The Construction Industry's Ethical Dilemma

Aug. 1, 2005
There is never a right way to do the wrong thing. Simply put, that's what ethics is all about, and we've seen it proven again and again in courtroom after courtroom over the last few years, as news of financial scandals continue to come under the public spotlight. In a way, our society has almost become desensitized to the unethical behavior and come to expect it from corporate America after the Enron,

There is never a right way to do the wrong thing. Simply put, that's what ethics is all about, and we've seen it proven again and again in courtroom after courtroom over the last few years, as news of financial scandals continue to come under the public spotlight. In a way, our society has almost become desensitized to the unethical behavior and come to expect it from corporate America after the Enron, Tyco, and WorldCom debacles. Are the same skeptical perceptions present in the electrical design and construction community?

That's exactly what Dennis Doran, FMI market manager, owner services, set out to examine in the “Survey of Construction Industry Ethical Practices,” a recent study that takes an in-depth look at ethics in the construction industry. Doran prepared the anonymous online survey and conducted it in conjunction with the Construction Management Association of America, which sent out the questionnaire electronically to its membership, in an effort to gauge ethical practices and concerns in the industry. The American Subcontractors Association did the same, offering its members a link through the organization's Web site to help solicit feedback.

Since corporate financial scandals have become more commonplace, Doran notes that whole industries have come under suspicion, prompting the creation of the Sarbanes-Oxley Act, which was signed into law in July 2002 by President Bush to protect investors by improving the accuracy and reliability of corporate disclosures. Breaches in construction ethics have a price (“The Cost of Unethical Behavior” at right), but Doran says focusing too much on financial fallout just contributes to the public's misunderstanding of the concept. “When a lot of people think about ethics, they automatically go to a simple notion of what brought about Sarbanes-Oxley — financial impropriety, improper reporting of financial results, and those types of things with a primary focus on public companies,” Doran says. “But ethics is much more than reporting results incorrectly.”

It's clear from the survey that ethics is a topic of extreme importance to most in the industry, but at the same time it remains an issue no one wants to talk about publicly. Not one of the more than a dozen electrical contractors contacted for this story responded, but the following results, which were excerpted with permission from FMI's study, still offer significant insight into what appears to be a growing trend.

Significant survey findings. According to the responses of 270 owners, architects, engineers, consultants, construction managers, contractors, and subcontractors, Doran's theory is correct. When asked if they had “experienced, encountered, or observed construction industry-related acts or transactions that they would consider unethical in the past year,” 84% of respondents said they had, and 34% indicated they had experienced unethical acts “many times.” This consensus may suggest the problem goes beyond the poor decisions of a few “bad seeds,” as can be evidenced in the candid comments offered up by several anonymous respondents (“Candid Industry Comments” below), who place blame for questionable behavior on many parties.

The study from FMI, a Raleigh, N.C.-based firm that provides management consulting and investment banking to the construction industry, also found that 69% of respondents believe the construction industry needs to pay more attention to ethical issues, and 21% said ethical issues put the industry “in a bad light.” Nevertheless, 24% admitted they might work with unethical contractors if circumstances dictated. The same percentage also revealed that they often didn't know if the contractor they hired was ethical or not until after that contractor was onboard.

However, respondents seemed to stop short of saying the industry was full of criminals. Although just more than 63% agreed or strongly agreed that the construction industry is tainted by prevalent acts that are considered “unethical” (Fig. 1), 44% disagreed or strongly disagreed that the construction industry was tainted by prevalent “illegal acts” (Fig. 2).

More specific concerns. Loosely defined as the discipline dealing with what is good and bad and with moral duty and obligation, ethics — whether in one's personal life or in business — come down to doing the right thing, as governed by rules, guidelines, laws, and principles for good moral conduct. In the construction industry, ethical behavior is measured by the degree of trustworthiness and integrity with which companies and individuals conduct business.

When you look at the nature of the relationships between owners, general contractors, and subcontractors in the construction industry, Doran says it's not surprising that ethics gets so complicated. “The subcontractors, who were the largest stakeholder group that responded to our survey, are a little further down in the food chain from the owner,” he says. “Therefore, they feel like they are subjected to more unethical acts.”

