Ethical Practices Today
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 percent of the owners, architects, construction managers, contractors and subcontractors responding to a recent survey said that they had, and 34 percent said they had experience with unethical acts “many times.” It is easy to see why 61 percent of our survey respondents thought that the industry was “tainted” by unethical acts. Whether the acts experienced by the survey respondents are small transgressions or large-scale scandals awaiting court dates, this is a serious knock on the construction industry.
We cannot conclude from this single survey that there is a trend one way or the other regarding construction industry ethical practices. Nor have we set a tolerance level for our analysis. Ideally, the industry would be free of any practices considered unethical, but there always will be some disagreement about what is or is not ethical. Nonetheless, the response to our survey shows that 84 percent of those answering the survey encountered situations that they considered unethical in their business dealings, and that is alarming.
To begin to understand why we think it is important for companies and individuals in business to follow ethical practices, we need only to look at recent business news headlines for a who's who of ethical meltdowns. Enron, WorldCom and Tyco not long ago were symbols of successful economic growth and model companies setting the pace for American business. Now, those company names have become synonymous with greed and corporate malfeasance, leading to tremendous losses in shareholder value, trust and a laundry list of legal battles. Besides spurring the enactment of new laws and regulations, the magnitude of these scandals has cast a bright light on ethical business practices.
The famous cases like Enron show the damage that can be caused by following unethical and illegal business practices. Companies rapidly lose their good reputations, shareholders revolt, employees lose their savings and jobs, and in these big cases, whole industries come under suspicion. The resultant lack of trust in business can mean higher legal costs, additional regulations, more complex contracts and a generally less cooperative environment in which to work.
What do we mean when we talk about “ethical” or “unethical” behavior? We relied on the idea that - as noted in several survey comments - individuals know right from wrong. However, for the sake of this discussion, ethics is defined as:
- the discipline dealing with what is good and bad about moral duty and obligation
- a set of accepted moral principles and values about what ought to be
- a theory or system of moral principles governing the appropriate conduct for an individual or group
- a code of morality
Although we accept the idea that we intuitively know right from wrong, once we start to talk about moral codes and values, duties and obligations, the subject gets complicated. We expect some differences of opinion as well as some gaps, for instance, in what we consider right and wrong in different circumstances or from different points of view and what we actually do when confronted with those circumstances. In our survey, we found evidence of those gaps and a good deal of agreement in several areas.
We could give the executive summary of what ethics is in this single wise saying, “There is no right way to do the wrong thing.” Another saying that isn't as easy for all to immediately believe is, “Good ethics are good business.” But, these bumper sticker ethical codes, true as they are, don't give us a very deep understanding of the issues regularly faced in the construction industry.
Many acts that we consider unethical were committed because someone representing a company thought the unethical activity was good for their particular business, at least until they were caught. Unethical acts often signal a failure of management or leadership to know how to get the job done the right way. They think they are taking short cuts.
What difference does it make if there is frequent unethical behavior in the construction industry? According to the response from our survey, unethical behavior affects the public's perception of the industry (61%) and, more importantly, it affects the level of trust between owners and contractors (74%) and between contractors and design professionals (60%).
Nearly two-thirds of survey respondents agreed or strongly agreed that, in general, the construction industry is tainted by prevalent acts that are considered “unethical.” Examples of unethical behavior given in the question included unauthorized use of equipment or supplies, mis-reporting costs and time.
Unethical behavior also affects the cost of getting projects built, according to 61 percent of respondents. When asked to choose an estimated range for the cost of unethical behavior on a project, 35 percent responded between 0.5 percent and 2 percent of the total project cost, and 25 percent said between 2 percent and 5 percent. 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.
Is there an acceptable level of loss for unethical practices? Should you provide for this somehow going into a project? Writing off these expenses as a cost of doing business is an admission that you accept unethical behavior as the norm. While some may find it more expedient to act unethically, if such behavior becomes the norm, then shouldn't we also question the safety of the projects involving such companies?
When asked if they thought that the construction industry was tainted by prevalent illegal acts, 44 percent either disagreed or strongly disagreed that the industry could be characterized that way. While we may be relieved to find that not everyone thinks the industry is plagued by unethical and illegal acts, it is clear that any firm or company operating in the construction industry is fighting an uphill battle to convince someone, say prospective employees or clients, that they are trustworthy.
What's the difference between unethical and illegal behavior? Ethics are governed by societal norms; laws and regulations tell us what is legal or illegal. While most people don't want more laws and regulations, if norms are continually broken, people will call for new laws to govern behavior. Think of all of the rules and regulations regarding safety, hiring practices and contracts. For instance, most companies understand that working safely is good practice; others need laws to encourage safe working conditions.
Critical Ethical IssuesThe top five “most critical issues” selected by respondents:
- bid shopping
- change order games
- payment games
- unreliable contractors
- and claims games.
With the possible exception of the unreliable contractor, one thing that ties all of these issues together is the apparent effort of one party to profit at the expense of another. The emphasis is on gamesmanship, not trust and integrity, not win-win situations. These games indicate a breakdown of the collaboration and communication that characterize healthy business relationships.
When asked if ethical issues were a consideration in their decision to work with or hire contractors, 91 percent responded that it was either of utmost importance (49%) or important (42%). Thirty-seven percent were concerned about the ethics and integrity of the contractors they work with, and only 30 percent were marginally concerned. Sixteen percent responded that they would never hire or work with a contractor or subcontractor they considered to be unethical, and 32 percent said they would rarely do so unless under pressure. However, 24 percent said they might work with unethical contractors if circumstances dictated, and 24 percent admitted that they often didn't know if the contractor they got involved with was ethical or not until that contractor already was on board.
