Ethics Compliance

November/December 2008

Doing the Right Thing

New industry ethics initiative helps construction firms stay compliant and improves their image with clients and the public

By Debra Wood

With the federal government’s increasing focus on ethics and an industry desire to improve its reputation, a group of construction executives has established the Construction Industry Ethics and Compliance Initiative to promote ethical behavior and full compliance with the law.

“We’re trying to elevate the culture so companies operate at the highest level of ethical conduct and, even if there is no rule, still do the right thing,” says Richard J. Bednar, coordinator for the initiative and a senior counsel at Crowell & Moring in Washington, D.C.

About two years ago, Michael Futch, general counsel and vice president of Granite Construction, Watsonville, Calif., recognized that firms needed to refocus on the specific compliance requirements of the construction industry. He began talking about the issue with Omaha-based Kiewit Corp., a frequent joint-venture partner, and then with his peers at other large construction firms operating in the public sector. “We thought this was a program that would let us take the lead in recognizing that integrity and honesty are important,” says John Prager, general counsel for Lusardi Construction Co., San Marcos, Calif., one of the initiative’s founding member firms.

Mike Futch, general counsel and vice president of Granite Construction, saw a need for an industry ethics and compliance initiative and reached out to other leaders in the construction industry.

Charles Hardy, general counsel of Austin Industries, Dallas, says his firm signed on as one of the founding members because “it is the right thing to do. We want to promote on a voluntary basis ethical conduct in the construction industry and develop best practices.”

Members commit to adhering to high ethical values, training their personnel to do the same, sharing best practices and working together toward maintaining open competition that is free of undue influences. To join the CIECI, companies pay a one-time fee of $1,000, plus between $1,000 and $5,000 in annual dues, depending on the company’s size.

“The construction industry is becoming even more professional, and this [initiative] is a real opportunity to take the industry up another notch in how it manages its affairs,” says Mike Kennedy, general counsel for the Associated General Contractors of America, Arlington, Va., which has endorsed the independent initiative.

CIECI members will help educate contractors that do not currently have their own ethics and compliance programs about what is involved in establishing them. Members held their first best-practices forum in Washington, D.C., this fall. A panel of CEOs from the founding companies offered their perspectives about the value of effective ethics and conduct programs, discussing among other things a board’s influence on conduct, cost-effective ethics training, internal reporting mechanisms and operation of hotlines. Later in the day, participants broke into panel discussions that dealt with the specifics of setting up ethics programs and different training methods. The day wrapped up with an update on current and coming government ethics and compliance requirements and future CIECI activities.

“This has become a hot topic,” says Andrew W. Stephenson, an attorney with Holland+Knight, Washington, D.C. “The construction industry is probably lagging all the other industries in having anything of this kind in place right now, so it will have to play some serious catch-up.”

Stephenson says while many large companies have had ethics and compliance programs for years, smaller firms have not, and now the federal government is mandating them.

“This was born out of the new federal focus on general contractors working on contracts of a certain size that must adopt an ethical code of conduct and train their folks in that code,” says Paul Ryan, deputy general counsel and corporate compliance officer for founding member Clark Construction Group, Bethesda, Md.

Starting in December 2007, the federal government began requiring all contractors awarded jobs valued at more than $5 million to have a written code of ethics and compliance within 30 days of being selected for a job. The amended Federal Acquisition Regulation Code of Business Ethics and Conduct pertains to work for the Dept. of Defense, General Services Administration and the National Aeronautics and Space Administration.

Futch says many private owners are beginning to require that contractors adopt similar ethics programs. He anticipates that states also will adopt similar requirements, especially if federal funding is involved in their projects. “We’re just at the beginning of this spreading around the country,” Futch adds.

As more owners require such programs, more construction firms will have to comply or lose out on opportunities. “If you are a contractor who doesn’t do federal work but takes on state work or local projects like school work, you will run into this,” Stephenson says. He expects the requirements to flow downstream, with prime contractors imposing obligations on subcontractors to avoid a break in coverage of the commitment the prime has made to the owner.

The federal regulations require self-reporting of ethical breeches. Futch says the idea is for companies to police themselves. Granite Construction maintains a hotline for employees to report trouble. “The government is going to look at you as a good corporate citizen because you tried to implement a program to prevent and detect wrongdoing, knowing you cannot prevent everything,” Futch says.

Stephenson cautions that self-reporting could affect the working relationship between general contractors and subs. “Every prime contractor becomes a cop on the beat, looking for any [possible] wrongdoing going on his watch by his contractors against the fear that if he has determined not to have uncovered and reported it in a timely way, he himself is in jeopardy of suspension and debarment because of the failure to discover and report,” he says.

A debarment can doom a company to failure. Stephenson says a bonding company can withhold bonds even for a contractor that is just under investigation. “Debarment and suspension is a death knell,” Futch adds.

Christine McAnney, general counsel for Balfour Beatty Infrastructure Inc., Atlanta, another founding member of the initiative, says the program is modeled after a similar one in the defense industry, which also has a troubling reputation for questionable ethics. “We as a group think that’s a black eye brought on by a few bad apples,” McAnney says.

Founding members deny that any particular unethical behavior prompted the need for the initiative. However, Futch says there are many ways to get into trouble when dealing with the government, including intentional and unintentional acts.

Construction offers the temptation to bill more than the company should, which can result in false claims. Stephenson offers as an example a recent case in which a subsidiary company submitted a claim for a surety bond it had bought. Later, the parent company received a volume rebate on part of the bond premium. At that point, the subsidiary violated the law even though it had a lump-sum contract and ultimately would not receive any more money from the government than the agreed-upon price. “The government looked at the scheme and said it was fraud, a kickback,” Stephenson says.

More intentionally, contractors may also set up or collaborate with sham minority- or woman-owned businesses in order to meet disadvantaged-business-enterprise contracting goals in contracts. They also have engaged in bid-rigging, complementary bidding, market allocation, price-fixing, padding or inventing invoices and downplaying environmental law violations in order to boost profitablity.

“We are not a dirty industry, even though we move a lot of dirt,” Prager says. Futch agrees, saying construction is not any less ethical than other industries. But “the industry does not have a good reputation with district attorneys and federal prosecutors,” he adds. “The construction industry is fraught with corruption—that is the perception.”

CIECI members hope to improve the industry’s reputation and demonstrate that ethical actions are good for business. McAnney says creating a culture of openness and communication will lead to better relationships with clients.

Ryan agrees, noting that ethics and compliance programs are good marketing tools. Even if the owner does not require the contractor to have an ethics program, putting one in place says something about the company’s commitment to honesty, he explains. Ryan also considers such programs good tools for recruiting and retaining employees because most people want to work for ethical firms.

“Ethics, compliance and good public stewardship is our No. 1 priority,” McAnney says. “It’s a concern for the industry, for sister companies, clients and the general public.”