Asked to rank the “most critical issues” respondents faced at work, payment games, bid shopping, reverse auctions, over-billing, changeorder games, unreliable contractors, and claims games were the most cited unethical behaviors in the survey. When you talk about payment games, subcontractors are typically the ones that feel the brunt, Doran says. “Even though the general contractor may in fact be paid by the owner on a timely basis, he may hold on to the money because he needs to buy some other materials or pay off another vendor who's an old buddy of his,” he says.

Bid shopping, or the practice of divulging solicited bids as leverage to encourage contractors to lower their prices, also proved to be a key issue in this survey, as 94% of respondents characterized the practice as unethical. It has even faced criticism in Congress, prompting one representative to introduce legislation banning it (“The Bid to Ban Bid Shopping” below).

According to James Gill, Jr., a lawyer and professor of construction law and ethics at Louisiana State University in Baton Rouge, the ethics of bid shopping ultimately lies in the eyes of the beholder — what subcontractors consider unethical might not be questionable to an owner. “That's why above and beyond the contract should be a good faith, trust-based relationship between people to work together as a team to get the job done,” says Gill, who has also presented seminars on ethics at conferences for the American General Contractors Association. “If you are an owner and you want to get the best price for your house, for example, what do you do? You call four or five different contractors while you are shopping. Suppliers expect you to shop around, but subcontractors don't want you to take their price and tell it to somebody else.”

According to Doran, a lot of “games” happen because people have a different understanding of what the rules are, citing reverse auctions, which are basically eBay in reverse, as a good example. “There are owners in the industry and others who view reverse auctions as important and valuable in the procurement process, but for every one of those, there are still a hundred that view it as nothing more than another form of bid shopping,” he says.

While few of the survey respondents disagreed that reverse auctions were unethical, Doran says more discussion among interested parties is necessary to further define the issue. For example, if owners who use reverse auctions as a method of securing contracts make the bidding rules clear up front for all parties, is ethics still in question?

Over-billing, another questionable behavior common in the construction industry, was considered unethical by 86% of respondents. However, 10% disagreed. Some advocates of over-billing cite the problem of withholding funds due contractors, especially subcontractors, as the reason a contractor must over-bill. Tom Kort, senior consultant for FMI, is a good example. Kort maintains that contractors should unbalance the bid/front-end load of the project even though they collect money in a timely manner. “If a contractor, particularly a subcontractor, doesn't unbalance the bid, the difference in cash disbursed against cash received on a project can be enormous, and no one would notice, because most accounting systems do not detect it,” he says. “When examining the job, you will find that you are funding labor and other costs but you're not being paid in a timely manner.”

With the possible exception of the “unreliable contractor” concern, one thing that ties all of these issues together is the apparent effort of one party to profit at the expense of another. When asked if ethical issues were a consideration in their decision to work with or hire contractors, 91% of respondents said it was either of utmost importance or important.

Bridging the gap. The survey also found a large discrepancy between the value people place on ethics and what they actually do in practice to support their values. Although the large majority (85%) believes there should be an industry-wide code of ethics, only 30% agreed that adding regulations concerning ethical behaviors is a good idea. On a smaller scale, few companies surveyed reported that they make ethical issues part of their mission statements or strategic plans — at least not to the point of drafting formal ethical codes of conduct. Only 30% indicated that they had formal ethical programs in place. In fact, a total of 11% of respondents admitted to having no ethical program at all.

As far as enforceability of ethics goes, Gill says this endeavor is easier said than done. “When you move into the business arena and you as a leader or owner of a company have set personal ethical standards that are going to be the reflection of the employees of the company, enforcement becomes a human resources problem,” he says. “People on your payroll need to be trained as to what the ethical standards for the company are, they need to be given levels of warnings for questionable behavior, and then eventually some people need to be let go if they do not meet the standards of the company. And that means everybody — you can't treat some people differently.”

The fact that 58% of respondents said that the topic of ethics programs never even came up in meetings or negotiations might be a good indication of the root of the problem. In order to minimize the chances of unethical or illegal behavior in the construction industry, respondents agreed that several initiatives should be implemented, including stiffer penalties for those caught in unethical or illegal acts, an industry-wide code of ethics, more emphasis placed on social responsibility in award criteria, and more training.

Besides more industry education and training, which Doran endorses, he says improving processes is also necessary. Citing some advice from Ralph James, author of The Integrity Chain, Doran notes two types of integrity: personal and process. “Personal integrity is when a person's words and actions are the same, and those same things are the right things,” Doran says. “Process integrity is what you would have in your company — processes that you can trust to produce the right results. Unfortunately, many companies in the construction industry have lousy processes, and lousy processes allow bad things to happen.”

