Cartel behaviour by builders

ROCKHAMPTON-based building company J.M. Kelly is disappointed in a Federal Court ruling released yesterday that found three Queensland companies engaged in bid rigging for government projects.

The court in Brisbane found J.M. Kelly, T.F. Woollam and Son and Carmichael Builders engaged in ‘cover pricing’ – a form of bid rigging - in relation to four construction projects between 2004 and 2007, according to the Australian Competition and Consumer Commission (ACCC).

“Yesterday’s outcome is upsetting to me and our family of more than 400 staff who have worked tirelessly to build our reputation as one of Queensland’s most trusted and experienced companies,” J.M. Kelly construction manager John Murphy said.

“We are a family-owned and operated company, which has operated in the Queensland community for 50 years and our reputation means everything to us.”

The court also found that managing director of T.F. Woollam and Son managing director George Bogiatzis and Mr Murphy of J.M. Kelly were parties to the contraventions.

Mr Murphy said allegations were made against the three building contractors which resulted in action being brought by the ACCC in the Federal Court.

“These allegations claimed our company was involved in a form of collusion through having participated in the wide-spread industry practice of ‘cover pricing’,” he said.

“ ‘Cover pricing’ is a term used to describe what was, prior to 2009, a wide-spread practice in the construction industry.

“It describes the practice where a builder, invited to tender on a project, was unable to calculate a competitive price or to perform the work (for example due to lack of resources or a sub-contractor’s failure to provide a crucial quotation), and asked another builder for an indicative ‘safe’ price at which their tender could be submitted without winning the job.

“As J.M. Kelly understands it the process evolved due to concerns (and at least one known instance) that builders who failed to provide tender prices would be black-listed from the opportunity to participate in future tenders.”

Both Woollam and Son and J.M. Kelly, which had built a number of projects in the Central Queensland region, issued statements to the Morning Bulletin yesterday with both saying they denied allegations and would look at appealing the decision. However, Carmichael Builders informed the Morning Bulletin it would not be making comment.

Wollam said it had implemented a comprehensive Competition and Consumer Act Compliance Program.

The statement issued by Wollam Constructions said Woollams has denied any allegations or arrangements had the purpose of fixing, controlling or maintaining prices.

The ACCC, J.M. Kelly and Woollam and Son statements follow:
 

J.M. Kelly’s statement

In 2009 allegations were made against three substantial Queensland building contractors, including JM Kelly (Project Builders) Pty Ltd, which resulted in action being brought by the ACCC in the Federal Court of Australia.

These allegations claimed our company was involved in a form of collusion through having participated in the wide-spread industry practice of ‘cover pricing’.

“Cover Pricing” is a term used to describe what was, prior to 2009, a wide-spread practice in the construction industry. It describes the practice where a builder, invited to tender on a project, was unable to calculate a competitive price or to perform the work (for example due to lack of resources or a sub-contractor’s failure to provide a crucial quotation), and asked another builder for an indicative “safe” price at which their tender could be submitted without winning the job.

As J M Kelly understands it the process evolved due to concerns (and at least one known instance) that builders who failed to provide tender prices would be black-listed from the opportunity to participate in future tenders.

The evidence given in the proceedings by participants in the building industry was that builders did not participate in cover pricing with the intention of securing any financial advantage, and that the ultimate tender price was not affected by cover-pricing. This was because:

- cover prices were generally given very close to the close of tenders, after the serious bidder’s price was already determined;

- a builder would never know all the other builders bidding in a tender; and

- the building industry is so highly competitive that even a tender between a small number of serious bidders would demand a very competitive price.

In the Federal Court proceedings J M Kelly admitted seeking cover prices in relation to 4 tenders and giving a cover price in one instance. Three of the four relevant tenders took place between late 2004 and mid 2005, with one instance occurring in 2007.

J M Kelly also admitted that cover pricing had a tendency to mislead or deceive, in that the tender submitted was not a competitive tender, and, for that reason, amounted to a breach of section 52 of the Trade Practices Act 1974 (Cth), even though not intended to mislead or deceive.

Although J M Kelly has admitted submitting a “cover price” tender on certain jobs, its intention was to avoid being black-listed from submitting future tenders, and at the same time not to submit a tender for any job which it was unable to properly price or perform. J M Kelly’s belief was that doing so would not advantage the company or its employees or disadvantage the architect or the owner of the project.

