Owners and developers (referred to here as “owners”) of infrastructure and construction projects face a myriad of reputational, financial, regulatory, and operational risks. Bid-rigging and other anticompetitive practices are real risks that can result in increased costs and reputational damage. Fortunately, there are practical measures that owners can take to mitigate these risks.
Within the last year, the US Department of Justice (DOJ) secured guilty pleas from several construction contractors for bid-rigging and fraud. This is on the heels of creating the Procurement Collusion Task Force to combat market allocation, price-fixing, bid-rigging and other anticompetitive conduct relating to government construction or infrastructure development. Bid-rigging is not only present in government contracting but in the private sector as well.
Recent investigations and convictions by the DOJ include those providing kickbacks to a government agent in California; a subcontractor providing kickbacks to prime contractors for work at a US Army facility; and a wide-ranging investigation of the insulation installation industry in Connecticut. In the private sector, recent bid-rigging and kickback schemes for construction activities at Bloomberg and Citibank show the need for private entities to be vigilant.
As the DOJ itself has noted, combatting bid-rigging and kickback schemes is difficult enough for government investigators to uncover, even armed with subpoena power and the ability to conduct wire taps and other searches. Without the powers of the government, owners face an even greater challenge to deter, detect and eliminate such conduct on their projects. The good news is that practical mitigation strategies work.
The DOJ provides several indicators to assist in identifying bid-rigging and collusion, most of which it then cautions are not proof of collusion or bid-rigging. These indicators include bids that are higher than estimated and intentionally high bids. A frustrating situation, to be sure, since both examples are relatively common in the industry. Bids higher than estimated could be the result of a poor estimate and intentionally high bids could be based on sound business reasons if the bidder is at or near capacity. But there are additional strategies and measures to identify potential anticompetitive behavior, minimizing financial risk to owners and aligning with the DOJ’s goals of mitigating anticompetitive risks—in other words, getting a fair price.
Data analytics can be a powerful tool to review bids, especially if the owner has multiple datasets relating to bidding for various trades. Data analytics can expose bids that have been copied and pasted from one bid to a competitor’s, patterns of activity across multiple projects that indicate a rotation of bid winners among conspirators, and patterns of winning bidders subcontracting some of the awarded scope to a losing bidder. Each of these can indicate anticompetitive behavior and should be addressed accordingly.
Addressing indicators of anticompetitive behavior can be thorny. An indicator doesn’t necessarily mean there’s corruption. Each instance should be reviewed, and a plan of action developed; actions could include speaking with the general contractor/construction manager, conducting additional manual reviews of the bids and data, and discussions with the bidder(s). After a thorough review, owners could require the general contractor/construction manager to rebid the scope of work, remove bidders from consideration, perform heightened monitoring of the bidder’s activities including a forensic review of its billings or require a written declaration that the bidder did not engage in anticompetitive behavior.
Ultimately, the following are tasks one can perform rather than simply screening the indicators we discussed: (1) performing due diligence on all bidders; (2) obtaining detailed estimates of scopes of work; (3) performing a detailed review and leveling of all bids; and (4) reviewing unit and labor rates used for time-and-material billing and the buildup of change orders.
In Part II of this article, we will go into more detail and discuss each area more thoroughly.