Gill agrees, maintaining that personal and business ethics are extremely similar. “Personal ethics tells us that if we are going to get along with one another, we shouldn't lie, steal, and cheat,” he says. “In business, the same thing is true. Business ethics is based upon a willingness to live up to our word and provide all the necessary information so that the other party can fulfill their obligations to us.”

He says business ethics is often dictated by what he calls the “hooking bull,” a figure of speech for the dominating personality of a company. “If it's a small or medium size company, it's usually the owner who has put his blood, sweat, and tears into the company over the years,” Gill says. “So ethics in his company is a reflection of his character. The problem that we have is how that character is perceived by his employees and customers. Sometimes they are not the same because one of the biggest problems we have in ethics is that we tend to lie to ourselves as to whom we really are and why we do things.”

To help eliminate self-rationalization of potentially questionable behavior, famous investor Warren Buffet once devised a creative solution. According to the FMI report, when he spoke to senior team leaders at Johns Manville following its acquisition by Berkshire Hathaway, he asked the group to assess all future business judgments using this rule: “If your business decisions and motives were published on the front page of a large circulation newspaper the day after you make your decision, and you will still feel comfortable, then do it.”

In theory, that seems like good advice: Running your business as if every decision were plastered on the front page of the New York Times might go a long way toward ensuring the highest code of ethics is followed.

Parson is a contributing writer and editor based in Lee's Summit, Mo.

Sidebar: The Cost of Unethical Behavior

According to the survey sampling, 61% believe unethical behavior affects the cost of getting projects built. When asked to choose an estimated range for the cost of unethical behavior on a project, 35% responded between ½ of 1% and 2% of the total project cost while 25% estimated between 2% and 5%. That means anywhere from $5,000 to $50,000 for every million dollars spent on a project is lost or “unaccounted for” in some sort of unethical transaction.

Sidebar: Candid Industry Comments

Following are just a few of the anonymous comments respondents to FMI's “Survey of Construction Industry Ethical Practices” had to say about the state of ethics in the construction industry today as well as what they believe is fueling questionable behavior.

“A contractor is free to do whatever is necessary to make money on a project, as long as he is observed to meet the terms of the contract he holds with the owner.”

“Owners play a large part in the unethical behavior of contractors. They try to pass off their responsibilities to others, don't ensure that adequate and complete information is supplied, and they play games with payments, extras, penalties, delays, etc.”

“In addition to bid shopping by GCs, owners' reps, and/or architects, intellectual property and/or design efforts are also regularly ‘shopped around’ as well.”

“There is no ethical violation to any of the behaviors seen as unethical (bid shopping, payment holding, etc.), as long as [the activity] is within the contractual requirements. The contract must trump any social code of conduct in my view.”

“Ethical issues must be driven from the owners. They must first follow their own code of ethics (enforcing the same requirements for all bidders, not shopping prices after the bids are submitted, honoring field orders, etc.). If owners dictate ethical behaviors and practices, general contractors and their subs will follow or get pushed out.”

Sidebar: The Bid to Ban Bid Shopping

Although there is currently no restriction on the use of bid shopping and reverse auctions in federal construction contracts, Rep. Paul Kanjorski, D-Pa., is trying to change that. Kanjorksi introduced the Construction Quality Assurance Act of 2005 (H.R. 2834) to the U.S. House of Representatives on June 9 — the purpose of which, he says, is to spare construction subcontractors and prime contractors from the deceptive practice of bid shopping and reverse auctions on federal government construction contracts over $1 million.

Recently hailed by the American Subcontractors Association (ASA) as “a solution that would bring much-needed reform within the federal procurement arena,” the act is gaining support in Congress, growing from six co-sponsors initially to 15 at press time. ASA is currently leading a grassroots lobbying effort to get this legislation passed.

“The goal of the Construction Quality Assurance Act is to ensure that bid shopping is eliminated from the federal construction contracting process,” Kanjorski says. “Ending this practice will ensure that the taxpayers receive the value and quality they deserve for their hard-earned tax dollars. The Construction Quality Assurance Act would remove the financial incentive of bid shopping by penalizing the contractors that participate in the deceptive practice.”

