Bid-rigging is rife in Australian construction, but the process itself is partly to blame

Earlier this year the Federal Court found ARM Architecture and its then managing director Tony Allen were guilty of attempting to rig bids for a tender relating to a $250 million building project at Charles Darwin University.

The Court ordered ARM Architecture to pay a penalty of $900,000 and Mr Allen to pay $75,000.

In a public statement, Mr Allen said he had made

a very serious mistake by attempting to induce the other firms to engage in bid-rigging, and this has had serious consequences for me. I have lost my position, my reputation, and my involvement in a profession that I love.

Allen had sent an email to at least eight other architecture firms that were members of the Australian Institute of Architects Victorian Branch Large Practice Forum prior to the close of bids:

Our request to you is simple. Please do not submit a tender as we are relying very heavily on continuing with this project to keep our practice alive throughout the remainder of this strange and difficult COVID time.

He had followed it up with this second email:

We have received very positive responses from Architectus and JWA. We would greatly appreciate a short note from you to let us know of your intentions either way.`

The biggest fine for architects so far

Although colluding in bidding for contracts is rife in the construction industry and materials supply industries, this is the biggest fine so far for an individual professional services firm.

In Australia, the Australian Competition and Consumer Commission managed to successfully prosecute Cement Australia Pty Ltd in 2017 for anti-competitive practices resulting in a fine of $20.6 million.

And in the United Kingdom, so many construction firms were involved in massive bid-rigging scandals uncovered in 2008 and 2020, that the UK government had to warn its agencies not to blacklist them because it would “limit choice”.

Fees used to be fixed

In the supposedly more genteel design professions, submitting tenders for fees is relatively new. Until about 40 years ago, architects and engineers normally worked on a fixed-fee basis, and often made deals to divide work between them.

The Royal Institute of British Architects, founded in 1834, was set up primarily as a cartel to maintain a schedule of fees and prescribe educational standards for those who wanted to use the term “architect”.

Although fixed fees are likely to upset economists on principle, they have the advantage of not encouraging architects to shortcut their professional responsibilities in order to compete on price.

This might be why the law allows medical professionals, lawyers and pharmacists to set fees for their services. Few people would be tempted to select their surgeon on the basis of price.

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Until about 1980, the Royal Australian Institute of Architects also attempted to fix fees. When the government gently pointed out that this was illegal under trade practices law, the Institute began a long, slow retreat and eventually stopped publishing a recommended fee scale, much to the chagrin of many members.

Competitive tendering is typically seen as the “gold standard” for getting value in construction, but tendering processes have become so onerous and convoluted that the costs of tendering in relation to the potential gains may now be reducing rather than enhancing competition.

This is especially significant for design consultants such as architects and engineers whose profitability is typically well below average for the industry.

Bidding processes convoluted

The Charles Darwin University project is a case in point. ARM was selected to design what was to be an “iconic” building, but documentation of the design was to be the subject of a second tender, which was the subject of ARM’s emails.

This two-stage process, devised by a project management firm, was self-defeating.

Charles Darwin University wanted a highly-awarded architect to deliver an iconic building, but much of the design ARM contributed has been lost.

The images of the new building, produced by another firm, do not resemble the original ARM design and are not the stuff architectural icons are made of.

ARM and Tony Allen have paid a very high price for their folly in asking other firms not to tender, but the project management firm that devised the expensive and ultimately unproductive double tender process has not been subject to any public scrutiny or criticism.

If we are going to have fee tenders, we need a transparent system with enforceable rules sufficient to stop public clients needlessly adding costs by wasteful convolutions, as happened with the Charles Darwin University double tender.

Maybe there’s a better way

Alternatives should to be considered. It ought to be possible for the client to nominate a reasonable fee, and then select consultants who will accept the nominated fee based purely on their merit.

Another possibility is a two-envelope system, where the fee and the quality of submission are assessed separately, with the fee envelope only opened when an evaluation of the quality of submissions has taken place.

Other than that, we could do worse than revert to a fixed percentage fee and reap a huge saving in the effort, time and money put into selection processes. Free-market economists might like to think about how much competitive tenders actually cost.