JM Kelly contested the ACCC’s allegations that cover-pricing amounted to price fixing pursuant to section 45A of the Trade Practices Act or caused a substantial lessening of competition pursuant to section 45 of the Trade Practices Act.

On 24 August 2011 the Federal Court found that J M Kelly, TF Woollam and Carmichael Builders infringed the provisions of sections 45 and 45A of the Trade Practices Act.

We are obviously very disappointed with this decision, and while we respect the Court’s decision, we will be considering an appeal to the Full Federal Court.

At all times, we have co-operated fully with the ACCC.

Yesterday’s outcome is upsetting to me and our family of more than 400 staff who have worked tirelessly to build our reputation as one of Queensland’s most trusted and experienced companies.

We are a family-owned and operated company, which has operated in the Queensland community for 50 years and our reputation means everything to us.

Delivering quality projects in a trustworthy and honest manner has always been the cornerstone of our company.

 

ACCC press release

The Federal Court in Brisbane has found that three Queensland based construction

companies engaged in price fixing and misleading or deceptive conduct in tendering

for Government public works projects in Queensland.

“The decision of the court is an extremely important one and follows the ACCC’s decision to pursue cover pricing as a form of cartel behaviour. Cartels damage the

Australian economy, raise prices for consumers in this case taxpayers and hurt businesses that play by the rules.” ACCC Chairman Rod Sims said.

The court found that between 2004 and 2007, T.F. Woollam & Son Pty Ltd, J.M. Kelly

(Project Builders) Pty Ltd and Carmichael Builders Pty Ltd engaged in ‘cover pricing’ in relation to the tenders for four construction projects.

This practice, which has developed within the building industry over many years, is allegedly used in situations where a construction company may not have the time, resources or inclination to prepare an accurate tender, but still wants to be seen as tendering for the project.

Cover pricing is a form of 'bid rigging' which involves a tender price being sought by construction company A from construction company B during a tender process. Both companies understand the cover price will be high enough to ensure that company A will not win the contract. Company A submits the cover price tender as a "genuine" tender. Company B has a better chance of winning the bid because its bid is under the cover price.

The court found that this conduct “amounts to controlling of the price at which services are to be supplied”.

“It is crucial for the proper functioning of business in Australia that the ACCC continues to tackle cartel conduct with the full force of the law,” Mr Sims said.

The distortion of the competitive tender process by cartel conduct may exclude legitimate competitors and pass on higher costs to customers.

Cartel conduct includes:

· price fixing

· allocation of customers or territory

· agreements on market share, or

· profit sharing.

The court also found that managing director of T.F. Woollam & Son, Mr George

Bogiatzis, and Construction Manager of J.M. Kelly, Mr John Murphy, were parties to the contraventions.

“It is also important to note that the conduct was also found to be misleading or deceptive as each company represented during the tendering processes that they had no knowledge of the price of any other tenderer and had not collaborated with another tenderer on price without the consent of the client. “ Mr Sims said.

Justice Logan adjourned the matter to a date to be fixed for the hearing of submissions on penalties and other orders.

 

Woollam’s statement

Woollam Constructions is disappointed with today’s judgement in the Federal Court under Section 45 of the Trade Practices Act in relation to alleged contracts, arrangements or understandings in relation to prices.

These allegations related to contracts completed approximately seven years ago and in no way reflect on the current operations of the company.

Woollams has denied that any allegations or arrangements had the purpose of fixing, controlling or maintaining prices.

Woollams is reviewing the decision – which has taken over 12 months to hand down – in respect to considering whether to lodge an appeal.

Regardless, the company has learnt a lot through this process and for nearly 12 months has implemented a comprehensive Competition and Consumer Act Compliance Programme reviewed and audited by Clayton Utz Lawyers and which is administered across the company and its offices.

All Woollam’s executive and commercial staff participate in this ongoing programme to ensure compliance with all legislative responsibilities of the company in regards to the Competition and Consumer Act.

A component of this program is the role and duties of a Trade Practices Compliance Officer.

This role has been filled by Woollam’s Executive Officer, Scott Wedgwood, who joined the company in 2007. Mr Wedgwood has been a practicing lawyer for close to 20 years and is also responsible for the company’s general legislative compliance.



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