Investigating Corruption In The Construction Industry Construction Essay

Investigating flubness In The spin Industry eddy Essay putridness is a long stand issue in spite of appearance the Construction Industry worldwide. What Effects eat the Recent Bidding Scandals had on the UK Construction Industry and what be their Implications for the approachingWorldwide, the locution celestial sphere is regularly rated as ane of the virtu anyy fog industries and the UK has non escaped these un truthful course sessions. In feature, in 2006 the Chartered wreak of Building (CIOB) published a survey entitled Corruption in the UK Construction Industry, which showed that putridness was picture to nearly(prenominal) degree in legion(predicate) a(prenominal) atomic number 18as of this sector and that to a greater extent(prenominal) should be d wiz to tackle this issue. The constancy was still rocked by the Office of Fair barters ( a great deal) Investigation into Bid Rigging in the Construction Industry. This topic is current and on- handout an d the main focus of my working class.The aim of my project is to investigate the widespread effects and outcomes of iron equipage on the UK Construction Industry and how companies can tackle such(prenominal)(prenominal)(prenominal) problems. Scandals hire included umpteen lifesize, last profile companies within the UK, damaging both reputations and trust.The project concludes that rot in the influence of tender rigging appears to be long standing and endemic in the twisting diligence and, often, an accept adapted practice. Even though economy against such practices exists and new legislation has/is coming on stream, this has non managed to stamp out these vile practices. If the UK finds it difficult to control corrupt practices with legislation in place it most sure enough follows that worldwide where practices are non subject to the similar legislation, the problem is huge. thither is a get for monitoring, great transparency and staying within the honor.Intr oduction (292)There are umteen reasons wherefore corruption concurs place including greed, a lack of transparency and accountability, bureaucracy and a lack of law en vehemencement. Corruption is fuelled by the enormous sums of m wizy entangled in carrying out projects and wherever money changes hands practices are up to(p) to corruption. Corruption is contraband and ca wasting diseases full problems.Corruption in social organisation fool aways umpteen different forms, from bribery or misuse of world power/position to obtaining large sums of money through with(predicate) and through fraud or other dishonest demeanour. In order to further contracts companies would normally non be in possession of won, corrupt practices take place. This has an effect on the decision make and freelancer hybridisees and conditions costs to rise. Corruption in the braid industry is a world-wide problem it is not unspoilt confined to developing countries, as there is extensive test of corruption taking place in developed industrialised countries.The United body politic has extensive experience of corruption in the aspect industry and, as a consequence, advanced systems of corruption wear evolved. High profile, leading companies defend been involved in corruption filths provided by large normal sector contracts organism issued to the private sector, which often core that taxpayers are liable(predicate) to drive been massively everywhereaerated.Politicians have been found disgraced of improperly accepting cash from businesses. Scandals such as cash for amendments and cash for favours have been reveal in recent years. Public sector contracts and concessions are the single greatest beginning of corruption in the UK and the majority of corruption human faces in the UK are connected to the dirty money of contracts. The use of contraband payments for contracts is widespread.A report by transparentness International rocked the mental synthesis ind ustry as the business sector most prone to bribery ahead of flat the arms, defence, oil and gas industries. query Re assured horizon (2134)This review focuses on reliable primary and secondary sources. really little speculative culture has been used in this study. Corruption is an illegal practice and by its nature is difficult to establish and to accuse companies of such practices without circumstantial evidence would promising lead to cases of slander or calumniate as the unions reputation would be at stake. No social club is going to admit freely to adopting an illegal practice. Speculative information is therefore in short supply.What is corruption?Corruption, with reference to the construction industry, is the abuse of power or resources for personal gain by extortion or saturnineering bribes. This includes collusion, i.e. an treaty amongst dickens or more people. It is used to limit open disceptation by deceiving or defrauding others of their legal rights, leadin g to gaining an un clear advantage.In a Global Corruption Report produced by Transparency International in 2005 it was estimated that the cost of corruption in the UK could be circa 3.75 gazillion per annum, a coarse sum of money. At the conviction they drew up an anti-corruption