Bid rigging

Bid rigging is a fraudulent scheme in a procurement action which enables companies to submit non-competitive bids. It can be performed by corrupt officials, by firms in an orchestrated act of collusion, or by officials and firms acting together. This form of collusion is illegal in most countries. It is a form of price fixing and market allocation, often practiced where contracts are determined by a call for bids, for example in the case of government construction contracts. The typical objective of bid rigging is to enable the "winning" party to obtain contracts at uncompetitive prices. The other parties are compensated in various ways, for example, by cash payments, or by being designated to be the "winning" bidder on other contracts, or by an arrangement where some parts of the successful bidder's contract will be subcontracted to them. In this way, they "share the spoils" among themselves. Bid rigging almost always results in economic harm to the agency which is seeking the bids, and to the public, who ultimately bear the costs as taxpayers or consumers.

Forms

As acts of corruption

Change order abuse occurs when a contractor colludes with project officials, wins a low bid, and asks to change the contract afterwards. That is approved by officials, resulting in a much higher bid being retroactively approved.
Bidder exclusion allows project officials to essentially choose their bid. There are multiple methods to achieve that like the following:
* Instituting unreasonable qualification parameters, excluding non-preferred firms, or effectuating the same by shortening the time of acceptance periods for new bids following a request.
* Advertising projects to select bidders or bidding markets, thereby reducing publicity of bid procurement.
* Bundling of contracts to exclude bidders.
* Coercion and intimidation can also be used, as well as the simple rejection of individual bids over trivial matters.
Purchase splitting to reduce the minimum bid amount. That functions as contracts are split up to reduce the actual procurement amount and keep it under a threshold value. That reduces competitive bidding and enables less oversight at the project level as bid prices drop and kickbacks can be allotted.
Leaking of bid information, which requires a relationship of some degree between the project and a bidder as the bidder is handed information to gain an unfair advantage.
Bid manipulation is another method for officials to choose the bidder of their choice but occurs after receipt of bids. The methods for this would include either changing bid parameters, evaluation processes, or other activity to effectively select the bidder of choice.
Rigged Specifications allow more bidder exclusion by officials by either tailoring requests to individual bidders or creating a vague criterion to reasonably choose a preferred bidder.
Unbalanced bidding involves high bid prices for commencing phases of development and low prices for later stages. That effectively increases the flow of funds for the bidding firm. This occurs when bidders cite high prices for items, intending to raise the number of units and purchase them at a competitive rate while simultaneously skimming profits from the artificially high bid price. Additionally, bidders may give low quotes for non-necessary items to disadvantage other firms as their bid amount is more competitive. This also serves to increase the cost of entry for new firms.
Unjustified sole source awards are bids chosen on criteria unrelated to their competitiveness. That can be performed blatantly, by falsifying bids, or by price splitting.
Within a [cartel]
Bid suppression collusion occurs when some of the conspirators agree not to submit bids to allow another conspirator to win the contract.
Complementary bidding, also known as cover bidding or courtesy bidding, occurs when some of the bidders agree to submit bids that are intended to be unsuccessful so that another conspirator can win the contract. For example, the cover bids might contain prices that are uncompetitive in relation to the prices submitted by the conspirator, who is designated to win the contract, or the cover bids might contain conditions that the conspirators know to be unacceptable to the agency calling for the bids.
Bid rotation occurs when bidders take turns being the designated successful bidder. For example, each conspirator is designated to be the successful bidder on a certain contract, with conspirators designated to win other contracts. That is a form of market allocation in which the conspirators allocate or apportion markets, products, customers or geographic territories among themselves. This is then divided up such that each will get a "fair share" of the total business, without truly having to compete with the others for that business.
Bid delegation can be a factor fostering the presence of bid rigging; for instance, it is the case of marketing agencies that bid for the same ad space on behalf of different and competing agents.).
As a seller, auctioneer or official
Phantom bids or shill bids are false bids to trick a legitimate bidder into bidding more than would have otherwise been the case. The seller or auctioneer hires confederates to call out the phantom bids. If the phantom bid is the winner, the lot is hidden and comes back around for a second auction, or the second-highest legitimate bidder is informed that the first bidder was unable to make payment. In online auctions, the latter ruse is pulled via a "second-chance offer." Sniping is a legitimate bidder's best chance to foil a shill bidder who aims to drive up the price artificially.
Buy-back is the strategy in which the auctioneer or seller bids on a lot and buys it back to protect it from being sold to the highest bidder for an insufficient price. That is fraud if the auction is advertised as an absolute auction, meaning that there are no reserve bids.
Phantom auctions, in the real estate industry, may occur when the bank "tentatively" auctions a foreclosed home and gives bidders an option to give "preliminary bids" for homes that are not yet authorized for auction. If the reserve bids are not met, the home is updated as "never was available for auction" even though bids were received. Some houses are auctioned at fire-sale prices, and the auctions are closed before the auction was formally announced. Investors rush to get in their preliminary bids before the house is technically up for auction. Bidders fear losing options so it results in more bids, and naturally, higher prices. If bidders fail to reach the target bids, the item was never available for auction. Banks do that because if they unloaded all of their toxic assets at once, the housing market would collapse, which causes foreclosed homes to be dribbled out with phantom auctions.

