or; Does a client really need a building?
Back in the 90’s, when I designed buildings for a living with Crampin and Pring Architects, we had a client, Tim Hopwell, He owned a frozen food distribution business and had a string of cold stores around the UK. Hopwell’s needed a new branch in Sheffield so after completing their Nottingham headquarters C&P was employed to extend and refurbish a cold store that they had acquired on the outskirts of the city.
I came up with what I thought was a quite innovative solution to a series of technical problems that affect these industrial buildings. The common issue is that damaging ice builds up in the inaccessible void between the inner insulated core and the outer weatherproof cladding. My solution was to solve this giving the building an external structural frame and creating high speed ventilation chambers between the wall and ceiling/roof layers. It looked interesting from the outside (imagine a tall Reliance Controls building wrapped around a shed) and dealt with an inherent cold store defect.
So far so good. But this was a more expensive solution than Tim had been used to paying for, so he quizzed me about why it was costing more than he expected. The solution made sense to him but he then went on to explain his thoughts on buildings and his business.It was an salutary lesson that has remained with me.
Tim explained that his business was selling frozen peas, and chips, and fish fingers. It paid the wages, put roofs over heads, and put petrol in his Lexus.
Tim wanted to sell frozen peas, and chips, and fish fingers – he didn’t want a building!
In fact, if he could sell frozen peas from the middle of a field he would. He needed a building to do it, but he didn’t want a building. My bubble was well and truly pricked.
There is a valuable lesson here for those of us in property when we consider what our clients and customers motives are for what we do. It is very easy to become tied up in the day to day issues of what is a complex business without ever seeing the core purpose that we are fulfilling.
It was a valuable lesson in what motivates the people who use and pay for our buildings. A building needs to fulfil its purpose first and foremost. Once that’s done we can make them beautiful.
The unprecedented fines levied by the Office of Fair Trading on the 103 building companies declared guilty of involvement in cover pricing has sent a shock wave through a construction industry already reeling from the worst recession in memory. With individual fines up to £18m the firms involved have been hit hard.
Predictably the general media and their readers have latched on to the investigation and decided that the size of the fine represents the measure of guilt but closer examination shows that it isn’t quite so straight forward. An unusual formula that includes the last three jobs involved in cover pricing and the proportion of that market sector in the turnover in the business means that one firm might have a million pound firm and another might have a hundred thousand even though the offences appear the same. On top of that some firms received leniency providing that they actually knew that they could apply before deadline expired, unlike Kier who at the time of writing is still ‘considering its position’. We might not have heard the last of this affair.
But what about the other firms? Cover pricing is, or at least was, standard practice throughout the construction industry simply because contractors want to remain on clients and project managers tender lists. So in a way the OFT investigation has highlighted fundamental problems within the clients procurement process. The OFT has not been able to quantify any loss yet they are encouraging clients to sue the ‘guilty’ contractors.
Controversially, the investigation was geographically and time limited meaning that those outside the area or a day past the deadline weren’t included in investigations or sanctions. Contractors on the west of the Pennines escaped investigation while those on the east did not. This raises an obvious and deeply ironic point about the OFT actually creating an unfair market.
In their note to procurers the OFT themselves state that;
the endemic nature of the practice within the industry suggests that many other companies are likely to have been involved in bid rigging, even though such activity remained undetected. For this reason, it cannot be assumed that the Parties are the only companies that may have engaged in cover pricing.
Don’t assume that those that received a fine were any more guilty than those who did not. They are now more likely to have strong internal procedures to avoid future problems. It might go against their natural inclination but clients and contract managers must take care when considering tender lists to ensure that firms aren’t excluded without a valid reason. The OFT and Office of Government Commerce have been very clear.
Check the guidance issued by the OFT, OGC and and OECD and ensure that tendering contractors know that they can say no without fear of being excluded from the next tender list. A transparent and equitable contract procurement process should ensure that all parties get the best price, performance and ongoing relationship well into the future.
The Building Cost Information Service are reporting that tender prices are not expected to return to pre-recession levels in the next five years. The next two few years were always expected to be tough but they predict that prices will continue to fall until growth returns in 2011. Worryingly though, building prices will rise steeply from then.