computer code for various(prenominal)s in the construction and engineering industry.TenderingThe main purpose for the principal contractor, the sub contractors and suppliers is to win contract work on a warlike basis and to stop that the net income margin placed within the put up is maintained or exceeded. If the reverse occurs, where a loss is make, it can be make up during the trading period of the bon ton with other projects however large losses cannot be maintained indefinitely and could lead eventually to the closure of the come with. roughly companies will submit to tender with no intention of winning the work, nevertheless when to maintain the reputation and references of their company. This can have adverse effects on smaller companies who fatality the work however are beaten by larger companies.There is a cost to the contractor for tendering. Construction firms have to survive in a high risk market and losing contractors get their costs of tendering.Illegal Practices within the Construction Industry affecting the tendering processCartelA formal agreement among competing firms to fix prices, marketing and production. The European Unions contest law explicitly for call downs cartels and related practices. controversy sham 1998 and term 81 of the EU TreatyBid RiggingBid rigging is a form of fraud in which a commercial contract is promised to one party even though several(prenominal) other parties likewise present a bid to make the process look acceptable. This is a form of price fixing and illegal in most countries, including the UK.Cover priceCover pricing takes place when companies join unitedly to overbid for a contract they have no intention of winning . One or more bidders tenders an inflated bid with an intention not to win the contract This is suffer to clients as it come roughs a false representation of the real extent of the aspiration as the client is unaware of the contact between the bidders and cheaper firms are less(prenominal) likely to be invited to tender. Often builders do this to avoid creation interpreted off the tendering list of contractors. Compensation payments known as bungs may take place in exchange for a cover price twain these practices can have the effect of inflating the last(a) contract price.BlacklistingA shitlist is a list or register of persons who, for one reason or another, are being denied a particular privilege, service mobility, access or recognition.SCANDALS Case StudiesOne very large scandal to hit the UK construction industry recently was the Office of Fair Tradings investigating into bid rigging and cover pricing. A primary source of information.The Office of Fair Trading ( frequen tly) started one of the largest probes in its history against the construction industry in April 2004. The investigation into the cartel demeanor which it claims artificially inflated the cost of 3 billion of universe and private sector contracts. 112 companies were accused of years of price fixing.It formally accused the industry of bid rigging and cover pricing, contrary to the controversy Act 1998. The contracts investigated included several frequent sector projects to build schools, hospitals, universities and brotherly housing. This bid rigging often involved the use of false invoices.The a great deal reported that in the course of its investigation it found evidence of cover pricing in thousands of tender processes in the construction industry involving approximately(prenominal) more than those named. The inquiry involved dozens of investigators and lawyers and firms had their offices raided during the process. The industry admitted privately that the practice of bid rigging and cover price fixing was widespread for some time before the OFT intervened. Among those named were large companies such as Carillion, Balfour Beatty and the Kier conclave nevertheless many small family bring businesses were also involved.The OFT had the power to fine the companies up to 10% of their global turnover for breaches of competitor rules and several firms admitted their guilt in order to keep down their fines to 1% or 2% of turnover.The Information Commissioners Office (ICO), also a primary source of information, uncovered serious breaches of the entropy security Act and served En crashment Notices on 14 construction firms who had remunerative for illegal information on voltage employees.Firms including Balfour Beatty and Laing ORourke nonrecreational yearly fees of 3,000 to obtain raw(a) information on workers and over 40 construction companies were accused of flouting the law by paying for personal information on blacklisted construction workers. Co nstruction firms would use the illegal list to vet potential new employees. The data included information on personal relationships, work union activity and employment history.The ICO say that companies paid a 3,000 annual fee to a firm known as the Consulting Association to use the service. Consulting Association was owned by Ian Kerr, who faced prosecution by the ICO for breaching the Data Protection Act. According to the ICO the firm operated for 15 years.Deputy Information Commissioner, David Smith, said This is a serious breach of the Data Protection Act. Not sole(prenominal) was