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Tendering (CONS6811) Lara Tookey
TENDERING #13
Risk Collusion
Tendering (CONS6811) Lara Tookey
RISK IN TENDERING
S12 CONS6811 Lara Tookey
Tendering (CONS6811) Lara Tookey
Would life not be a better place if….
• Things did not go wrong
• You knew why things that ‘did not go wrong’ DID – so that you could stop them!!!
Tendering (CONS6811) Lara Tookey
Unfortunately….
• They DO go wrong • We know they probably will - but not when (or
if) • We take a chance
• But when we take a chance, we have to assess a
risk and manage it so that it is not overwhelming…….
Tendering (CONS6811) Lara Tookey
Tendering (CONS6811) Lara Tookey
“No construction project is risk free.
Risk can be managed, minimised, shared, transferred, or accepted.
It cannot be ignored."
Risk management - The commercial imperative … Sir Michael Latham 1994
Tendering (CONS6811) Lara Tookey
A fundamental maxim of modern project management is:
“If you do not know it, you can not measure it; if you can not measure it, you can not control it.”
Joe O’Carroll, Risk Manager Parsons Brinckerhoff
Tendering (CONS6811) Lara Tookey
What is an Estimate?
1. The act of evaluating or appraising. 2. A tentative evaluation or rough calculation. 3. A statement of the approximate cost of work
to be done. 4. A judgement based on one’s impressions
• Your opinion
Tendering (CONS6811) Lara Tookey
Risks in Construction
Contractor Supplier
Project Manager
Engineer
Architect
Client
Quantity Survey
Inspector`
Soci
al F
acto
rs
Political Factors
Economic Factors
Envi
ronm
enta
l Fac
tors
Tendering (CONS6811) Lara Tookey
Types of Risk – 10 ‘P’s (one way of looking at it)
1. Premises • where firm located, premises available for use
2. Product • industry sector, product features, fashion trends etc
3. Purchasing • access to supplies, storage, stock control, payment terms
4. People • workers in organisation, skills, employment contracts
5. Procedures • production procedures, record keeping, reporting systems monitoring and
review, use of standards, emergency procedures
Tendering (CONS6811) Lara Tookey
6. Protection • personal protection for workers / others, vehicle security, insurance cover,
information systems
7. Processes • production processes, waste disposal, skills, technology etc
8. Performance • targets set, monitoring, measurement tools, consistency
9. Planning • access to relevant data, management skills, external factors and levels of
control, investment options
10.Policy • range of policies supporting strategic plan of firm.
Tendering (CONS6811) Lara Tookey
Examples Technical • Incomplete design • Inadequate site investigation • Uncertainty over the source and availability of materials • Appropriateness of specifications
Logistical • Availability of resources – particularly … labour
Construction • Uncertain productivity of resources • Weather and seasonal implications • Industrial relations pressures
KEY Totally outside control Partly within control Totally within control
Tendering (CONS6811) Lara Tookey
Examples Financial • Inflation • Delay in payment
Political • Insistence on use of local firms
KEY Totally outside control Partly within control Totally within control
Tendering (CONS6811) Lara Tookey
• Funding constraints • Prioritization uncertainty •Under funding potential
Funding Risk
• Productivity uncertainty •Area / facility availability • Personal availability • Equipment / material availability •Adverse environmental conditions
Schedule Risk
Another way of thinking about categorising RISK
Tendering (CONS6811) Lara Tookey
• Process capacity adequacy • System reliability concerns • Safety concerns • Technology maturity • Performance requirements • Design data availability • Test failure potential
Technical Risk
• Escalation sensitivity • Labour rate uncertainty • Equipment & materials uncertainty • Estimate completeness
Cost Risk
Tendering (CONS6811) Lara Tookey
So, what happens if it is ignored?
• Increased costs • Loss or reduction in profit • Damage to brand / reputation; and at worst • Disposal of the business or insolvency
Tendering (CONS6811) Lara Tookey
HOW DO YOU MANAGE THE RISKS?
Tendering (CONS6811) Lara Tookey
Identification
Analysis
Evaluation
Treatment
Tendering (CONS6811) Lara Tookey
Risk Analysis & Management in Construction
• Particularly difficult to apply in construction • Structure of construction industry • Nature of product • Vulnerability to state of economy
• Risk analysis involves past, present & future
issues. • Dynamic & turbulent times
Tendering (CONS6811) Lara Tookey
Probability / Impact Matrix
• A probability/impact matrix or chart lists the relative probability of a risk occurring on one side of a matrix or axis on a chart and the relative impact of the risk occurring on the other.
