The Construction Industry's Ethical

Dilemma
Ellen Parson | Aug 01, 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, 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.

(Parson, 2005)