Collusive bidding refers to agreements by contractors or suppliers in a particular trade or area to cooperate to defeat the competitive bidding process in order to inflate prices to artificially high levels. It can occur in large and small contracts. Where collusive bidding is well established prices can rise substantially, in some cases by as much as several hundred percent.
Collusion in international projects often involves corruption, in which government officials and procurement personnel under their direction sponsor or facilitate the collusion in exchange for bribes. All or part of the corrupt payments often end up in the coffers of local political parties where they are used to offset campaign and other expenses.
The most common methods to execute collusive bidding schemes are:
Complementary bids, also known as “protective,” “courtesy,” or “shadow” bids, are intended merely to give the appearance of a genuine bid and not to secure the buyer’s acceptance.
Under this scheme, cooperating bidders agree to submit higher priced or deliberately defective bids to ensure the selection of the designated winner at inflated prices. In exchange, the winner might pay a percentage of its profits to the losing bidders, hire them as subcontractors, or allow them to win other high priced contracts. Collusive bidders can submit complementary bids from shell companies or affiliates to give the appearance of competition.
Participants in a bid rigging scheme often rotate winning bids by geographic areas (e.g., one road contractor gets all the work in one county, another company all the work in the next), or by type of job or by time to give each member a chance to share in the spoils. As noted above, “losing” bidders might receive a percentage of the winning company’s profits or be hired as sub-contractors to improve their cash flow as they await their turn to win.
For bid rigging schemes to succeed, group members must prevent outside companies from bidding. This can be accomplished by paying off an interloper or by more forceful measures, such as threats or violence. The collusive group also can submit fabricated bid protests or coerce suppliers and subcontractors not to do business with the outsider in order to protect its monopoly.
Corrupt government and procurement officials can facilitate the bid suppression efforts (e.g., by disqualifying other legitimate bidders during the bidding process) in exchange for bribes from the conspirators. In fact, government officials often are involved in organizing and facilitating collusive bidding schemes and take a cut of the profits.
The cooperating companies may divide markets or product lines and agree not to compete in each other’s territory, or to do only so through collusive measures, such as submitting complementary bids.
CONDITIONS FAVORABLE TO COLLUSION
Collusion can occur in almost any industry, and has been observed in development projects in the following sectors, among others:
- Road construction, repair and maintenance
- Pharmaceutical supplies
- Major building construction
- Major IT projects
- Office supplies
Collusion is more is more likely to occur if there are few qualified competitors in the area, and where access to the market is difficult because of high entry costs, restrictive legislation or other reasons. Collusion also may occur when there are a number of qualified firms, but there is a smaller group of major companies that dominate the market.
RED FLAGS OF COLLUSIVE BIDDING
Pricing red flags:
- Persistently high or increasing bid prices compared to cost estimates, price lists, previous prices similar jobs or industry averages
- Wide variation in line item bid prices between bidders, without apparent justification
- Bid prices drop when a new or infrequent competitor enters
Bidding red flags:
- Rotation of winning bidders by job, type of work or geographical area
- The same companies always bid, the same companies always win and the same companies always lose
- Unusual bid patterns, e.g.,
- Bids are identical, very close or too far apart based on prior similar tenders
- Bids are an exact percentage apart
- Winning bid is within 5% of the reserve price (the highest price the bidding agency will accept)
- Bids are round numbers, when that is unusual
- Bidders submit bids in subsequent re-bidding rounds in same order as in original bid
- Bidder submits a high price on one line item in one bid (to support designated winner), and a low price on the same line item in another bid (to win a contract)
- Losing bidders are hired as subcontractors or suppliers
- Contractor includes subcontractors in its bid that are competing for the prime contract
- Joint venture bids by firms that usually bid alone
- Qualified contractors fail to bid and become sub-contractors, or one bidder withdraws and becomes a subcontractor
- A significant number of bidders who buy bid packages do not submit bids
- Losing bids do not comply with bid specifications, or only one bid is complete and other bids are poorly prepared or defective
- Losing bidders are unknown in the industry or cannot be located in business or telephone directories or on the internet
Documentary red flags:
- Physical similarities in bids or proposals submitted by different bidders (indicating that all of the bids might have been prepared by the same party):
- Identical stationery layout, type face, etc.
- Common addresses, personnel, phone numbers, etc.
- Same calculations, type face, handwriting, spelling errors or corrections appear in two or more bid packages
- Bids or proposals contain white-outs or corrections indicating last minute price changes
- Multiple losing bidders submit defective, forged or sequential bid securities, or securities purchased at the same bank on the same day, etc.
Other red flags:
- Correspondence or other indications that contractors exchange pricing information, divide territories, or enter agreements
- A bidder requests a bid package for itself and a competitor or submits both its and another’s bids.
- A bidder that is incapable of successfully performing the contract submits a bid or proposal (likely a complementary bid)
- A bidder brings multiple bids to a bid opening and submits its bid only after determining who else is bidding.
- A bidder makes:
- Any reference to industry-wide or association price schedules.
- Any statement indicating advance (non-public) knowledge of competitors’ pricing
- Statements to the effect that a particular customer or contract “belongs” to a certain vendor
- Statements that a bid was a “courtesy,” “complementary,” “token,” or “cover” bid
- Any statement indicating that suppliers have discussed prices among themselves or have reached an understanding about prices
CASE EXAMPLES OF COLLUSIVE BIDDING BY CONTRACTORS
See actual case examples of collusive bidding by contractors from investigated cases.
BASIC STEPS TO DETECT AND PROVE COLLUSIVE BIDDING
1. Identify and interview all complainants and confidential sources to obtain further detail.
2. Do due diligence background checks on the winning and losing bidders to identify, for example, undisclosed common ownership, employees or other affiliations, or prior involvement in other collusive bidding schemes.
3. Obtain the following bidding documents, including, if possible, bidding documents from similar prior projects (to identify bid rotation):
- Prequalification applications and reports
- Requests for bids
- Winning and losing bids and supporting documents, including BoQ line items and bid securities
- Bid evaluation reports
4. Examine the actual, physical bidding documents for the red flags listed above, particularly:
- Physical similarities in the bidding documents from different bidders, such as common formatting, typefaces and color schemes
- Other apparent connections between bidders, such as common addresses, fax numbers or email addresses
- Persistent, unexplained high bid prices
- Unusual bidding patterns, e.g., line item or final bids are an exact percentage apart
- Losing bidders are hired as subcontractors
- Rotation of winning bidders by time, location or job type.
5. Do a computer-aided analysis of the bids, looking for unusual bid patterns.
6. Collect and review bid securities submitted by the winning and losing bidders (or, if the actual securities are unavailable, examine the bid security information in the Bid Evaluation Report); note such securities issued by the same bank on the same day to different bidders. Also note such securities that appear to be forged (this information can be used to induce the guilty party to cooperate in the investigation).
7. Contact local trade associations, competition authorities or anti-corruption commissions to obtain leads for further investigations.
8. Interview any “divers” (companies that submit legitimate, low bids, in defiance of the collusive group); question the diver on any threats received or other efforts to block its bid.
9. Interview qualified companies that failed to bid, including such firms that purchased bid packages; then interview the losing and disqualified bidders and attempt to obtain their cooperation, using the evidence obtained in the investigation.
10. Exercise audit rights on the winning bidder; look for evidence of collusion, including emails between bidders setting bid prices, etc.
11. Interview the winning bidder based on the evidence obtained in the investigation.
Collusive bidding by contractors constitutes a collusive practice.