Construction sector research – questions and answers

1. Why did the Commission undertake this research?

2. Why choose the construction sector?

3. What were the key findings of the research?

4. What kinds of anti-competitive behaviour are prohibited under the Act?

5. What is cover pricing?

6. Does cover pricing breach the Commerce Act?

7. How does cover pricing harm competition?

8. Does cover pricing also breach the Fair Trading Act?

9. How prevalent is cover pricing?

10. Why isn't the Commission opening an investigation into this behaviour?

11. Why do builders put in cover prices if they do not want the job?

12. What was the sample and how was the research carried out?

13. How do I apply for leniency if I want to blow the whistle?

14. What will the Commerce Commission do, if I report cover pricing or other anti-competitive behaviour?

15. What are the penalties for anti-competitive behaviour?

 1. Why did the Commerce Commission undertake this research?

The Commission undertook the research to gather information about the construction sector's current levels of awareness and understanding of competition law. We are going to use that information to provide targeted information to participants in the industry to improve compliance with the law.

In the past, the Commission has been promoting competition through investigation and litigation of potential breaches of the Commerce Act. Most investigations have been initiated as a result of complaints to the Commission, or applications for leniency under the leniency policy.

The Commission is now taking a proactive approach to encourage greater awareness of the benefits of competition and to encourage compliance with the Act. This approach places greater emphasis on education to avoid illegal behaviour, rather than relying on taking enforcement action after a breach has occurred.

 2. Why choose the construction sector?

On the basis of a significant number of overseas cases, the Commission identified the non-residential construction sector as a sector that could be at risk of collusive behaviour.

Internationally, the construction sector is considered to be prone to anti-competitive activity. Certain features of the industry structure make collusion more likely, such as:

  • repeat bidding by the same companies for similar products/services;
  • few substitutes for construction products and services; and,
  • some of the rules around bidding for public work, eg, transparency, make it easier for suppliers to rig bids (although there are good reasons for these rules).

 3. What were the key findings of the research?

  • There is a very low level of understanding in this sector as to what constitutes unlawful anti-competitive conduct under the Act, including what is meant by the terms cartel and collusion.
  • There is little or no knowledge about the Commission's leniency policy, or of the potential penalties and fines that can be ordered by the courts for companies or individuals that breach the Act.
  • There is an indication that cover pricing is being practised by some companies in this sector now, and/or that it has been practised in the past.

More information: Key findings.

 4. What kinds of anti-competitive behaviour are prohibited under the Act?

The relevant provisions are Sections 27 and 30 of the Act:

  • Section 27 prohibits anyone from entering into agreements that have the purpose, or effect or likely effect, of substantially lessening competition.
  • Section 30 prohibits agreements between competitors that fix, control or maintain prices.

More information: Anti-competitive practices

 5. What is cover pricing?

Cover pricing is a practice where  a tenderer collaborates with a competitor in order to invent a believable but not genuine bid for a job. Higher than the genuine price on which it is based, the cover price is not meant to win the tender but is meant to look like a legitimate bid. Here are three possible scenarios in the building sector involving cover pricing:

  • 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 that is higher than the price 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's price is competitive. The favoured builder wins the tender.

 6. Does cover pricing breach the Commerce Act?

These practices may breach section 27, or section 27 via section 30, of the Act, depending on the specific circumstances of the case. By making their intentions known to each other, competitors are reducing the independence and competitiveness of the tender process, and this may directly or indirectly affect the price paid.

 7. How does cover pricing harm competition?

Whether the practice of cover pricing results in harm to competition depends on the circumstances of each case. Relevant factors include:

  • how many bidders were involved in  the tender round;  and
  • how many bids were genuine compared to how many were cover prices.

It is more likely that cover pricing interferes with the normal competitive process in tenders where there are fewer bidders or where the proportion of cover bids in relation to genuine bids is significant.

The Commission considers that cover pricing could be a breach of the Commerce Act.

 8. Does cover pricing also breach the Fair Trading Act?

Yes, if the tender contains misleading or deceptive information in relation to how the tender was prepared. Bidders are sometimes required to sign a warranty that their bid has been independently developed and that there has been no communication with competitors about price, submission of the bid or terms of the bid. If bidders have signed such a warranty but have had communications with competitors, such as cover pricing discussions, this could be misrepresentation under the Fair Trading Act.

More information: The Fair Trading Act

 9. How prevalent is cover pricing?

We do not know the prevalence of cover pricing in New Zealand. Our research was qualitative, and on a small scale, and therefore it is not necessarily indicative of how widespread the practice may be. However, all 12 respondents to the survey talked about cover pricing, unprompted, as a practice they had been involved with either in the past or currently, or as a practice they were familiar with.

