Retroactive rebates driving lack of price transparency in the construction materials market

“Insufficient price transparency in the construction materials market results in purchasers paying too much for materials and may lead to reduced competition. These issues have been raised in several investigations but have so far remained unsolved. Clear direction away from retroactive rebates is therefore needed,” says Marie Östman, Director General of the Swedish Competition Authority.

The Swedish Competition Authority has carried out an in-depth mapping of pricing and discount structures within the installation sector, which shows that retroactive rebates – that is, rebates paid from suppliers to installation companies in retrospect – are both common and significant. In 2023, payments of retroactive rebates from wholesalers to installers amounted to approximately SEK 4.4 billion.

Retroactive rebates constitute a particular problem in connection with construction assignments carried out on a cost-plus basis, meaning that the remuneration is based on reported actual costs, which is common when the purchaser is a public body. The Swedish Competition Authority assesses that the problems are most significant in the construction of complex projects such as hospitals, infrastructure and other facilities.

It has long been reported by actors in the market that contractors use different price lists from wholesalers, enabling them to choose whether to report higher or lower costs on invoices, although evidence of the extent of this practice has been lacking. The investigation conducted by the Swedish Competition Authority can now show that this is a recurring practice in the market.

When a substantial share of the material cost is refunded at a later stage in the form of retroactive rebates, the installation company receives money back from suppliers beyond the purchaser’s perception—and often without the purchaser receiving any share of the rebates. The retroactive rebates can thus be used to conceal the actual material costs, and the purchaser risks paying both a higher material reimbursement and a higher contractor fee.

To address the transparency problems, the Swedish Competition Authority presents several proposed measures directed at public purchasers.

“According to our current assessment, it is not appropriate to regulate the freedom of contract. However, when it comes to retroactive rebates, clearer contractual terms are required. Public purchasers can set an example and thereby influence the entire market. For this reason, we are presenting measures aimed at the public purchasers,” says Marie Östman.

The Swedish Competition Authority proposes that public purchasers should primarily use fixed-price contracts, and secondly agree on prices for materials in advance in cases where cost-plus pricing is used. Thirdly, public purchasers should include clear terms in contracts that regulate how retroactive rebates are to be handled under cost-plus arrangements. Among other things, public purchasers should require that all rebates accrue to them, while also strengthening their contract monitoring.

To provide contracting authorities with greater opportunities to benefit from discounts and rebates on construction materials, the Swedish Competition Authority proposes a regulation requiring suppliers to report all discounts and rebates on construction materials on the invoice issued to the contracting authority.

“It is unacceptable that rebates intended for the public sector are concealed and that reported costs are inaccurate. This occurs at the expense of taxpayers. We therefore propose mandatory reporting of rebates,” says Marie Östman.

The Swedish Competition Authority also sees a need for strengthened procurement competence in this area and proposes that the Government commissions appropriate agencies to enhance guidance, support and coordination for public purchasers on these matters.

The Swedish Competition Authority’s mapping of price transparency in the construction materials market and the proposed measures have been carried out on behalf of the Government and are presented in the report Pristransparens på byggmaterial (Price Transparency in Construction Materials).

Martin Sutinen, Project Manager, +46 08-700 16 72, martin.sutinen@kkv.se
Marie Strömberg Lindvall, Press Officer, +46 08-700 15 92, marie.stromberglindvall@kkv.se

Read the report (in Swedish)

English summary of the report