personal information held on individuals without their noesis or consent besides the very existence of the database was repeatedly denied.The covert system enabled Mr Kerr to unlawfully switch personal information on workers for many years serviceing the construction industry to vet prospective employees.Smith said the ICO was considering what regulatory execute to take against the constructio n firms who had paid for personal information from the blacklist.I remind business leaders that they must take their obligations under the Data Protection Act seriously.From 16 March the ICO said it will operate a dedicated enquiry system for people who believe personal information about them may be held on the database.Prosecutions for such corrupt activities are not new. A famous corruption case from the 1970s was the Poulson case, involving public works contracts, which led to the resignation of a Government Minister, the then main office Secretary, The Right Honourable Reginald Maudling. This case was very well documented legitimately and is a primary source of information.Architect John Poulson was jailed for quintuple years in 1974 for corruption after being found shamefaced of bribing public figures to win contracts. After his business failed in 1972 an investigation showed it had been making payments to several MPs, police officers, health authorities and civil servants . This case was one of the longest for corruption in legal history.Scandal of 19m rigged construct tendersAn investigation by the Office of Fair Trading found that two firms colluded with each other on tendering for the 8.3m project to renovate Bradfords Eastbrook Hall.Bidding processes intentional to batten down clients and, in many cases taxpayers, receive the best possible excerption and prices were distorted, creating a real risk of increased prices. This decision sends a absolute message that anti- war-ridden and illegal practices, including cover pricing, must cease.Five charged with corruption over 66m engineering constructionFive men have been charged with offences of conspiracy to corrupt followers a two year investigation into allegations of corruption in the energy sector between January 2001 and August 2009 and it is so-called that inside information was being offered to companies bid for contracts in high measure engineering projects in return for a percentage of the contract determine. The case will be heard during November 2010.Local vitrinesLast year, Regional increment Agency Advantage West Midlands withheld 511,046 of funding from Stoke-on-Trent council due to concerns over the procurance surgical operations of the North Staffordshire Regeneration Partnership (NSRP), for which Stoke-on-Trent Council is the accountable body. AWM finally released the money be month after NSRP agreed to address procural issues over the designation of consultants identified by an audit and independent review by KPMG. The council insisted that no deliberate wrong-doing had taken place.In March this year, Staffordshire Police began an investigation into the award of the contract todemolish the former Westcliffe Hospital site, which was re-tendered following an internal investigation which found that the correct procedures had not been followed. The meeting also heard that the council had paid a company 3.2 million for building maintenance over the sometime(prenominal) three years without tendering for the work.The above are a few example cases of which there are many. These practices have still taken place condescension the existence of laws governing conduct. It is recognised that it is up to each individual company to comply with the law and there are severe penalties in force for those that do not.The UK construction industry is committed to compliance with UK and EU contest law. Competition helps to lower prices and give more choice. There are ceremonious laws in the UK on anti-competitive behaviour.The Competition Act 1998This law prohibits anti competitive agreements such as cartels between businesses and also anti competitive behaviour. The OFT is there to enforce disceptation laws but does rely on complaints to help enforcement. A wide range of information published by the OFT is available to companies on the Competition Act.Enterprise Act 2002This is an Act passed to give legal powers to the Office of Fair Tradi ng, the Competition Appeal Tribunal and the Competition Service.to create an offence for those entering into certain anti-competitive agreements to provide for the disqualification of directors of companies engaging in certain anti-competitive practices ..The Serious Fraud Office (SFO)Available advice from the SFO includes a list of corruption indicators. Some of these indicators can be applied to the construction industry both in the UK and worldwide.Abnormal cash paymentsPressure exerted for payments to be made urgently or ahead of schedulePayments being made through 3rd party country, e.g. goods or services supplied to country A but payment is being made, normally to shell company in country BAbnormally high commission percentage being paid to a particular agency. This may be split into 2 accounts for the same agent, often in different jurisdictionsPrivate