Features: Issues & Trends — November/December 2005

Investing in Ethics

Industry leaders see a need to create a broader culture of ethics in their firms but don't always agree about how to implement the changes

By Tom Nicholson

GA recent construction industry ethics survey that suggested unethical practices among contractors were rampant was not only shocking, but has also ignited a firestorm of proposed remedies.

The online survey of contractors and industry representatives conducted by FMI and the Construction Management Association of America in late 2004 revealed that more than 80% of respondents had witnessed unethical behavior in construction in the past year. The survey included a cross section of nearly 300 construction-industry professionals, including owners, architects, engineers, construction managers, general contractors and subcontractors. Respondents were solicited randomly in the industry and among CMAA and American Subcontractors Association members, according to FMI.

Respondents suggested that there should be an industry-wide code of conduct, new legislation or heightened vigilance. But many contractors say they also are tackling the issue themselves by managing ethics within their firms, in business dealings and on jobsites. Some contractors say they invest in ethics as seriously as they invest in equipment, resources or staff. Others say an ethical mistake on a job can be more costly than any other. "You can do 20 good jobs, but one bad job will be remembered," says Ron Norby, vice president at Hensel Phelps Construction Co., Greeley, Colo.

While it is fair to say that most contractors are honest, there is plenty of unscrupulous activity among contractors. Slippery business dealings, substandard work and unfair hiring practices are among them.
"Material substitutions are common," says Rick Poppe, senior vice president at The Weitz Co., Des Moines, who led an ethics seminar at the firm this fall as part of a series of ethics training seminars it holds annually. In October the firm dispatched its ethics "road show" to 11 of its branch offices across the country, says Poppe.

Through the seminars, employees receive a primer in the company's core values and an education in how to be ethical in the business decisions they may make or encounter daily. "We go through examples in the industry," Poppe says. "Some of the subjects of discussion are billing and relations with subcontractors and owners." Others are case studies of unethical behavior on construction jobs, such as "using change orders to make up for losses or to increase profits," or "underbidding to get the job and then overbilling," he adds. "Many times it's all about what you reveal and hide."

Employees also are told what to do when they discover unethical behavior. "We explain to them how to report unethical behavior to another employee, or how to go above a supervisor if it's required," says Poppe. "Our goal is to give our people a rational basis with which to make better decisions."

Managing Ethics

There are a number of ways contractors invest in ethical behavior. Many large firms have established codes of ethics and guidelines or mission statements that outline values. Other firms have less formal policies and establish or monitor ethics within their firms through personal contact in the field or offices with staff, owners, subcontractors, vendors, officials and stakeholders.

In some form, most contractors have an ethics policy in place, but that's half the challenge. "It's not only how you develop an ethics policy, but also how you implement it and make it effective, especially if you have thousands of employees," says Mike Kennedy, general counsel for the Associated General Contractors. "It's one thing to adopt a policy, and another to enforce it."

Managing ethics is complex task for large firms. As small firms grow, a contractor has less personal contact with staff, owners, designers and subcontractors, and ethics policies have to be adapted and modified, Kennedy says. "We've seen situations where a company has grown and personal contact is lost, and they don't realize it," he says. "They have to anticipate this challenge."

Many contractors react to expansion by creating in-house ethics training programs and seminars, hiring an ethics consultant to establish a program or writing and disseminating a code of ethics. But that only goes so far, and even if a firm does not have a formal ethics policy, "it does not mean it's not concerned with ethics," Kennedy says. "The construction industry remains a relationship industry."

At Hensel Phelps, relationships are the core of the company's ethics policy. "We don't have a written code of ethics," Norby says. "A code alone doesn't necessarily ensure you are going to have your employees being ethical on a day-to-day basis."

Forming relationships with staff is key to managing ethics within the 2,500-employee firm, he says. "Our philosophy is long-term employment," Norby adds. "We try to hire very few people to important positions who are new to the company and may not understand our ethics."

The firm prefers to hire at entry level and instill values and ethics over the long haul. "We start training in ethics right from the get-go," Norby says. "It's something that's drummed into them from the beginning. When they make decisions with a client, subcontractors or vendors, they have to understand what the company expects."

