The Office of Fair Trading has today formally accused 112 construction firms in England of participating in "bid rigging", in its biggest investigation of cartel activity to date.

Some of the biggest names in construction in the UK — including Balfour Beatty, Carillion, Connaught, Interserve and Kier — have been accused of ripping off the public sector to the tune of hundreds of millions of pounds. They were today issued with a "statement of objections" from the OFT, alleging that they participated in cartel-type activity in bidding for thousands of public sector construction contracts, worth £3 billion, including tenders for schools, universities and hospitals.

Multi-million pound fines are expected to arise from the investigation, which began in 2004 after a complaint from an East Midlands council and quickly spread across England.

The focus of the OFT’s investigation is on “cover pricing”, where companies place a high bid for work that they have no intention of winning so that they are not left off a client’s tender list. The cover price is fixed after consultation with another supplier.

However, agreements between suppliers gives a false impression of the level of economy and can lead to inflated prices, the OFT said. A spokesman for the competition watchdog said that the general rule of thumb was that cover pricing can lead to prices 10 per cent higher than those achieved in a normal competitive situation.

In one case revealed by the OFT, the price of building work at a college leapt by 25 per cent after four bidders agreed artificially high bids.

In another, the winning bid for a primary school contract was £500,000 over the client's budget.

Cover pricing has been illegal since 2000. The OFT investigated thousands of contracts but has focused on 240 alleged offences which it is pursuing.

John Fingleton, the chief executive of the OFT, said: "Cartel activity of the type alleged today harms the economy by distorting competition and keeping prices artificially high. This investigation, together with the OFT's previous decisions in the roofing sector, will hopefully send out a strong message to the construction industry about the seriousness with which we view suspected anti-competitive behaviour. Businesses have no excuses for not knowing and abiding by the law."

Stephen Ratcliffe, the chief executive of the Construction Confederation which represents many of the building firms, said: "The only motive in these cases was to avoid doing the work but stay on tender lists and there was no intention to make a single penny at the tax payers’ expense.

“We are concerned that, because the OFT fines system is based on turnovers, there is a risk that fines will be disproportionate in an industry which has high turnovers and relatively small profit margins.

There are also concerns in the industry that public sector procurers may exclude firms accused of cover pricing from bidding for future public sector work.

In addition to cover pricing, the OFT alleges that a minority of the construction companies have entered into agreements where the winner of a contract would make a payment to the unsuccessful bidder — known as a compensation payment. This is a more serious form of bid rigging, the OFT said, and is usually facilitated by false invoices.

Any business found to be a member of a cartel could be fined up to 10 per cent of its worldwide turnover, but penalties are reduced for those who cooperate with an investigation.

Construction companies have been scrambling to help the OFT in the hope that any fines may be reduced. So far 37 companies have applied for leniency, although many larger organisations are thought to be waiting to see what evidence the watchdog has.

The companies can now make oral and written representations to the OFT, before it makes its final decision on whether the law has been broken, expected next year.

The OFT believes that the construction industry is rife with malpractice and has been targeting it for some years. In 2004 it found nine roofing contractors guilty of collusion and fined them almost £300,000. It made four further findings of bid rigging in the roofing industry, imposing aggregate penalties of £4 million.

Balfour Beatty, the biggest company named, said it believed that all its subsidiaries were now fully compliant with the Competition Act. "The company and its operating businesses have co-operated fully with the OFT in all aspects of its investigation. As a result and subject to ongoing co-operation, the OFT has granted leniency to Balfour Beatty, thus reducing any fines which might ultimately be levied on Balfour Beatty or any of its operating businesses," the company said.

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