meetings with public contractors or companies hoping to tender for contractsLavish gifts being authenticIndividual never ta kes time off even if ill, or holidays, or insists on dealing with particularised contractors him/herselfmaking unexpected or illogical decisions accepting projects or contractsUnusually suave process of cases where individual does not have the expected level of knowledge or expertiseAbusing decision process or delegated powers in specific casesAgreeing contracts not favourable to the organisation both with harm or time periodUnexplained preference for certain contractors during tendering periodAvoidance of independent escorts on tendering or contracting processesRaising barriers around specific roles or departments which are key in the tendering/contracting processBypassing normal tendering/contractors procedureInvoices being agreed in excess of contract without reasonable causeMissing documents or records regarding meetings or decisionsCompany procedures or guidelines not being followedThe payment of or making funds available for high value expenses or school fees etc on behal f of others.Another Act coming into force in April 2011 to help clean up corruption is the UK Bribery Act which will have a signifi slang expression effect on the construction industry.The UK will honor its reputation as one of the least corrupt countries in the world, when the Bribery Act comes into force in April 2011.Such conduct is not without significant consequences. If such practices go undetected companies can put on from huge fiscal rewards at the expense of the client or tax payer if caught, the guilty can face huge fines or even imprisonment, not to mention tarnished reputations and blacklisting for breaching trust.Discussion/ teaching/Analysis (2518)What Effects have the Recent Bidding Scandals had on the UK Construction Industry and what are their Implications for the succeeding(a)?An internal audit of building projects commissioned by Nottingham University Hospital NHS devote in 2004 developed into a major OFT investigation with serious implications for the Constru ction Industry. This became the biggest investigation the OFT had ever conducted into cartels and price fixing. The OFT rivet its investigation on approximately 240 alleged infringements even though evidence was uncovered on cover pricing being undertaken by many more companies. Evidence was uncovered on cover pricing in over 4000 tenders involving over 1000 companies.The effects of the scandal resulted in one hundred and three companies being implicated in the OFTs investigation into bid rigging, including some very high profile companies. This was scandalous as many of these projects were for the public sector, involving schools and hospitals. It was all the more scandalous as the companies involved were some of the biggest names in the construction industry Carillion, Balfour Beatty, Kier Group, Interserve and many more. In some cases the winning bidder made payments of several thousand pounds, known as requital payments (kickbacks), to the others submitting high bids. Compani es were visited under the Competition Act during the investigation and several of these companies admitted suspension the law and assisted in the investigation in the hope of their fines being reduced. Fines totalling c.129.5 million were imposed on those companies involved in the scandal. The Kier Group received the largest fine at 17.9 million. A table listing those involved and the amount of money of fines imposed is attached as Appendix 2.The construction industry showed it could not be trusted. The effect of the recent scandal has exposed high profile firms in the UK cheating. Until corruption is regulated in the UK/EU how can UK companies be expected to bid legally/ no-hitly for overseas contracts?The companies that were found guilty of these offences also risked being barred from taking part in future contracts but Government intervention ensured that these firms were not blacklisted by the public sector and the OFT issued an information note for the guidance of those inv olved in procurement in the public and private sectors, which included a recommendation that these companies should not be automatically excluded from tendering in the future (see below). unpackThe OFT considers that the following factors are relevant to the aboveThe Parties have received significant financial penalties purloin to the infringement findings in the DecisionIt would be wrong automatically to assume that construction companies that are not named in the Decision have not also been involved in bid riggingAs a result of the OFTs investigation, the Parties can be expected to be particularly aware of the opposition rules and the need for compliance and, if anything, are more likely to be compliant andMany of the Parties have cooperated fully with the OFTs investigation and a significant proportion have taken measures to introduce or reinforce formal compliance programmes and to ensure that their staff are aware of their competition law obligations.For the avoidance of do ubt, this recommendation is only intended to apply to this case. It should not be assumed that the OFT would take a similar view in future