Those forms of bid rigging can occur together, and two or more of the practices could occur at the same time. For example, if one member of the bidding ring is designated to win a particular contract, that bidder's conspirators could avoid winning by not bidding or by submitting a high bid.

Economic costs

Many of the issues presented by bid rigging are the result of cartel involvement. Inefficient firms are not pushed out, as they would have been in a competitive market, and firms experience more profit, despite an inefficient allocation of resources. Cartels behave more like monopolies and so their behaviors, such as bid rigging, create market inefficiencies as contracts are fulfilled at elevated values. Furthermore, bid prices increase with more repeated collusion. Ultimately, the cost is typically borne by the taxpayer as government-sponsored contracts are artificially above market value. Additionally, it can be thought of as raising prices for the taxpayer as firms rent seek. One study found that bid rigging significantly raised prices over market value in the seafood industry in Philadelphia in a bidding scheme involving Defense Personnel Support Center, a purchaser for the Department of Defense. The high price of entry and fewer entrants in many industries results in lessened incentives for firms to behave competitively.

Detection

In the UK, the Competition and Markets Authority published an open letter in 2016 aiming to promote good practice among procurement and supply staff, and detailing indications they should watch out for.

Remediation

Bid rigging is an illegal practice under the criminal or competition laws of most developed countries. Depending on the jurisdiction, it is punishable by fines, imprisonment or both.
At a very basic level, there would likely be more competitive bidding if there were more firms present in a market, outside of a cartel, as evidence shows that bids lessen in value as the number of firms rises. Furthermore, collusion becomes less frequent with better market competitiveness, a result of reduced ability to compromise.
The Organisation for Economic Co-operation and Development, in its work on bid-rigging and cartels in public procurement, makes the following suggestions for better tenders:

Developing expertise and awareness of the market for which a tender is being designed.
Maximizing the number of bids and potential contractors for enhanced competition among proposals.
Striving for clarity in requirements and details.
Reducing potential for communication between bidders and procurement officials and adhering to a strict criterion and process of evaluation.

Suggestions for ameliorating procurement auctions have also been put forth. Lengstein and Wolfstetter suggest that when a particular bidder is preferred, disregarding cost, possible reforms include a sealed Vickrey auction, or if there is reason to believe that officials and bidders are in contact, an open auction is preferred to sidestep potential bribery. When officials are engaged in more competitive procurement processes with regard to price but are suspected of kickbacks, a potential solution is the open auction to prevent clandestine arrangements such as change order abuse. If a closed or sealed auction process is preferred, the use of electronic bidding and investment in tamper-resistant systems is suggested.