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Bidders and Their Subcontractors: The Importance of Full Disclosure

Public entities routinely ask bidders to identify their subcontractors. Bidders usually comply. But what is the reason for the requirement? Is the question merely boilerplate or something more? While the identification of subcontractors may serve a variety of purposes, one of the most important relates to the detection of bid-rigging.

Subcontracting is an essential part of many projects that are put out for competitive bid by public entity purchasers. Unscrupulous vendors, however, can utilize otherwise valid subcontracting arrangements as an effective means to short-circuit the competitive process. Take, for example, one common form of bid-rigging that involves some competitors submitting intentionally losing bids, or agreeing not to bid at all, in order to ensure success for a predetermined winner. At first glance, it seems illogical that a company would agree to surrender its chance to win a job so that its rival can prevail. It makes sense, however, when it occurs in conjunction with a bid-rigging agreement.
Winning contractors on rigged bids often reward rival vendors that back off and let them have the business by naming the rivals as subcontractors on the job. With competition suppressed, the successful bidder can extract a higher price from the public entity, and the resulting excess profits can be divided between the winning bidder and its complicit subcontractors. Thus, a subcontract can be a very desirable reward for a cooperative competitor who goes along with the scheme.
So how does the identification of subcontractors in a bid submission aid in the detection of bid-rigging conspiracies? It can provide the procurement official with information that is invaluable for identifying suspicious subcontracting arrangements. For example, a contractor that wins a job every time it is put out for bid and then awards the subcontract to the same losing bidder each time could signify an illegal arrangement between the two. Further, two or more firms that appear to take turns acting as prime contractor versus subcontractor could be doing so as part of an orchestrated bid-rigging scheme.
When subcontractors are identified during the course of the bid process, patterns such as these can much more easily come to light. Having detected such a pattern, the public purchaser can report its suspicions to antitrust enforcers such as the Ohio Attorney General’s Office and possibly put a stop to the illegal anticompetitive activity.
Requiring bidders to identify their planned subcontractors and to supplement that information as it changes is an important means of protecting public purchasing dollars from being diverted by illegal bid-rigging schemes. Check to make sure all bidders complete the subcontractor portion of their bid submissions, and insist that the winner update that information as the project progresses. These relatively simple steps can yield big benefits in the future.
To submit a tip or ask a question about bid-rigging or other forms of collusion, call 800-282-0515 or visit the Antitrust page.