Tendering (CONS6811) Lara Tookey
Probability / Impact Matrix
• List the risks and then label each one as high, medium, or low in terms of its probability of occurrence and its impact if it did occur.
• Can also calculate risk factors: • Numbers that represent the overall risk of specific
events based on their probability of occurring and the consequences to the project if they do occur.
Tendering (CONS6811) Lara Tookey
Severity of Risk – matrix example Consequence
Likelihood 1 Insignificant 2 Minor 3 Moderate 4 Major 5 Catastrophic
1 Rare L L M H H
2 Unlikely L L M H E
3 Possible L M H E E
4 Likely M H H E E
5 Almost certain H H E E E
E Extreme risk - should be brought to the attention of Directors and continuously monitored
H High risk - requires attention of Managing Director / CEO and General Managers
M Moderate risk - appropriately monitored by middle management
L Low risk - monitored at supervisory level
Tendering (CONS6811) Lara Tookey
Tendering (CONS6811) Lara Tookey
Recap - Treatment of risk
Generic approaches:- 1. Accept the risk. 2. Reduce exposure and/or consequence. 3. Transfer in full or part to another party. 4. Avoid (retain) the risk.
Tendering (CONS6811) Lara Tookey
Mini - Workshop
Simplified sample risk issues in tendering:- 1. Market conditions. 2. Client’s ability to pay. 3. Scope definition (quality of documentation) 4. Construction timeframes
Tendering (CONS6811) Lara Tookey
• Working in your groups consider the risk categories from the previous slide.
• Identify 3 examples of each and what you would consider doing in Stage 1 of the tendering process to manage them.
5 minutes
Tendering (CONS6811) Lara Tookey
ANTI-COMPETITIVE PRACTICES
Tendering (CONS6811) Lara Tookey
• The purpose of the Commerce Act 1986 is to promote competition in markets for the long-term benefit of New Zealand consumers.
• It prohibits anti-competitive agreements between businesses such as agreements to fix prices or to carve up markets. It also makes it illegal for companies to abuse a dominant market position.
Tendering (CONS6811) Lara Tookey
Collusion by definition is an illegal, secret agreement between two or more parties for a fraudulent or wrongful purpose.
Tendering (CONS6811) Lara Tookey
What is illegal?
• The type of agreements that are illegal: • two or more businesses colluding
(coordinated conduct) • single business or person (unilateral
conduct).
Tendering (CONS6811) Lara Tookey
Coordinated conduct
• includes: • Agreements that substantially lessen competition in
a market; • Agreements that exclude or limit dealings with a
rival; • Agreements that fix, maintain or control prices
(also known as cartels).
Tendering (CONS6811) Lara Tookey
Unilateral conduct
• includes: • A person or business taking advantage of their
dominant position in a market for an anti-competitive purpose
• A person or business specifying a minimum price at which its goods or services can be sold by another – this is called resale price maintenance.
Tendering (CONS6811) Lara Tookey
Cartles:
• Cartels are formed when companies collude with their competitors to:
• increase or maintain prices, • divide geographical territories, customers or
projects between themselves, • agree to limit production, and/or • engage in bid rigging.
• This is usually done in secret.
• Bid rigging is a form of cartel conduct, and is prohibited by the Commerce Act 1986.
Tendering (CONS6811) Lara Tookey
Price Fixing
• Price Fixing is an agreement among competitors to raise, fix, or otherwise maintain the price at which their goods or services are sold.
Tendering (CONS6811) Lara Tookey
Bid Rigging
• Bid rigging, or collusive tendering, occurs when there is an agreement among some or all of the bidders as to which of them should win a bid (with the contract being let through the normal competitive bidding process).
• Bid rigging prevents open and effective competition and can lead to increased prices and reductions in choice, innovation and quality.
• As a result, procurers (purchasers) are unlikely to achieve best value for money.
Tendering (CONS6811) Lara Tookey
• Bid Rigging typically is one of 4 forms. • Bid Suppression. • Complementary Bidding. • Bid Rotation. • Subcontracting.
