important to note that if the same conduct occurred now, the companies and individuals involved could potentially face criminal prosecution.

Clearly, cover pricing is an extremely dangerous practice.

UK Office of Fair Trading: £129.2 million in fines for cover pricing

Cover pricing is also in the spotlight overseas after serious fines were recently imposed by the UK Office of Fair Trading (OFT). The OFT's lengthy investigation started in 2004 after a sharp-eyed auditor at the Queen's Medical Centre in Nottingham became suspicious about tenders for a project. The OFT soon discovered that the practice of cover pricing was "endemic" within the building industry. It uncovered evidence of cover pricing in more than 4,000 tenders involving around 1,000 companies, but decided to focus on the strongest cases.

In late September 2009, the OFT fined 103 companies a total of £129.2 million for illegally colluding on 199 tenders across England between 2000 and 2006. The fined companies include some of the UK's largest construction companies.

Despite the seriousness of the fines imposed by the OFT, they were actually much lower than expected. Although the OFT had the power to impose fines of up to 10 percent of global turnover, the average penalty imposed worked out at around 1.14 percent of global turnover. In calculating the fines, the OFT took a number of factors into account including the seriousness of the infringements, the turnover in the relevant market, and any mitigating or aggravating factors. Some companies were granted leniency for co-operating with the OFT's investigation.

At the time of writing, there are 25 notices of appeal filed with the United Kingdom Competition Appeal Tribunal against the OFT's decision. These appeals are based on a variety of reasons ranging from claims that the OFT erred in law and/or fact, to claims that the OFT’s penalty was "calculated arbitrarily, is excessive, disproportionate and unjust and should be reduced".

What action should construction companies take?

Companies should ensure that they have robust Trade Practices Act compliance procedures in place. It is important that training is provided for all staff involved in project bidding to ensure that they are aware of their obligations under the Act, and to ensure that they follow appropriate practices.

Related Knowledge

Get in Touch

Get in touch information is loading


Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.