Construction Cost Control: How to Thwart Bid-Rigging

One of the highest premiums you may ever pay after a loss can come before the remediation work even begins. What’s worse, you might never know where the money went. Bid-rigging is a costly hazard in the construction world—and one that often goes unseen.

According to the Competition Bureau, “Bid-rigging typically involves competitors agreeing to artificially increase the prices of goods and/or services offered in bids to potential customers.”  It can come in a few different forms, all of which are illegal under Section 47 of the Competition Act:

  • In cases where multiple parties are required to submit a bid, two or more companies get together and arrange amongst themselves which individual company will submit a bid that meets all the criteria of the job. The others may submit overly inflated bids—or even withhold or withdraw their bids from the competition. In extreme cases, colluders can try to give an appearance of competition by submitting complementary bids from phantom/shell companies or affiliates.
  • Companies rotate between themselves as to who will submit the “winning” bid for any given project.
  • The selected vendor subcontracts out areas of the job to the unsuccessful companies that it colluded with on the bid.
  • Suppliers portion out geographic regions that include specific customers and agree not to compete beyond their territory.
  • The person or persons in charge of reviewing and selecting the successful bid works with one vendor, and only calls for additional submissions as a formality to appear unbiased.

These schemes may only be uncovered years later…or never. For example, the Competition Bureau has been investigating allegations of bid-rigging and conspiracy in the supply of condo refurbishment services relating to contracts dating back from August 2006 to September 2014. Regardless of their findings, which may take a long time to complete, these proceedings likely will put pressure on boards to review their contract-tendering standards.

While bid-rigging can be hard to detect as there are no definitive telltale signs, there are some red flags:

  • Issues with bid documentation: Companies that are in collusion often submit bids together and/or make the same errors or inconsistencies in their bids. Similar terminology and pricing could also appear. Also, there may be a big cost difference between the successful bid and the others submitted, and/or the winning bid is very close to the maximum budget for the project.
  • Suspicious behaviour: When a company refuses to accept the contract once awarded, it could warrant further investigation. Another warning sign is if the successful bidder subcontracts the project work to an unsuccessful bidder.
  • Changes to status quo: If your business uses the same pool of suppliers for construction work and a company that usually submits a bid does not do so, pay careful attention. Another alarm bell? A vendor puts forth drastic price changes without proper explanation—especially after a new bidder has entered the picture.

There are also safeguards you can put in place to discourage bid-rigging:

  • Prepare detailed documentation: Start with the bid package. Detailed documentation that outlines what work needs to be completed—as well as conditions and specifications in which that work will be completed—makes it harder for potential colluders to exploit ambiguities. This includes outlining conditions that require bidders to name any companies they may subcontract to if awarded the contract. That being said, offer some flexibility in terms of like kind and quality materials or services that may be used, so that the process does not exclude qualified bidders and facilitate the selection of a favored bidder.
  • Ensure confidentiality: It is important not to let bidders know the names of the other companies on the roster. Likewise, bids should be kept confidential. Do not share details or pricing beyond the decision-makers.
  • Take time and ask questions: Commissioner of Competition for the Competition Bureau, John Pecman, was correct in saying, “I think it’s fair to say that when procurement is done in haste and perhaps the competitive bidding process is done quickly and there’s not a lot of care taken, it increases the likelihood of bid-rigging.” Take the time to do your due diligence. An example? In the event prices do not add up, if they seem out of line with market rates, or if any details are unclear, ask questions. Also, if you are not familiar with a company, ensure that they are a viable business with proper qualifications and existing customers. The more clarity you can achieve, the easier it is to uncover shady business dealings.
  • Build knowledge and connections: Get to know costs for services and materials. This will help you spot irregularities more easily. Build an extensive network of potential bidders from which to pull, so you have options when choosing suppliers.
  • Seek experience and objectivity: The single most effective way to prevent bid-rigging is to have an experienced third-party manage the process. With no affiliation to adjustment, restoration, construction or engineering services, there is transparency in the process and outcomes. Also, an experienced consultant will have a good understanding of local market conditions and pricing—in addition to an extensive list of specialized suppliers. Moreover, a trained eye will be able to spot anomalies in bids.

It is often said that what you don’t know can’t hurt you. However, when bid-rigging goes undetected, it can hurt your bottom-line—and the industry as a whole. A combination of knowledge and vigilance can bring this illegal practice, as well as its associated hidden costs, out of the woodwork and under the microscope.

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