For small contractors, reputations, relationships and handshake deals often function in lieu of formal ethics policies. But some take a proactive approach in establishing ethics polices. F.W. Madigan Co. Inc., Worcester, Mass., a construction firm with 30 employees, is one of them. President Fran Madigan says the firm invests in ethics training materials to educate staff and outlines the company's values in its mission statement.

"In our training course, we look at cases in the industry so our people will know how to react in those situations," Madigan says. "The way we promote our ethics to our employees is by the reputation we keep with customers and suppliers."

"There needs to be a code of ethics from the top down, and not just something you talk about. You have to live it," says Les Hunkele, an ethics expert asked by the Construction Management Association of America this year to deliver ethics presentations to members. He says an effective code of ethics must be seen by all employees, discussed with them, openly embraced by management and present examples of behavior consistent with the ethics established in the code. He claims that the cost of investing in an ethics policy is small compared to what unethical behavior can cost a firm. Bad business stunts future prospects, causes lawsuits, prompts stricter licensing and certification within the industry and can lead to bankruptcy, he says.

Hunkele encourages the industry and individual firms to develop and publish codes of ethics as a clear starting point for changing behavior. He says a code not only serves as a guide for employees and establishes a value commitment by management, but is also required for work in some federal sectors and may reduce liability in mistakes or accidents where questions of ethics arise.

Still, the temptation for contractors and others in the industry to be unethical is almost irresitible when they get caught in a bind. "When contractors do unethical things it's usually to get an edge," Hunkele says. "Many times they promise things they can't deliver, so they start cutting corners. They may substitute substandard materials, hire illegal workers and not pay them well, engage in bid rigging or claim competencies they don't have. If they do this long enough, they get caught."

Hunkele identifies some red flags-situations where contractors most often run into ethics trouble. "Low-bid situations are where a lot of unethical behavior occurs," he says. "With low-bid, it doesn't matter how good you are, you have to be the lowest bid to get the work. That sets some contractors up to bid too low, and they have to make up profits in change orders."

Some of that may be changing and provide new opportunities for firms that invest in their good reputation. In the past 15 years, "the trend is for more negotiated contracts rather than low-bid," Hunkele adds. "Firms should be able to negotiate with their reputations."

Another slippery slope that contractors should beware of is inadvertently setting the stage for unethical behavior by providing project managers or other staff with profit-sharing incentive plans on projects. Sometimes, "in those situations, they begin to look for what they can get for themselves and it's asking for trouble," The Weitz Co.'s Poppe says. He adds that unethical behavior in construction is usually centered around issues of expediency, relationships or money. "We tell our employees 'take the value out of it. If it was $10 you are dealing with instead of $1 million, would your decision be different?'"

Preparing a written code of ethics or establishing a training program is not something firms have to figure out on their own. Consultants have found a niche in advising contractors on how to create an ethics program.
At Midlothian, Va.-based ethics consulting firm Integribuild, President and founder Rick Bishop has devised training programs and support services tailored for construction firms. Integribuild offers firms a model code of conduct that Bishop, a former contractor, created after studying the types of ethical dilemmas contractors face on a daily basis. The code addresses scenarios ranging from bid rigging to sexual harassment issues and drug and alcohol policies. Integribuild also provides clients with a 24-hour hotline for workers to report possible violations.

"It's company specific and modified for each firm," he says. "In large firms, training can happen in a number of formats and some firms want their subcontractors included in training."

Bishop says there is a growing trend among contractors to implement some form of ethics training or code of conduct, and he points to a National Business Ethics survey published this year that says the number of companies implementing ethics programs grew 15% over last year.

Bishop has been active in promoting the need for ethics programs in construction but says his attempts to encourage construction industry organizations to adopt a universal code of conduct has largely been futile. With many construction industry organizations,
"I have hit a stone wall," Bishop says. "Until you prove that ethical behavior yields financial rewards, no one will do anything."

Whether the answer lies in an industry-wide policy or with individual responsibility, "you have to look at the long term," Poppe says. "Sometimes making the right decision costs cash. You may do the right thing and never get a [financial] reward. But your credibility increases and you can look people in the eye."