What Is Bid Rigging?
Feb 04, 2022
In a normal, competitive public procurement, an owner or agency will send out invitations to contractors, inviting them to bid on a construction project. They might also post a Request for Proposal (RFP) on their website. These publicly accessible documents are intended to attract a diverse bidding pool by clearly stating the job requirements. General contractors who are interested in bidding for the main job may also solicit proposals from subcontractors for parts of the work. The prepared bids are submitted to the requesting entity for review, and the contract is subsequently awarded.
Unfortunately, it doesn’t always work this way. Bid rigging is an attempt to unethically—and illegally—influence the prices and margins of construction contracts.
What is bid rigging?
Bid rigging is a form of collusion and price fixing that occurs at the beginning of a procurement process and subverts the competitive bidding process in order to charge a higher price to the owner.
General contractors and local entities like school boards may work together often and know each other through networking events, even as the GCs compete with each other for contracts, explains Dr. Kenneth Sands, a professor in Construction Management at Florida Gulf Coast University who holds a Ph.D. in Environmental Design and Planning. In a small market, for example, a group of general contractors could unethically collude to rig the bidding process for a school renovation. They would work together to unfairly influence who was awarded the contract and at what price. The colluding parties might split the higher fee or take turns winning inflated contracts.
Bid rigging could occur at either the general contractor level or the subcontractor level. In both cases, the likely outcome would be to inflate the cost that the owner, agency, or general contractor would pay for the work.
There are several forms a bid rigging scheme could take, explains Dr. Sands. All of them involve the contractors or subcontractors functioning as a type of cartel to control the outcome of the bidding process.
- Setting a price floor. Contractors or subcontractors may agree amongst themselves on a price floor for a certain kind of work and use that figure in their bids.
- Bid rotation. If a group of contractors or subcontractors expect more contracts to be available in the future, the bidders may engage in bid rotation, taking turns submitting bids on different contracts so there’s only one winning bidder.
- Cover bidding or complementary bidding. This is the practice of submitting bids that are intended to be rejected in order to create the appearance of a competitive market while still ensuring that the pre-selected bid is chosen. Complementary bidding is the most common form of bid rigging, according to the Department of Justice.
- Bid suppression. This is when a contractor agrees not to submit a bid, or withdraws one that was already submitted. The goal is the same—to engineer a designated winner. Contractors who agree to make courtesy bids or suppress their bids may be rewarded with subcontracts from the winning bidder, dividing the ill-gotten higher price between the colluding contractors.
Why bid rigging is unethical and illegal
The goal of a competitive bidding process, says Dr. Sands, is for the owner to get the most value at the best price. All forms of bid rigging undermine this outcome. They generally artificially increase the margins of the contractor and the cost to the owner. In the case of a publicly-financed entity like a school board, bloated renovation costs would cut into spending on other district priorities.
Bid rigging is illegal in the United States. It’s a form of anti-competitive practice that violates the Sherman Act. This 1980 law is enforced by the Department of Justice, and violations are felonies punishable by fines of up to $100 million for corporations and fines of up to $1 million or 10 years’ imprisonment (or both) for individuals. The Department of Justice can prosecute a person or company for bid rigging even in the absence of a formal written agreement to collude. They can instead use direct evidence such as witness testimony, and “circumstantial evidence, such as suspicious bid patterns, travel and expense reports, telephone records, and business diary entries.”
Crucially, there is no defense against price fixing. Doing it at all, even with a good reason (such as attempting to establish fair prices), is illegal, the Justice Department’s documentation states.