If their data turns out to be correct there is a small window of time to deliver extreme value on developments while build costs, land prices, interest rates and demand are all low. If developers are able to access funding the contracting industry is currently willing to price at cost just to stay in business. We would never advocate stripping out all profits because that is the road to disaster but open book tendering with pre-determined margins are increasingly attractive to both client and contractor alike.
We are seeing mounting evidence that clients are looking to dip a toe back in the market, so hopefully some of those unloved tower cranes will come back to life next year.
After five years the Office of Fair Trading has released a press statement and published the outcome of the investigation into cover pricing. The wording is interesting because while enormous fines have been issued, and the firms involved have undoubtedly been in involved in anti-competitive practices, the OFT does not appear to have quantified any losses. It remains to be seen if clients, especially the public bodies such as councils and health authorities, try to quantify potential financial losses and pursue contractors through the courts… if they are in a position to pay in these financially straitened times.
The decision follows an OFT Statement of Objections in April 2008 after one of its largest Competition Act investigations.
The OFT has concluded that the firms engaged in illegal anti-competitive bid-rigging activities on 199 tenders from 2000 to 2006, mostly in the form of ‘cover pricing’.
Cover pricing is where one or more bidders in a tender process obtains an artificially high price from a competitor. Such cover bids are priced so as not to win the contract but are submitted as genuine bids, which gives a misleading impression to clients as to the real extent of competition. This distorts the tender process and makes it less likely that other potentially cheaper firms are invited to tender.
In 11 tendering rounds, the lowest bidder faced no genuine competition because all other bids were cover bids, leading to an even greater risk that the client may have unknowingly paid a higher price.
The OFT also found six instances where successful bidders had paid an agreed sum of money to the unsuccessful bidder (known as a ‘compensation payment’). These payments of between £2,500 and £60,000 were facilitated by the raising of false invoices.
The infringements affected building projects across England worth in excess of £200 million including schools, universities hospitals, and numerous private projects from the construction of apartment blocks to housing refurbishments.
Eighty-six out of the 103 firms received reductions in their penalties because they admitted their involvement in cover pricing prior to today’s decision.
The OFT has also informed nine companies originally listed in its Statement of Objections that it will not pursue allegations of bid-rigging against them as it considers it has insufficient evidence to proceed to an infringement finding.
Related guidance issued today by the OFT in conjunction with the Office of Government Commerce cautions procurers against excluding the infringing firms from future tenders, as the practice of cover pricing was widespread in the construction industry and those that have already faced investigation can now be expected to be particularly aware of the competition rules.
Simon Williams, the OFT’s Senior Director for this case, said:
‘Our investigation has uncovered significant infringements of competition law on nearly 200 projects across England. Bidding processes designed to ensure clients and in many cases taxpayers receive the best possible choice and price were distorted, creating a real risk of increased prices. This decision sends a strong message that anti-competitive and illegal practices, including cover pricing, must cease. The OFT welcomes initiatives by the leadership of the construction industry to add weight to that message through a clear compliance code which we hope will help to embed more fully a culture of competition within the construction sector.’
Retail spend has experienced something of a mixed bag recently with some high street traders like Next seeing reasonable increases in profits alongside the supermarkets while French Connection and John Lewis are manning the barricades in the face of worsening figures.
Overall the retail figures for August remain flat with traders looking towards a Christmas boost to lift them out of the mire.
The Homes and Communities Agency £3m initiative to rejuvenate 57 town and city centres is attracting plenty of criticism. The number of vacant shops has tripled and there seems to be little prospect of a take up in retail space in the near future as large city centre retail schemes fall victim to the recession.
Ian Fletcher from the British Property Federation recently said ‘First we had Hazel Blears’ craft fair solution and now we have £50,000 hand outs that are barely a drop in the ocean compared to the extent of the problem.’
The intention seems to be to fill empty shops with amateur art galleries and community cafés. That might not impress the owners of commercial cafés and galleries and £3m isn’t anywhere near enough to make a huge difference nationally but it might provide lots of small catalysts for arts and community groups to keep the high street a little more active until economic times improve.
This might not be much of a shot in the arm for the beleaguered owners of empty properties as they battle with empty rates bills but it will provide some benefit for the third sector.Provesta is working with an art collective to set up a network of community art galleries in the South Yorkshire region. More of that in another post.
