Construction sector research – key findings

Research New Zealand was commissioned to conduct a small number of qualitative interviews with commercial building contractors, a group the Commerce Commission considers may be susceptible to cartel conduct.

The overriding objective of this research was to guide development of communications strategies aiming to increase compliance with the Commerce Act in this sector.

The findings of this report reflect commercial building contractors' views and experiences of anti-competitive, cartel and collusive behaviours. The views expressed are those of the research participants and Research New Zealand and not those of the Commerce Commission.

The context

Factors important in shaping commercial building contractors' attitudes towards cartel and other anticompetitive behaviours include:

  • the extremely competitive environment in which they operate;
  • a reliance on tendered work, including the significant investment contractors make in preparing tenders, and their concerns that they will be dropped off tender lists if they do not put in a price;
  • the fluidity of relationships with peers, as the same businesses may be competitors, partners, or sub-contract to one another at different times; and
  • the closeness of relationships with staff and competitors, some of which span decades.

Anti-competitive behaviour

One of the important findings of this research is that some commercial construction contractors misunderstand what constitutes collusive behaviour. For example, some contractors include cooperation between competitors in their definition of collusive behaviour (eg, getting together to discuss sustainable work practices).

The audience is generally of the opinion that anti-competitive behaviour, as they understand the kinds of conduct that is covered by this term, just doesn't occur in their highly competitive market situation. As such, they are generally not interested in, and are consequently unconcerned about, such activity.

Concerns

While not necessarily included in their definition of anti-competitive behaviour, commercial building contractors' greatest concerns are about what they consider to be unfair conditions and possibly illegal activities that are making it difficult for them to survive and are harming their sector's reputation. These include:

  • the consequences of a lack of regulation and poor understanding of the legislation (eg, not being paid, 'fly by night' contractors); and
  • unfair and possibly unlawful tendering practices (eg, suspicions of corrupt procurement practices within some government departments, project managers receiving backhanders).

Cartels and collusive behaviour

Some of the audience use the terms cartel and collusion interchangeably, and again, some misunderstand what collusive activity is under the Commerce Act. Commercial building contractors' definitions of collusive behaviour vary. Some believe that, as well as agreements between competitors that are to the detriment of others (eg, bid rotation), collusive behaviours also include agreements between commercial building contractors and procurement managers and collaboration/cooperation between competitors, which have no downside for any party (eg, getting together to discuss union issues).

Regardless of exactly how they define it, commercial building contractors generally regard collusion as being considerably less serious than cartel activity. This is because it is assumed that collusion occurs between just two parties (eg, two competitors), is ad hoc and short-term (eg, getting together for a single tender).

In contrast, cartels are understood to be relatively organised, long-term operations involving all, or most, of a group of competitors conspiring together to control a market. Fitting with this definition, cartels are more often associated with organised crime (eg, the mafia), large overseas businesses and global concerns.

In terms of their own industry sector, commercial building contractors do not believe cartels exist amongst their competitors, but some wonder if they might exist amongst some of their material suppliers (eg, ready mixed concrete) and the largest commercial and civil building contractors.

Motivations and inhibitors

Both cartel and collusive behaviours are thought to be motivated by the prospect of financial gain.

The audience believes that the most powerful factor inhibiting participation in cartel and collusive behaviour is the extreme competitiveness evident in the current environment. Other inhibitors mentioned by some of the audience include:

  • their and their staff's business ethics;
  • not wanting to tarnish a good reputation; and
  • the prospect of being penalised; however, none of the audience had any idea of the potential size of fines in New Zealand, or whether this might result in imprisonment.

Cover pricing

Commercial building contractors' definition of cover pricing differs from the Commission's understanding of behaviour encompassed by this term in that the Commission's definition also includes a business making a unilateral decision to put in a cover price.

When commercial building contractors talk about cover pricing they mean collaborating with another party in order to invent a believable (cover) price, based on the genuine pricing information that one of the parties intends to go to tender with. Higher than the genuine price on which it is based, the cover price is not intended to win the tender, but it is meant to look like a legitimate bid.

Examples and prevalence

Cover pricing mostly occurs between 'friendly' competitors, when one of the parties does not want to win a job, or is too busy to prepare a tender. It may also occur when a project manager or architect asks a contractor to put in a cover price, because they want to prove to their client that a favoured contractor's price is competitive.

Reflecting its prevalence, cover pricing was mentioned by all respondents. While some are very comfortable asking for and giving a cover price, as was evident by the openness with which they talked about this, others are adamant that they do not currently partake in cover pricing, albeit that they may have in the past. Between these two stances are those who may partake in cover pricing but are more reticent to talk about their own involvement (ie, preferring to talk about what others are doing).

Motivations and inhibitors

The most powerful motivation to participate in cover pricing is to stay on an architect's/project manager's tender list, which is regarded as vital to business survival in the highly competitive current market situation.

Importantly, some businesses are adamant that they would continue to cover price even if they were to learn that it is illegal, because the costs of not doing so (ie, being dropped from a tender list) are greater than any perceived downsides.

Those uncomfortable with cover pricing identify the following inhibitors to asking for/giving a cover price:

  • ethical reasons (ie, not believing that it is completely honest); and
  • not wanting to break the law.

Minimising risks

Reflecting their relative lack of concern about anti-competitive behaviour (including cartel/collusive behaviour), none of the businesses we spoke to are taking specific actions to protect themselves from the risks of becoming the victim of, or being a party to, such activity.

However, some businesses believe that they are inherently protected by their own and their staff's business ethics and/or through the dishonesty clauses included in their staff contracts.

Whistle blowing

Some of the audience have no idea who to contact if they were concerned about cartel behaviour. Others say their first port of call would be either:

  • the police;
  • a lawyer; or
  • making contact with the parties themselves.

Inhibitors to contacting the Commerce Commission

The greatest inhibitor to making contact with the Commerce Commission is the audience's lack of awareness of the Commission and its role. Unsure of which government service is responsible for dealing with anticompetitive behaviour, contractors guess it could be the Serious Fraud Office, the Ministry of Consumer Affairs, or "the department responsible for fair trading".

Other inhibitors to making contact with the Commerce Commission include:

  • concerns that the Commission will be bureaucratic in its approach and, as a result, they would have to spend far too much time and energy helping them with their investigations;
  • lack of faith in the justice system;
  • not wanting themselves to be exposed to scrutiny;
  • not having any hard evidence to prove their concerns; and
  • believing that the behaviour is "just a bit dodgy", rather than illegal.

None of the audience had heard of the cartel leniency policy, or was aware that cartel activity may become a criminal offence in the future. In fact, the difference between civil and criminal offences is generally not understood.

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