This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its March 2017 report entitled Detection of Warning Signs for Potential Bid Rigging Should be Strengthened, the City of Toronto Auditor General found indications of price-fixing in its review of city-owned paving contracts. The Auditor General noted that the City of Toronto spends $100 million a year on road repair contracts and its report questioned “whether proper monitoring and management controls are in place to ensure a competitive tendering environment allowing the City to obtain the best value for money.” In fact, the Auditor General identified “a number of red flags which should raise concerns about the potential for bid rigging by contractors and conflicts of interest associated with certain contractors and employees.”
The Auditor General found that the City lacked a central electronic database for tracking its bid prices, which significantly undermined efforts to monitor bids and identify patterns of price-fixing. The report found multiple indicators of potential bid-rigging, price-fixing, and collusion, including: (i) market domination; (ii) market division and bid suppression; (iii) cover bidding; (iv) co-ordinated bids; (v) uncompetitive subcontracting; and (vi) conflict of interest.
With respect to market domination, the Auditor General found that local road resurfacing contracts “were dominated by two contractors who together won 71 per cent of all local road resurfacing contracts issued between 2010 and June 2015.” In fact, the report noted that in “District 1, Contractor A’s odds of winning was nearly 92 per cent, winning 11 out of 12 bids it submitted.”
The Auditor General also found strong indications of market division and bid-suppression practices. For example, it found that in District 4, the work “appeared to be geographically split between Contractor A and Contractor B”, wherein “Contractor A won every contract in the eastern segment of the District from 2010 to 2015” and “Contractor B won every contract in the western segment of the District from 2010 to 2015, except in 2011.”
Regarding evidence of bid suppression, the Auditor General noted that the “bidding patterns between two Districts were very different”. For District 2, “of the 13 tenders issued, there were a total of 16 unique bidders with 8 different winners”, whereas “of 14 tenders issued by District 4, they attracted only five unique bidders, and over the past five years, Contractor A and Contractor B won all but one [contract] in that District.”
The Auditor General further found evidence of cover bidding, which, as it explained, is also known as “complimentary bidding”, in that “cover bids give the impression of competitive bidding, but in reality, contractors agree to submit token bids that are usually too pricey to stand a chance to win.” As the report stated, a typical red flag of cover bidding is “repeated bids by certain bidders who rarely win.” For example, the report noted “one contractor who bid 24 times but never won, resulting in zero odds of winning.” While the report was careful to note that these bids may not have been cover bids, “this should call for a closer examination by [City] staff as to whether such bids were reasonably competitive.” In other words, the multiple high bids from the same losing contractor should have, at minimum, drawn the attention of staff and prompted further investigation.
The report also found evidence of co-ordinated bidding. For example, it noted that “in a tender with 198 line items, a block of 44 line items had exactly 10 per cent price difference on each line item between the two contractors.” For example, as the report explained, “when one contractor quoted $5,365.00 for an item, the other contractor quoted exactly 10 per cent higher, i.e. $6,198.50.” The report concluded that such pricing patterns were too consistent in their exact percentage differences, over too many different pricing line items, to be random or coincidental. As with the potential cover bidding, this should have attracted further staff attention if pricing patterns were being properly monitored.
In addition, the Auditor General found evidence of uncompetitive subcontracting, in that winning bidders regularly awarded subcontracts to their competitors. For example, the report noted that in “eight local road resurfacing contracts in one District, the bidders had included several bidders as subcontractors such that whoever won the tender, certain losing bidders got a share of work.” As the report stated, this practice “can undermine the competitiveness of the procurement process, when bidders don’t need to rely on winning the tender from the City as they can split the work amongst themselves.”
Finally, the report found multiple instances of conflict of interest between City staff and competing bidders, including former City employees working for contractors, former contractor employees working for the City, and current City staff participating in the tendering process despite being related to members of bidding companies.
In summary, the Auditor General’s report “identified significant control deficiencies and a lack of routine analysis of bid submissions and bidding patterns” such that, when combined with “a lack of accurate quantity estimates by staff in issuing road resurfacing tenders”, the City was rendered “vulnerable to inflated prices and potential bid rigging by contractors.” The report concluded that there “were many telltale signs of bid rigging and inflated pricing and even more concerning was the fact that most District contracts were consistently dominated by a small group of contractors over the past five years.”
In response to these findings, the Auditor General recommended the implementation of the following control measures to help prevent bid-rigging: (i) keeping the name of potential bidders confidential (as opposed to publishing the bid-takers list during the pre-bid stage) to avoid facilitating pre-bid collusion between bidders; (ii) ensuring adequate data resources to help monitor for potential bid-rigging; and (iii) ensuring greater staff awareness of bid-rigging and conflict of interest through the delivery of regular refresher training programs.
