City staff have contacted Toronto police after an audit found several "red flags" about potential bid-rigging involving certain outside paving contractors, which could be costing the city millions every year.

Inflated prices by one contractor cost the city an additional $2.5 million in contract costs over five years, according to the Auditor General's Office. That same contractor "dominated" one district by winning 92 per cent of the contracts on which it bid.

"There were telltale signs of bid-rigging and inflated pricing and even more concerning was the fact that most district contracts were consistently dominated by a small group of contractors over the past five years," reads a summary of the report from Auditor General Beverly Romeo-Beehler.

Bid-rigging is a form of fraud in which a contract is promised to one business, even though other businesses also present bids.

It's also a criminal offence under Canada's Competition Act which "eliminates competition" and leads to increased costs being passed on to the public, notes the Competition Bureau.

Audit found $2M could be saved per year

The audit covered the period from January 2010 to June 2015 and examined whether paving contracts were being tendered through a fair and competitive process.

Beverly Romeo-Beehler, Toronto’s Auditor General. (City of Toronto)

The Transportation Services Division spent, on average, more than $100 million annually on road repair and maintenance contracts during that time. Given the large amount spent on these contracts, they can be a "prime target for corruption and collusion activities," stated a background file on the report.

The audit found $2 million per year in paving contract costs can be saved by addressing unbalanced bidding.

Co-ordinated bids and allegations of bribery

Although the auditor general found instances of potential collusion — highlighting examples of alleged competitors who submitted virtually identical bids, except for the fact that one's itemized costs would fall exactly 10 per cent above or below the other.

The auditor general noted that while the city's fraud hotline has received tips about allegations of kickbacks and bribery connected to government officials, none have been substantiated.

In a statement, Mayor John Tory said he was "extremely troubled" by the findings, adding he's confident the city is making changes to address the issues.

On Wednesday, city spokesperson Wynna Brown confirmed that City Manager Peter Wallace has contacted police and an investigation was initiated.

The city has "undertaken a comprehensive action plan in response to the AG's review and implementation is well underway to ensure fair and competitive procurement processes are in place to enable the City to obtain best value for money and fair market prices," she added.

A police spokesperson, however, would not comment on the investigation.

Auditor general recommends database to detect bid-rigging

Some of the auditor general's recommendations include the development of a database of tender, contract, and sub-contracting information for all construction projects to proactively detect bid-rigging, and training on bid-rigging for the city's purchasing and divisional staff who are involved in tender preparation or contract administration.

In his statement, Tory stressed that the city has been "transforming and modernizing" the bid process to ensure things are fair.

"There have been a number of personnel changes in the offices in question during the period of the investigation and I trust City staff will take whatever additional measures are necessary to ensure that the identified mismanagement and misconduct are addressed and won't be repeated," he added.

The response from city managers echoed Tory, noting that they were in the middle of switching over to a centralized online procurement system.

The new system will "facilitate the ability to analyze bids/proposals very quickly for issues such as unbalanced bidding, and to review data trends," management wrote in its response to the auditor general's recommendations.

That new system should apply to all forms of construction and municipal tenders, audit committee vice-chair Stephen Holyday said Wednesday.

Holyday, also the Ward 3 councillor, said he believes that auditor general's recommendations can be applied more broadly.

"It's my expectation that managers across the city will look at this report and think about how lessons apply to the areas they represent," he said. "And that the same controls and the same protections ... going forward for paving will be applied to all areas of work."

This latest auditor general report follows an earlier report in June 2016, which highlighted the unbalanced bidding happening in the awarding of road resurfacing contracts.