The Federal Court in Brisbane has imposed penalties against three Queensland-based construction companies for engaging in illegal price controlling conduct known in the construction industry as cover pricing.
The conduct related to tenders for one Local Government and three State Government construction projects in Queensland.
Justice Logan said “This type of conduct sends to those in, materially, the State Government or a local government, false signals about price or about a range of prices for a particular building works undertaking. It creates an illusion both as to range of prices and as to the existence of a particular level of competition."
"In the particular context in which the conduct occurred in relation to the State Government projects, the conduct also involved a betrayal of trust."
Justice Logan imposed penalties against each company to be paid in instalments over 24 months as follows:
- JM Kelly (Project Builders) Pty Ltd – $600,000
- TF Woollam & Son Pty Ltd – $450,000
- Carmichael Builders Pty Ltd – $250,000
“This decision shows that cover pricing is illegal and building companies who continue with this practice can expect the ACCC to ensure that the law is enforced,” ACCC Chairman Rod Sims said.
“The penalties imposed here should be a wake-up call for the construction industry that cover pricing is not a legitimate business strategy.”
Cover pricing is a practice which has developed within the building industry. It was alleged by the ACCC to have been 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 that project.
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 (who 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.
Managing director of TF Woollam & Son, Mr George Bogiatzis was party to three contraventions by that company and was penalised $50,000 to be paid within 6 months. Construction Manager of JM Kelly, Mr John Murphy was party to one contravention by that company and was penalised $30,000 to be paid within 6 months.
The companies were also ordered to pay the ACCC’s legal costs. The Court ordered that Mr Bogiatzis and Mr Murphy are jointly and severally liable for the respective legal costs that TF Woollam and JM Kelly are required to pay the ACCC.
The penalties follow earlier findings made by the Court in August 2011 that between 2004 and 2007, TF Woollam & 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 conduct amounted to a controlling of the price at which services were to be supplied. The companies were also found to have engaged in misleading and deceptive conduct.