Tendering (CONS6811) Lara Tookey
Bid Suppression
• When one or more contractors, who typically would be expected to bid, agree to refrain from bidding or withdraw a previously submitted bid so that another contractors bid will be accepted.
Tendering (CONS6811) Lara Tookey
Complementary Bidding
• This is a form of bidding, where similar to Bid Suppression there is a predetermined winning contractor, but in this case, the competing contractors submit bids that are too high or where they violate special terms of the contract and are therefore not accepted.
Tendering (CONS6811) Lara Tookey
Bid Rotation
• All conspirators take turns being the winning bidder. The terms of the rotation may vary depending on agreement.
• “Defies the law of chance”
Tendering (CONS6811) Lara Tookey
Subcontracting
• This occurs when one party gets awarded a contract and then awards subcontracts to the conspiracy members in exchange for not submitting a winning bid.
Tendering (CONS6811) Lara Tookey
Market Division
• When competitors allocate certain customers, products, or territories amongst themselves.
• X, can sell to Y, as long as they don’t sell to Z
Tendering (CONS6811) Lara Tookey
Detecting Collusion
• Collusion is difficult to detect as it is done in secrecy.
• Indicators of collusion: • Suspicious bidding patterns. • Suspicious pricing patterns. • Suspicious statements or behaviors.
Tendering (CONS6811) Lara Tookey
Suspicious Bids
• The same competitor always wins the contract, especially when there are the same competitors placing bids.
• The same competitors submit bids and they seem to take turns winning.
• Some bids are unnecessarily higher. • Fewer than normal number of competitive bids.
Tendering (CONS6811) Lara Tookey
Suspicious Bids
• A company appears to bid substantially higher on some bids than others, with no apparent reason.
• Bid prices drop when a new or infrequent bidder submits a bid.
• Successful bidder subcontracts work, to competitors that submitted unsuccessful bids.
Tendering (CONS6811) Lara Tookey
Suspicious Prices
• Identical prices may indicate a price-fixing conspiracy, when:
• Prices stay identical for long periods of time. • Prices previously were different. • Price increases do not appear to be relative to
increased costs.
Tendering (CONS6811) Lara Tookey
Suspicious Prices
• When discounts are eliminated, especially when they historically were given.
• Vendors charge higher prices to local customers than to distant customers.
• This indicates possible local price fixing.
Tendering (CONS6811) Lara Tookey
Suspicious Statements/Behaviors
• Irregularities in bids indicate that both parties combined efforts on bids.
• Similar handwriting, type, or stationary.
• Bid documents contain last minute price alterations.
• White out or physical alterations.
• One person submits bid for two parties. • Submitting a bid when they are incapable of
performing the contract.
Tendering (CONS6811) Lara Tookey
Suspicious Statements/Behaviors
• A company brings multiple bids to an opening and submits a particular bid based on who else is submitting bids.
• A bidder, or person, makes a suspicious statement indicating some acknowledgement of a conspiracy.
Tendering (CONS6811) Lara Tookey
Suspicious Statements/Behaviors
• While these are indicators of possible collusion, they are not proof of collusion. They may choose to do certain things for their own business use, and only does it become illegal if and when an agreement is made between competitors.
Tendering (CONS6811) Lara Tookey
What can be done?
• Computer system to detect collusion. • Strengthen estimating techniques or continue
to find improved methods of cost estimation. • Estimate must remain confidential.
• Bidders list must be confidential on project by project basis.
Tendering (CONS6811) Lara Tookey
What can be done?
• Know and understand the dynamics of the markets in which you make purchases.
• Ask questions: • If the bids or prices don’t make sense, ask why this
is. You may find a reasonable explanation or your suspicions may be increased.
Tendering (CONS6811) Lara Tookey
What can be done?
• The most important part of a fraud investigation is documentation. It is vital that you are proactive.
• Information should be collected on an on-going basis and should be dynamic in nature.
• The day that a contractor is suspected of collusive activity is not the day to begin gathering information.
Tendering (CONS6811) Lara Tookey
Risk relating to corruption
• Risks for corruption are often linked to lack of transparency.
• leads to inconsistent distribution of information to bidders, unclear evaluation criteria.
• TEC may not be adequately trained and thus lack necessary professionalism.
• This can lead to planning, budgeting and risk management below standard. Furthermore, insufficient accountability and control mechanisms may translate into mismanagement.