What Is Bid Rigging (Explained: All You Need To Know)

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What Is Bid Rigging

Bid rigging refers to an illegal activity where companies work hand-in-hand in such a way as to determine who will win a particular bid.

In other words, the bidding process is “rigged”!

In a free market, competitors bidding against one another on a contract or a project can hope to win if they offer the lowest or best proposal to the client.

However, when competitors collude with one another to manipulate the bidding process, they will act in such a way that the winner of the bid commands a much higher price than one would have expected in a competitive market.

Bid rigging benefits the companies colluding with one another, affects the proper functioning of competitive markets, and adversely impacts clients.

To prevent competitors from illegally manipulating the bidding process, various laws and statutes are adopted to prevent such anti-competitive conduct and punish those who engage in such practices.

In the United States, the adoption of the Sherman Antitrust Act of 1890 has made bid rigging an illegal practice in the country.

Keep reading as I will further break down the meaning of bid rigging and tell you how it works!

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How Does Bid Rigging Work

Bid rigging refers to anti-competitive conduct where competitors will act in a coordinated manner when submitting bids to win contracts or get awarded projects.

The objective of the colluding parties is to submit “rigged prices” in such a way that the winner of the bid can obtain a much higher price than it could have in free and competitive markets.

The way bid rigging works is that the colluding parties will reach an agreement as to how they will “rig” the bidding process.

For example, in the construction field, several competitors can work together to submit proposals for construction projects by increasing their prices by 50%. 

In addition, the colluding parties will work out an arrangement where they will each win a contract in a given period of time.

For instance, if they bid on 10 projects in a year and there are five colluding parties, they will rig their prices in such a way that they can potentially each win two of the contracts at much higher prices.

Bid rigging can happen in any business situation, such as when bidding on construction contracts, government contracts, auctions, and any other process where competitors are required to bid to win a contract or project.

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Bid Rigging Methods

Whenever you have a bidding process where the winner of the bid wins a contract or deal, you can potentially have market players engaging in bid rigging.

Bid rigging can be done in ways.

One common method is to have competitors work out an “under-the-table” deal where they decide who will submit the lowest bid in such a way as to have that company win the deal.

In this scenario, each competitor will take turns submitting the lowest possible bid to win contracts.

Another form of bid rigging is when competing companies submit proposals where the prices are rigged in such a way that the “lowest” bidder is able to charge a much higher price than in the competitive bidding process.

This way, the colluding parties will not only predetermine who will win the bid but will also submit much higher prices in an attempt to increase their profit margin.

Bid rigging can also be done where a party wins a particular contract but then works out a deal with a competitor to have parts of the project handled by them.

This way, the competitors are able to bring one another into their projects so they can all get a piece of the pie.

Finally, competitors can formally join forces and jointly submit proposals.

This way, instead of having a couple of companies submit their competitive bids, the competitors will form a joint venture and submit only one bid.

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Bid Rigging Example

Let’s look at an example of bid rigging to better understand the concept.

Let’s assume that there are three companies having the expertise to develop a specific type of software that the government needs.

The government requests the market players to submit a proposal for a particular project.

In a free and competitive market, the three companies would have potentially made the following bids:

• Company A: $2,000,000 
• Company B: $2,500,000
• Company C: $3,000,000

In this scenario, assuming that all three companies had the same expertise and offered the same thing, Company A would be selected as it offers the best price.

However, the three companies are well aware that they are the only companies able to deliver what the government needs.

Instead of submitting competitive bids, they decide to join forces and submit a single bid for $4,000,000.

By submitting a single bid, the government will have no choice but to accept the bid.

However, the government ends up paying twice what it would have paid if the market players did not “rig” the bidding process.

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Bid Rigging FAQ

What does bid rigging mean?

Bid rigging is an illegal practice of setting prices when bidding on particular contracts or when competitive bids are solicited.

This can happen when different companies bid on government construction contracts or other government procurement contracts.

Although the government believes that it is awarding the contract to the best and lowest bidder, in reality, the lowest bid is not competitive.

What are the different types of bid rigging?

Bid rigging can take different forms, such as bid rotation, bid suppression, complementary bidding, phantom bidding, bid delegation, and buyback in no-reverse auctions.

Companies engaged in bid rigging have the ultimate objective of manipulating the bidding process in such a way that they can determine in advance who will win the bid and on what terms.

What are some examples of bid rigging?

Bid rigging can take many forms but here are some common examples:

• Purchase splitting
• Bidder exclusion
• Complementary bidding
• Bid rotation
• Bid delegation
• Phantom bids
• Buybacks 
• Phantom auctions 
• Change order abuse
• Unbalanced bidding 

Why is bid rigging illegal?

Bid rigging is illegal in most countries as the colluding parties act in such a way as to submit non-competitive bids.

Since the market players are “manipulating” the market, clients, taxpayers, and society end up being economically harmed by paying more for something that should have cost less in a free market.

Bid rigging can also be done unethically where company employees or government officials are given bribes to award contracts a certain way.

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Takeaways 

So there you have it folks!

What does bid rigging mean?

In a nutshell, bid rigging is when competing organizations conspire in such a way as to raise their prices in situations when competing bids are solicited.

In other words, competitors will agree in advance on who will bid on a project, who should win the contract, what price to bid, and so on.

Bid rigging is considered an illegal practice and those who engage in such practices can face severe penalties and potential imprisonment.

If you are bidding on contracts, it’s important that you make sure you understand the applicable laws and statutes relating to bid rigging so you avoid any unintentional consequences.

Also, companies looking to solicit bids should ensure they have a diverse pool of bids to select from, allow for diversity, do proper research on market rates before awarding the bid, and have their employees trained on various bid rigging tactics.

Now that you know what bid rigging means and how it works, good luck with your research.

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