The proposed legislation defines bid shopping as “the practice of divulging, or causing to be divulged, a contractor's or subcontractor's bid or proposal, or requiring a contractor or subcontractor to divulge its bid or proposal to another prospective contractor or subcontractor before the award of a contract or subcontract in order to secure a lower bid or proposal.”

The act states that no party, including the government, prime contractors, and subcontractors, shall engage in bid shopping, or will face penalties of liquidated damages in the amount of the shopped bid or contract price. Penalties would include contract termination or imposition of liquidated damages equal to the greater of the final bid on the contract or the price paid to the contractor or subcontractor for work performed.

“Construction owners often are leaders of change in the construction industry, and the federal government should act as a responsible owner and end bid shopping on its projects,” says ASA President-Elect Vincent Terraferma, P.E., KSW Mechanical Services, Inc., Long Island City, N.Y. “When taxpayers' money is spent to fund construction, whether it is military housing or courthouses, the integrity of the procurement process is extremely important. Bid shopping threatens that integrity.”

In order for it to pass, the bill must first pass out of the Government Reform Committee. Following committee action, it would then go to the House floor for a vote. If passed by the House, it would be referred to the Senate for consideration.

Sidebar: IEEE Sets Ethical Examples for Students

Nine out of 10 respondents to FMI's survey of construction ethical practices indicated that the industry needs more ethics training — 97% of which indicated such training should start at the collegiate level. Although more than 80% of survey respondents came from the contractor side of the business, the most common problems identified are not exclusive to the contractor community. Some of the hot issues, such as bid shopping, changeorder, payment, and claims games, also affect architects, engineers, and consultants directly or indirectly, depending on the nature of the firm and how these groups interact with the owner, developer, or facility manager on the project and their contractors and subcontractors.

IEEE is one professional engineering organization that's taking ethics training for young people beyond books. In April, it held the first IEEE Student Ethics Competition, hosted by the IEEE Student Branch at Rowan University in Region 2 (Eastern United States). Developed by the IEEE Ethics and Member Conduct Committee (EMCC), the competition is designed to provide IEEE's student members with experience in applying ethical concepts to situations that might arise in the workplace, such as issues of public safety and welfare, a conflict of interest, an engineering practice, or an ethical question in research. Temple University in Philadelphia beat out eight other teams for first prize.

“Ethics is vitally important, and we cover it indirectly in classes and project work, but it's tough to really discuss it because we have so many other subjects to teach,” says Shreekanth Mandayam, an associate professor of electrical and computer engineering at Rowan University in Glassboro, N.J. “Competitions like this are probably one of the best ways to teach ethics because the contests can be fun. They get students to think creatively, and the students try to win.”

The first competition hinged on a case study that posed an ethical dilemma. To set an example on how to make the contest entertaining, the Rowan hosts enlisted the help of their school's theater department. The result was a 7-minute playlet staged in the school's atrium that presented the issue outlined in the case study. A six-person cast acted out the playlet before the 150 conference attendees and the nine student teams.

As presented in the staged drama, a company was competing for a government contract to build a military bomber, but the plane would have to fly so fast that it pushed its “envelope of safety,” according to Tim Osedach, a conference co-chair and author of the case study. When the project manager refused to work on the project because he believed the design compromised safety, the company replaced him with another engineer who gave the project the green light. The students were also told that once built, the bomber operated flawlessly.

“The goal was to present a case that had no obvious right or wrong answers, which forces the contestants to give some thought to the dilemma and defend their arguments,” says Osedach, who graduated from Rowan in May with a bachelor of science degree in electrical engineering. “Poor ethical decisions can lead to drastic consequences.”

For the ethics competition, the students relied on the IEEE Code of Ethics as a guide. Each team had to prepare a Power Point presentation explaining its views, which it had five minutes to present to a four-judge panel. Judges included a working engineer, professors from Rowan's religion and ethics departments, and a social psychologist. Each team was scored on how well it analyzed the case, its presentation skills, and its use of specific principles cited in the code of ethics in its argument.

Editor's Note: Information in this section reprinted with permission from the July 2005 edition of The Institute, IEEE's newspaper for members.

About the Author

Ellen Parson | Editor-in-Chief - EC&M

Ellen Parson is the Editor-in-Chief for EC&M. She has a journalism degree from the University of Missouri-Columbia. She's been a business-to-business writer and editor for more than 25 years, most of which have been covering the construction and electrical industries. Contact her at [email protected].

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