cases.Did the Government intervene due to the involvement of such high profile national companies? It certainly gave them a second chance. The fact that cover pricing has been common in the construction industry is certainly a contributory factor.The OFT operates a policy where financial incentives of up to 100,000 are available in return for information on cartels and illegal practices. This, however, raises the issue of whistle blowing and protection for those who come forward with information.The recent bidding scandals have raised the profile of ethical conduct in the construction industry where many people did not realise that their unethical behaviour was a barbarous offence which could also lead to losing their job or even their professional status.Not everyone was sympathetic to the bid rigging scandal. In 2008 Sir John Egan, who chaired the construction industry task force that produced the 1998 Egan Report (Rethinking Construction) was openly critical of the OFT investigation saying that public sector clients only had themselves to blame for the alleged bid riggings, blaming the culture of public sector utmost price procurement.I have little sympathy for government over this OFT investigation. What do they expect if they persist in procuring based on lowest price? I am very sad the public sector is still using this short cut approach. It is still procuring on lowest price and as long as this is the case, proper tendering cant happen.It is not illegal to submit an inflated bit but it is the parley between the bidder and its competitors that infringes the law.On a smaller scale following a discussion with the proprietor of a topical anaesthetic building company, who preferred to stay put anonymous, it was apparent that cover pricing was common even on a small scale. He admitted that he had obtained quotes from colleagues that enabled him to ensure he was submitting the lowest quote, usually in the case of indemnity quotes or small works for local authorities and had provided quotes for colleagues in the same way.. However, in his defence, in the case of insurance claims he stated this was sometimes done on behalf of the client who valued to ensure they secured the services of the contractor they knew and trusted by trying to ensure the preferred contractor submitted the lowest quote. It was also said that in hard-fought times this act of cover pricing was seen as a natural selection technique and a way of keeping the business going. Collusion is not only confined to large companies. Small companies and the self employed are at a greater disadvantage when tendering due to limited resources.On speaking to a Quantity Surveyor who works for a national company she told me that late bids were never considered and negotiations with tenderers was illegal.In order to achieve fair competitive tendering it is essential that any unauthorised amendments to or qualifications of the tender documents by a tenderer render the tender non-compliant and subject to rejection, although the tenderer should be given the opportunity to train the amendments/qualifications and stand by his tender. It is also essential that unsolicited alternative bids, either in terms of price or time, are considered non-compliant and rejected.How might bid rigging be retarded?A tender is the construction industry method whereby clients choose the main contractor. The practice of building firms quoting for free is a problem. It takes a lot of time and effort to produce an accurate quotation. Costs for tendering for contracts that are not won have to be absorbed by the company at its own expense. Cover pricing has been seen as a means to ease the loss. For every amount lost in unsuccessful bids more work must be generated to cover those costs or the profit is lost through the lost tenders. Bid rigging has been seen as a method of compensation. Each construction project is individual and there is no guarantee to companies that they will win any work at all through the tendering process. Perhaps procurement policies and/or tendering processes are in need of overhaul as it is not the tender price that matters but the final building cost, which is subject to all manner of variations due to delays, weather, etc.The scandal of bid rigging and the subsequent high profile media coverage has doubtlessly affected client thinking. Firms should now be more aware that skepticism and whistleblowing has been made easier to act on, which may act as a deterrent.There are measures which can be promoted to try to combat the perceived need for bid rigging, although there is probably none so attractive as financial gainOne of the most obvious measures is regular and appropriate training which can be used on a local and national scale so awareness is raised as to what types of behaviour are illegal. This can also be used to reinforce honourable obligation to do what is correct. Again, the self employed small contractor is highly unlikely to be able to afford the time or the spare cost for training. It maybe that small firms cannot bypass bid rigging. Where firms are able to employ professionals to prepare bids and tenders the likelihood of bid rigging reduces as they would run the risk of losing