Whether to buy or not to buy - that is the question... By Jonathan Owen

From Market Matters December 09

Over the years I’ve organized a fair few building contracts to refurbish or redevelop markets, so the recent OFT inquiry into the alleged price-fixing of Council contracts was a bit close to home. I’m pleased to say it has taken the Office of Fair Trading four years to find out the system of bidding for Council contracts is working but they still fined 103 contractors for ‘anti-competitive practices’. Given the seriousness of the original allegations, I think that’s a pretty good result for Council Project Managers so I’m rewarding myself with the afternoon off.

The myth is that building contractors sit around in smoke-filled rooms deciding who will get the next juicy Council contract for a new school or market hall etc. My experience is that in reality they’re too busy cutting each others throats to do as much. Council bidding rules and good old-fashioned competitive pressure does keep prices down for the taxpayer so the OFT had to redefine so-called ‘cover pricing’ as anti-competitive to produce a headline result. I can’t say I agree with the OFT as cover pricing is inevitable, but you may at least be relieved to know your stall rent is going up for some other reason.

‘Buying’ a building contract to deliver a project can be a tricky business. The Project Manager needs to balance the tender bid against the contractor’s competency and whether there’s enough profit left in the bid for the builder to stay in business. The last thing any Project Manager wants is the contractor going pop halfway through the job. But Council contracts don’t come along every day so contractors are keen to stay on the tender list to be offered all opportunities to bid - and that is where the problem starts.

If they’re too busy to do the work this time they’ll still want to submit a bid to show they’re keen, but they’ll pitch it deliberately too high to win the job. That represents a ‘Cover Price’, which according to the OFT is an anti-competitive practice. I would call it human nature and can’t think of a way round it, but a decent Project Manager can of course sniff it out and substitute a genuinely competitive bid. Which just goes to show that Project Managers should be running the country and not politicians. So there.

But of course different people buy different things for different reasons. Take Tesco’s purchase of the former Co-op store in Slough for instance.

In 2003 the Competition Commission launched an investigation into Tesco’s purchase of the former Co-op store - less than a mile down the road from one of the largest Tesco stores in the country - after allegations they were ‘landbanking’ the site to prevent competition. Following the probe Tesco agreed to sell the site, but only after it had used it as a temporary location throughout 2004 whilst it redeveloped its existing site. After that temporary use finished in 2005 the former Co-op store remained derelict until it’s demolition in 2007.

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