2017.AU8.3 Background: Detection of Warning Signs for Potential Bid Rigging Should be Strengthened
- 1. Detection of Warning Signs for Potential Bid Rigging Should be Strengthened Auditor General's Office Integrity, Excellence and Innovation Presentation to the Audit Committee on March 24, 2017 Beverly Romeo-Beehler, CPA, CMA, B.B.A., JD, ICD.D, CFF Auditor General Jane Ying, CPA, CMA, CIA, CGAP, MHSc Assistant Auditor General Ruchir Patel, CPA, CA, MBA Senior Audit Manager
- 2. Why it Matters 1. City of Toronto awards over $1 billion annually for construction contracts 2. Transportation Services procures over $100 million annually for road repair and maintenance work 3. Competitive procurement helps to save costs and ensure ‘a level playing field’ 2
- 3. Audit Objectives and Scope To assess whether: 1. effective controls were in place to ensure fair and competitive tendering process; and 2. the City received the best value for money 3
- 4. Scope 4 Report 1: June 2015 Report – Improving the Tendering Process for Paving Contracts (focused on unbalanced bidding) Report 2: This report – Detection of Warning Signs for Potential Bid Rigging Should be Strengthened Road Resurfacing Utility Cuts Road Maintenance ECS – Road/Bridge construction TTC Water Paving related
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- 6. Overview of Findings Four Categories 1. Bid and contractor information not being analyzed to identify overspending and potential problems 2. Poor quantity estimates (staff), and inflated prices (contractors) result in extra costs 3. Monitoring and controls for detection of bid rigging not in place 4. Potential conflicts of interest were not managed effectively 6
- 7. Category 1: Analyzing Bid and Contractor Information 7 District 1 District 2 District 3 District 4 PMMD • Each District operated independently • No standardized information for line items • No centralized information for bids – Information stored in various Districts
- 8. 8 What we expected What we found What we needed to do to commence our work Sequential list of contracts No list of contracts Used tender numbers to ensure completeness of contracts for 5 years Centralized bid analysis and bid documentation Bid analysis and documentation located in the for districts or in PMMD Centralize bid information, scan all bid sheets for all bids in ever tender for 5 years, convert to excel Consistent line items use across the City Every district operated differently. Line items different between districts and changed within districts in different years Harmonized the data across the City Pricing database because engineering estimates include estimated prices No database Entered the prices for all bids Quantities estimated and quantities used to be in one database Not the case Quantity estimate from contract files, Actual usage from the TMMS database
- 9. The Waterfront - Building the Data 9
- 10. All pricing information for every bid on every tender for five years 10
- 11. Category 2: Inflated Prices 11 Example 1: Comparison of bid prices two similar tenders (i.e. same closing date, in the same District, similar scope of work). Line Item Tender 1 Tender 2 Cold milling 40 mm $47.26 (Contractor A) $5.00 (Contractor A) Cold milling 75-100mm $51.00 (Contractor A) $4.00 (Contractor A) Cold milling 75-100mm (Asbestos) $60.00 (Contractor A) $30.00 (Contractor A)
- 13. Category 2: Inflated Prices (Contd.) Example 2: Crack Repairs – Impact of Inflated Prices from Contractor A who won the bids Estimated QTY Actual QTY Overrun Contractor A’s Winning Price ($) Second Lowest Bidder's price ($) Overpaid ($) Total Loss on the contract ($) Contract 1 1000 13356 1236% 46 14 440,361 995,890 Contract 2 3500 19756 464% 56 24 641,306 518,781 Contract 3 100 7372 7272% 60 12 360,083 270,752 Contract 4 1000 4403 340% 75 21 240,602 347,821 Contract 5 100 5332 5232% 59 12 254,991 270,638 Contract 6 1000 5662 466% 58 23 201,359 238,903 Contract 7 1000 3353 235% 55 15 135,278 204,365 Contract 8 1000 6379 538% 43 14 186,302 183,559 2,460,282 3,030,709
- 14. Example of grossly inaccurate quantity estimates – Same contract series – year over year 14 Year Estimated qty Actual qty City’s price estimate Winning bidder’s price Price range among bidders Per line item – savings had the second lowest bidder been selected 2012 1,000 6,379 $25 $42.50 $13.80-$42.50 $183,080 2013 1,000 13,356 $25 $46.00 $13.60-$46.00 $432,745 2014 1,000 5,662 $25 $58.00 $23.05-$58.00 $197,887 2015 3,500 19,756 $25 $56.00 $21.29-$56.00 $476,118