Important as ethical issues were to respondents, only 30 percent had ethical programs that were “formal and well-known to everyone in the firm and enforced by top management,” while 11 percent had no ethics program at all. Forty percent of the companies responding do not have formal programs, but they take ethics seriously. In contrast, just more than 10 percent had formal programs that were not enforced or widely known, and 7 percent said their programs were both informal and not widely known.
Given the low number of respondents that had well-known, formal ethics programs in their own companies, it is not surprising to see that when these companies were working with other contractors or subcontractors, only 1 percent were aware that the companies they worked with had formal, documented ethics programs. Fifty-eight percent responded that the topic of ethics programs never came up in meetings or negotiations or they just didn't know if the contractors they worked with had ethics programs. When asked if the owners they worked with had ethics programs, only 14 percent were aware of such programs.
In the results above, we find a large gap between the value people place on ethics and what they actually do in practice to support their values. It is important to be an ethical company and work with ethical companies, but who wants to bring up the subject in meetings or negotiations? Forty-seven percent of respondents said it would be important to have the contractors they worked with review and sign their ethics code - 20 percent agreed that this would be good for business - but most people in the industry rely solely on their judgment and relationship with other companies to assure that they are on the same page ethics-wise. Few (8%) make ethical issues part of meeting discussions.
It is clear from our survey response that ethics is an important concern among companies in the industry. It also is clear that very few are taking actions to support their ethical values. For most, “ethics” is an abstract concept that is not quantifiable in terms of person-hours or cost per square foot. What measure would we use to know if one company was more ethical than another? Nonetheless, we usually do know right from wrong. We won't resolve ethical issues without some lively discussions and agreements on those issues that aren't always clearly right or wrong.
Getting CraftyAmong the issues that don't seem to be clearly unethical to everyone - at least not in practice - are bid shopping, reverse auctions and over-billing. Bid shopping - the practice of divulging solicited bids as leverage with contractors to lower their prices - is a hot topic, especially for specialty and trade contractors. Ninety-four percent of those surveyed think that bid shopping is unethical.
The response to the reverse auction question nearly mirrors the response to the bid shopping question, with the notable exception that 20 percent said they didn't know if reverse auctions were unethical. In this case, it seems that the question needs clarification. While very few disagreed that reverse auctions were unethical, more discussion among interested parties could help decide the question of ethics here. What is the ethical issue in reverse auctions? Is it really just a business issue that is measured by profit and loss, market share and growth? If the owners that are using reverse auctions as a method of securing contracts make the bidding rules clear up front for all parties, where is the ethical issue?
These are important questions for the industry. There are those who bristle at the mention of these questions; others think we are at the frontier of a new way of securing construction projects. Will e-Bay be the model for all business in the future? Bid shopping may lead to a breakdown in trust and collaboration - likely to cause a more contentious atmosphere between owners, contractors and subcontractors.
The question of whether or not over-billing is unethical at first seems quite clear; it is not. Eighty six percent of respondents agree or strongly agree that over-billing is unethical. If so many agree, why do we also find that 10 percent disagreed, and a smaller percentage did not know if the practice was unethical? How prevalent is this practice?
We asked Tom Kort, senior consultant for FMI, to clear up this difference. Kort often consults with clients on the subject of cash flow, and he happens to be among those who do not think that over-billing is unethical. The over-billing question came up recently at an executive seminar he was teaching. Two professors attending the seminar said that over-billing clearly was unethical. However, according to Kort, they changed their minds on the topic “when I showed them what happens to their cash flows when they don't collect their money on time.”
Advocates of over-billing cite the problem of withholding funds due contractors - especially subcontractors - as the reason that a contractor must over-bill. When asked if holding monies for any period after receipt and not forwarding payment to subcontractors that have done the work the money has been received for is unethical, 94 percent either agreed (25%) or strongly agreed (69%). It is clear that the practice of holding funds or not “paying when paid” is unethical. That it happens at all appears to be another example of gamesmanship that pervades the industry and leads to the opinion that the construction industry is ethically challenged.
Finding SolutionsIn order to minimize the chances of unethical or illegal behavior in the construction industry, respondents chose four answers rating about the same degree of importance:
- 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
- more training
Even though a large majority (85%) believes that there should be an industry-wide code of ethics, only 30 percent agreed that adding regulations concerning ethical behaviors is a good idea. There is a strong indication that associations should take the lead in crafting and enforcing codes of conduct. We didn't ask associations how they felt about this, but it was our discussions with associations that initiated this survey. Some industry associations already are taking steps to help their membership learn about and support ethical codes.
Many didn't know (20%) if more regulation was the answer to ethical problems in the industry; however, more than 90 percent thought that the industry should get more training on ethics. Ninety-seven percent thought that ethics training should begin at the collegiate level. The trend toward increased training in the industry continues to grow, but we seldom hear about initiatives to offer training on ethics.
Before there is a trend to increase training on ethics, more companies and associations will need to adopt ethical codes. When that happens, training will be more goal-oriented and become part of an overall corporate strategy. Companies should consider ethical issues in their strategic plan in order to foster a culture for growth and improvement in those areas.
Leadership RoleJust sending people out to get training in ethics won't improve the industry's ethical profile. We often hear from companies that say they want to do training without really focusing on what they want to accomplish or where the training fits into their strategic plans. If a company really wants to change their ethical standing, the company's leadership must serve as a role model and guide; leadership practices reflect on the whole company. Competent leaders with noble characters will act ethically.