We also know that there have been cases of cover pricing in other countries, including the UK, Australia and the Netherlands. In the UK, the Office of Fair Trading last year prosecuted 103 businesses that it found had engaged in cover pricing payments on 199 tenders between 2000 and 2006. Compensation payments are when the winner of the bid has an arrangement to pay the losers when the bid is won. In total, the businesses were fined £129.2 million and found to have breached the law.

 10. Why isn't the Commission opening an investigation into this behaviour?

The Commission undertook the research to gather information about the sector's current levels of awareness and understanding of competition law. We want to improve compliance with the law through education.  

The research was carried out on the basis that all responses provided to Research New Zealand were to be used for the purposes of the research only and could not be used for the purposes of an investigation. To this end, it was agreed that Research New Zealand would not disclose the identity of the participants, and that individual responses and transcripts of interviews would not be disclosed to the Commission. It was agreed that Research New Zealand's report would present the findings from the research on an aggregated and anonymous basis and any information which could identify an individual or a business would be removed.

To date, the Commission has not received any other information or complaints that would lead to an investigation. However, if the Commission were to receive a specific complaint alleging anti-competitive conduct in the construction sector, it would investigate and take the appropriate enforcement action. As part of the education campaign, the Commission is highlighting 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 with the investigation.

More information: Making a complaint

 11. Why do builders put in cover prices if they do not want the job?

Builders have explained that they have different reasons for cover pricing. One is that if they do not put in a reasonable price, they will be dropped off the tender list for that client or project manager the next time a contract is tendered. Often tenders are let on a closed basis and only a selected group of companies may be approached for expressions of interest.

Purchasers, who may be 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.

More information: Bid rigging

Another reason given for cover pricing is that sometimes a builder will ask another builder to put in a tender because he is worried there may not be enough tenderers and the job may have to be re-tendered. If another builder puts in a cover price, this increases the first builder's chance of winning the tender and not having to re-tender.

A third reason is where an architect or project manager has a favoured builder who they want to get a particular job. Several builders are asked 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, and to ensure that he gets the job at the specified price.

However, the courts are not concerned with the subjective intention of the person who has entered a potentially anti-competitive agreement - rather the court is concerned with the effect and likely effects of the agreement on pricing and competition.

 12. What was the sample and how was the research carried out?

The sample for this research was 12 commercial building contractors. The contractors were sourced from an independent broker's database. The sample included large and medium sized businesses (ie, with an annual turnover of $5-$50 million), those who worked nationally, as well as those who were more locally based.

Both very small (ie, those with less than five employees) and very large firms (ie, those from the Fletchers, Mainzeal and McConnell groups, including Hawkins) were excluded from the sample. Interviews were conducted with businesses from Wellington, Christchurch and Auckland.

The interviews were approximately one hour in duration and were conducted face-to-face at respondents' business premises. Respondents for the research were the business owners.

 13. How do I apply for leniency if I want to blow the whistle?

The Commerce Commission's leniency policy has two parts:

  • Immunity: Conditional immunity will be granted to the first participant in anti-competitive behaviour who applies for leniency. The applicant must meet the conditions described in the policy, such as full, continuing and complete cooperation throughout the Commission's investigation and any subsequent proceedings. Immunity is 'conditional' in that the holder must continue to meet the conditions to maintain their immunity status.
  • Cooperation: The Commission may exercise its discretion by taking a lower level of enforcement action, or, in exceptional cases for individuals, no action at all, in exchange for information and full, continuing and complete cooperation throughout an investigation into anti-competitive behaviour and any subsequent proceedings.

More information: Leniency policy and process guidelines  

All approaches must be made in person or by phone to the General Manager Enforcement during the Commission's normal hours of business (8.30am to 5.00pm Monday to Friday). This ensures that applicants are treated strictly in order of application. If desired, this can be done on a hypothetical, 'no names' basis so as not to identify the company who is contemplating applying for immunity.

If you are not involved yourself but wish to report concerns about potentially anti-competitive behaviour you can contact the Commerce Commission on 0800 94 3600, via our email contact@comcom.govt.nz or by filing a complaint on our online complaints form.

 14. What will the Commerce Commission do if I report cover pricing or other anti-competitive behaviour?

The Commission assesses all complaints it receives to determine whether to investigate and then the most appropriate type(s) of enforcement action or response in each case. To assist it in making these decisions, the Commission considers the following factors:

  • extent of detriment;
  • seriousness of conduct; and
  • public interest.

Enforcement action open to the Commission ranges from issuing a compliance advice letter or a warning, through to enforcement action in the High Court.

More information: Enforcement criteria

 15. What are the penalties for anti-competitive behaviour?

If the courts find an individual or body corporate has breached the Act, penalties can be heavy:

  • for an individual, a maximum of $500,000; or
  • for a company:
  • the greater of $10 million, or
    • three times the commercial gain (if this can be readily ascertained),
    • 10 per cent of turnover.

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