- 15. Example: Overall impact on final contract prices 15 Actual amount paid to the winning bidder Amount that would have been paid to the second lowest bidder Estimated savings had the second lowest bidder been selected Contract 1 $4,322,657 $3,326,767 $995,890 Contract 2 $5,104,115 $4,585,334 $518,781 Contract 3 $2,729,233 $2,371,167 $358,065
- 16. Category 3: Controls to identify bid rigging not in place Examples of Red Flags … A. Market Domination B. Market Division C. Cover bids / Coordinated bids D. Subcontracting 16 Not conclusive of bid rigging But flags should be monitored
- 17. A. Market Domination “Same company always winning…This may be more suspicious if one or more companies continually submit unsuccessful bids.” US Dept of Justice • Examples of winning patterns from five contractors (2010 To June 2015) 17 Contractor # of Times Bid # of Times Won Odds of Winning A 43 27 63% B 52 12 23% C 49 3 6% D 35 5 14% E 24 0 0%
- 18. Market Domination Bidding Patterns - (2010 to 2015) 55 Local Road Resurfacing Contracts 18 District 1 District 2 District 3 District 4 Tender Calls Issued 16 13 12 14 Unique Bidders 18 16 9 5 Winners 5 8 4 3 Number of times Contractor A bid 12 5 12 14 Number of bids won by Contractor A 11 1 7 8
- 19. A. What a Competitive Market looks like… 19
- 20. A. Signs of Market Domination 20
- 21. B. Signs of Market Division 21 "Market division is an agreement among suppliers not to compete in designated geographic regions or for specific customers." Competition Bureau
- 22. C. Signs of Cover Bidding / Coordinating Bids 22 Item No. Estimated Quantity Estimated Price Contractor F's Price Contractor A's Price Contractor A's Price compared to Contractor F's Price Contractor G's Price 147 8 $5,000 $1,983 $2,181 110% $16,000 148 8 $3,500 $5,837 $6,421 110% $16,000 149 6 $4,000 $2,076 $2,284 110% $16,000 150 6 $3,000 $5,537 $6,091 110% $16,000 151 2 $3,000 $4,321 $4,753 110% $16,000 152 50 $28 $60 $66 110% $125 153 1400 $20 $12 $13 110% $20 154 1400 $20 $12 $13 110% $20 155 1400 $20 $16 $18 110% $25 156 10 $700 $766 $843 110% $2,200 157 1 $6,000 $6,128 $6,741 110% $28,000 158 1 $6,000 $9,716 $10,688 110% $28,000 159 1 $5,000 $9,716 $10,688 110% $28,000 160 1 $7,000 $7,682 $8,450 110% $28,000 161 1 $3,000 $7,682 $8,450 110% $28,000 162 1 $4,000 $5,635 $6,199 110% $28,000 163 1 $5,000 $5,635 $6,199 110% $28,000 164 100 $20 $181 $199 110% $350 165 1400 $85 $66 $73 110% $90 “Suspicious indicators of bid rigging include when we notice the same increment between the bids of each company….” US Department of Justice
- 23. D. Subcontractors • City is not monitoring the subcontracting arrangements • Several examples where contractors lost on the bid but became subcontractors 23 “...when losing bidders are hired as subcontractors or suppliers, or a contractor includes subcontractors in its bid that are competing for the prime contract, these are red flags of bid rigging OECD
- 24. 4. Potential Conflicts of Interest City is not fully monitoring relationships for emerging conflicts and proper segregation of duties • Former City employees working for contactors • Former employees of contractors working for the City • Close relatives of City employees working for contractors 24
- 25. Timeline March 2015 – AG Office began developing informal database of construction contracts and bids to analyze multi-year bidding trends November 2015 – High level concerns discussed with City Manager January 2015 Briefed Transportation Mgt about the pervasive nature of the issue - Provided audit tools, information and database to inform the upcoming contract cycle February 2016 – Draft report provided to Management We recommended the City conduct its own investigation because the issues were broad, longstanding and deeply concerning – Mgt involved Law Enforcement. June 2016 – AG Report: Improving the Tendering Process for Paving Contracts December 2016 – City concluded its investigation AG presented to about 600 staff to help educate and raise awareness of the issues to help change the culture and their responsibility to report if they suspect wrongdoing. March 2017 – AG Report Detection of Warning Signs for Potential Bid Rigging Should be Strengthened 25
- 26. Overall 1. The significant control deficiencies and lack of routine analysis of bid submissions and bidding patterns, combined with grossly inaccurate quantity estimates and inflated prices left the City vulnerable to potential bid rigging. 26 2. Each District operated as essentially a separate entity and our review found several red flags, inflated pricing and domination of the market by a few contractors. 3. There are 12 recommendations from two reports. Management accepted all findings and is implementing many measures to address this situation.