their professional status if found to be undertaking illegal practices.Practical steps can be taken to help reduce the risks, such as the use of non-collusion clauses and careful design of procurement processes.In 2009 the National Federation of Builders (NFB) and the UK contractors Group launched a competition law code of conduct (see extract below). This high bring downed the need for construction companies to establish internal procedures to obstruct anti-competitive practices. It remains to be seen whether this Code will have a tenacious effect on contract practices. Codes have to be adopted together with training and military rank on a continuing basis and made an integral part of the companys culture.The Competition Law Code of Conduct ExtractThe UK construction industry is committed to compliance with UK and EU competition law. The industry understands that the purpose of competition law is to preserve free, fair and efficient competition for the benefit of all companies operating in the industry and their clients.The industry agrees at all times to commit to ensuring the highest standards of competition law compliance within the sector by adhering in all of its business practices to the principle of fair competition and to ensure that construction companies do not engage in conduct which is anti-competitive.Construction companies mustnot restrain competition amongst themselves through agreements, arrangements or understandings that restrict competitionbid for contracts and tenders independently from and without any agreement or arrangement with their competitors ornot exchange competitively sensitive information or engage in discussions that may lead to the co-ordination of competitive behaviour and, in particular, must not share information about current or future pricing intentions for tenders, or any instalment that might affect prices or pricing practices, including the exchange of cover prices.Construction companies understand that co-operation with a competitor is justified only under the exceptions permitted by the competition rules or where they have been expressly required to enter into such arrangements by the client, for example, certain joint ventures and framework agreements, in which case such arrangements will be fully disclosed to the client.The industry understands that each individual construction company is responsible for its own compliance with competition law and that the consequences of breaching competition law are severe including possible penalties, director disqualification, criminal sanctions and da mages actions.Construction companies will therefore endeavour toensure that competition law compliance will be achieved through implementing effective competition compliance policies and guidelines throughout their businesses andpromote an understanding of and compliance with competition law throughout their supply chains, including with their sub-contractors.This may or may not dig up to be effective in cleaning up the industry as it is non-binding.In the light of recent problems clients may not be happy with verbal reassurances on competition law compliance.An overhaul of tendering processes in light of new regulations could help to avoid bid rigging. The Organisation for Economic Cooperation and Development (OECD), together with the assistance of the OFT has issued the following best practice guidelinesGuidelines for scrap Bid Rigging in Public ProcurementDesigning Tenders to reduce bid riggingDetecting bid rigging in public procurementA checklist includesBids received at the same time or containing similar or unusual wording.Identical prices.Bids containing less detail than expected.The likely bidder failing to submit a bid.The lowest bidder not taking the contract.Bids that surrender on the entry of a new or infrequent bidder.The successful bidder later subcontracting work to a supplier that submitted a higher bid. judge discounts suddenly vanishing or other last minute changes.Suspiciously high bids without logical cost differences (e.g. delivery distances).A bidder betraying discussions with others or with knowledge of preceding(prenominal) bids.The construction industry has been badly affected by the recession and competition is fierce. It has put itself in the spotlight and faces further scrutiny.It may be sensible for companies to carry out their own evaluation of project procurement to check for any anti-competitive behaviour.Corruption has a cost both in terms of reputation and uneconomic projects, raising the cost to the client.The FutureThe OFT also published a report in June of this year on the evaluation of the impact of its investigation into bid rigging in the construction industry. The enquiry was based on surveys of construction contractors and procurers first shape 2008 and second phase 2010.Nine in 10 construction firms now recognise that bid rigging, including cover pricing, is a serious breach of competition law with associated penalties. almost two in three procurers have introduced a new implement in the last two years to detect or prevent anti-competitive practices.A recognised way forward is the adoption of a company competition compliance policy to minimise risk, together wit