Bid rigging occurs when a company soliciting bids for a project promises the contract to a certain vendor outside of the formal bid process. This practice is considered fraud and is therefore illegal in most places. It may also open the individuals involved to civil prosecution.
In a normal bidding process, a company or organization has a project that requires one or more outside vendors to complete. The company sends out a request for bids to multiple vendor companies. The vendors who are interested in the project return their bids, and the soliciting company chooses the one that it feels is the best value. This decision may be based solely on price, but may also consider other factors, such as the reputation, financial stability, and experience of the chosen vendor. The decision may also take into consideration the time frame in which each vendor can complete the job.
In bid rigging, this normal process appears to occur. In reality, however, the decision-maker at the soliciting company has already made a promise to a specific vendor that it will be awarded the project, regardless of the actual result of the bidding. In cases wherein the lowest bid is always the one accepted, the party offering the project for bid may tell its preferred party how much it needs to bid in order to win.
There can be a number of motivations behind bid rigging. In some cases, the party offering the project has a personal relationship with the vendor, or may even have a personal interest in the vendor company, such as part-ownership in the business. In other cases, the individual rigging the process may receive a payment, called a kick-back, from the awarded vendor. This payment may involve large sums of money or may be as simple as tickets to a favorite sporting event.
Bid rigging is nearly always detrimental to the company offering the project for bid. It often results in a company that has less ability or experience, or that is more expensive, receiving the project over more qualified vendors. It can waste company money and can also damage relationships with vendors that the company might need in the future.
In most cases, bid rigging is illegal, particularly when it occurs within a governmental setting. It is prohibited by laws such as the Sherman Act in the US and the Competition Act in Canada. Participants may be open to criminal charges, including fraud, conspiracy and collusion. A conviction can carry high fines and extensive jail time. An individual who rigs bids without his company's knowledge may also be sued for damages by his employer.