Tiffany Couch, CPA/CFF + CFE, is the chief executive officer (CEO) and founder of Acuity Forensics, a nationally recognized forensic accounting firm. She is also the author of The Thief in Your Company, a book that explores the financial and emotional impact of fraud on organizations of all sizes. She can be reached at firstname.lastname@example.org or 360-573-5158.
Most public and some private companies require a competitive public bidding process to choose the best qualified contractors who will provide the lowest prices, the best services, and the most innovative solutions. The competitive process achieves those goals only when companies compete honestly and ethically and agree to the terms up front. Bid rigging disrupts this natural market competition and often results in shoddy work, cut corners and the use of subpar materials.
Bid rigging occurs when subcontractors (subs), who would otherwise have to compete for the job, covertly conspire to raise their prices or reduce the quality of goods or services to win the project. It’s a criminal act, and fraudsters can be investigated and prosecuted if collusion is discovered.
Here are four of the most common bid-rigging schemes.
- Bid suppression—This scheme suppresses or limits the number of bids that will be accepted for the project. It occurs when a group of subcontractors secretly assent that some of the bidders will refrain from submitting a proposal. If the bid has already been submitted, the sub may withdraw it. This type of fraud breaches the competitive process so that a predetermined sub in the group will win the bid.
- Complementary bidding—This scheme is similar to bid suppression. A group of subs conspires to throw the competitive process by predetermining who will win the bid. Unlike bid suppression, in complementary bidding schemes, all participants submit a proposal. Some of the bids will include exclusions or codicils that will disqualify them or render their submission incomplete or nonresponsive. Complementary bid-rigging groups ensure members can be part of the conspiratorial contractor and therefore be awarded a contract at some point for their participation in the fraud.
- Bid rotation—Just as the name suggests, this fraud scheme involves a collusive group of subs who conspire to "take turns" winning projects. Participants know the others' pricing up front and price their bids accordingly, thus removing any guesswork from the process.
- Guaranteed subcontracting—In this bid-rigging scheme, conspirators are awarded pieces of the project in exchange for not submitting a bid that would grant them the entire scope of work. As such, participants have an equal opportunity to be the main sub on the project.
Unfortunately, many general contractors and developers may not even realize their projects involve bid rigging. The following checklist can assist the procurement team in deterring and detecting potential bid-rigging schemes.
- Understand market conditions—Contractors and developers know the industry ebbs and flows based on the economy, and the competition and pricing follow suit. Pay attention to current bid pricing on comparable projects to keep a pulse on what things cost.
- Provide training—Make sure staff understand the telltale signs of potential bid ridding, such as:
- Significantly lower prices than have been previously tendered for similar services or goods
- Identical or oddly similar pricing from multiple bidders
- Fewer bids than should have been suspected
- Unnecessary joint bids
- Seemingly intentional errors or omissions that disqualify an otherwise viable bid
- Restrict communication among bidders—Avoid opportunities for bidders to have visibility and contact with competitors. Refrain from hosting group jobsite visits, and use blind copy for any email communications.
- Expand the list of potential bidders—Open the request-for-proposal (RFP) process to a broader group of subs or expand the geographical region to increase the diversity of bidders. Another option is to openly state the number of bids required for the RFP to be considered substantial.
- Make non-collusion affidavits a standard practice—This should be a regular practice for bidders in all bid documents.
- Clearly communicate bid requirements—Provide bid documents that explain what proposals should include and the criteria for their evaluation.
- Exercise right of refusal—If the competition feels unfair or raises any red flags of collusion, be empowered to reject the bids and reopen the call for proposals.
Understanding and recognizing potential bid-rigging schemes and setting clear expectations and criteria in all bid documents can help general contractors and business owners achieve the best possible outcomes of their RFPs. More than that, though, is the importance of ensuring public bidding processes are fair, equitable and ethical, and protecting the integrity of the construction industry.