The Full Federal Court in Brisbane has dismissed the appeal by Queensland construction company Carmichael Builders Pty Ltd (Carmichael) against findings in 2011 that Carmichael engaged in illegal price controlling conduct known in the construction industry as ‘cover pricing’.

“This Full Federal Court decision supports the findings made by the Federal Court last year against Carmichael and other construction companies, and reinforces the message that pricing controlling conduct through cover pricing is illegal,” ACCC Chairman Rod Sims said.

“Companies who engage in cover pricing can expect to be pursued vigorously by the ACCC.”

In August 2011, the Federal Court made findings in favour of the Australian Competition and Consumer Commission (ACCC) that between 2004 and 2007, each of Carmichael, TF Woollam & Son Pty Ltd, and JM Kelly (Project Builders) Pty Ltd engaged in ‘cover pricing’ in relation to one or more tenders for Government construction projects.

The Court found that Carmichael engaged in one instance of cover pricing conduct in 2005.  It was found that the conduct amounted to a controlling of the price at which services were to be supplied, and further that the conduct was misleading and deceptive.

The Federal Court subsequently imposed total penalties of $1.3 million against these three Queensland-based construction companies, as well as penalties totalling $80,000 against two individuals who were found to have been knowingly concerned in the conduct.

On 11 November 2011 Carmichael filed a notice of appeal to the Full Federal Court in relation to the adverse findings made against it. Carmichael’s appeal was centrally based on arguments to the effect that there was insufficient evidence on which the Federal Court found that Carmichael had been a party to a cover price exchange with one of its competitors in relation to the tender process for a local government construction project.

In dismissing Carmichael’s appeal, the Full Federal Court also ordered Carmichael to pay the ACCC’s legal costs.

Cover-pricing is a practice which has developed within the building industry. It was alleged by the ACCC to have been used in situations where a construction company may not have the time, resources or inclination to prepare an accurate tender, but still wants to be seen as tendering for that project.

Cover-pricing involves discussions between two potential suppliers (in this case builders) in a tender process. Company A does not want to win the contract for reasons identified above and so asks company B (who intends to make a genuine tender) to provide them with a ‘cover price’. Both companies understand that this ‘cover price’ will be higher than company B’s tender price. Once the cover price has been received from company B, company A (should it choose to tender) then submits its tender to the client at a price which is at or above the cover price.

This gives the client the impression that both companies are tendering competitively, but the exchange of the cover price actually ensures that company A's tender price is higher than that of company B and therefore makes it unlikely that company A will be the successful tenderer.