Three Queensland construction companies nailed for illegal collusion

The Federal Court in Brisbane has imposed penalties against three Queensland construction companies for engaging in illegal price controlling conduct known in the construction industry as cover pricing.

The conduct related to tenders for three state government construction projects in Queensland and one local government project. The projects were Rockhampton Airport, the Jilalan Inspection Shed, the Callemondah project, and the West Pacific Pines Project.

Justice John Logan imposed penalties against each company to be paid in instalments over 24 months – JM Kelly (Project Builders) Pty Ltd – $600,000; TF Woollam and Son Pty Ltd – $450,000; and Carmichael Builders Pty Ltd – $250,000.

“The conduct here is aptly described as price-controlling behaviour,” Logan noted.

“It is a form of collusive tendering and an unlawful civil conspiracy.”

Cover pricing involves discussions between two potential suppliers (in this case builders) in a tender process.

Company A does not want to win the contract for reasons identified above and so asks company B (which intends to make a genuine tender) to provide them with a “cover price”.

Both companies understand that this “cover price” will be higher than company B’s tender price.

Once the cover price has been received from company B, company A (should it choose to tender) then submits its tender to the client at a price, which is at or above the cover price. This gives the client the impression that both companies are tendering competitively, but the exchange of the cover price actually ensures that company A’s tender price is higher than that of company B and therefore makes it unlikely that company A will be the successful tenderer.

This type of conduct sends to those in, materially, the state government or a local government sectors false signals about price or about a range of prices for a particular building works.

“It creates an illusion both as to range of prices and as to the existence of a particular level of competition,” the judge said.

“In the particular context in which the conduct occurred in relation to the state government projects, the conduct also involved a betrayal of trust,” Logan found.

ACCC chairman Rod Sims says the decision shows that cover pricing is illegal and building companies that continue with the practice can expect the ACCC to ensure that the law was enforced.

“The penalties imposed here should be a wake-up call for the construction industry that cover pricing is not a legitimate business strategy,” Sims says.

It was alleged by the ACCC to have been used in situations where a construction company might not have the time, resources or inclination to prepare an accurate tender, but still wanted to be seen as tendering for that project.

The penalties follow earlier findings made by the court in August 2011 that between 2004 and 2007, TF Woollam and Son Pty Ltd, JM Kelly (Project Builders) Pty Ltd and Carmichael Builders Pty Ltd engaged in “cover pricing” in relation to the tenders for four government construction projects.

This article first appeared on Property Observer.