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Assignme ent Business ethi di ics ilemm pr ma resent in a t an Ind ry dustr

Subm mitted B By
The C Construct tors Chinta Pandy an ya Gaura Mehta av (092110) 092116) (0 Jit Shrim ten markar Ra ahul Pand dya (09212 22) (09215 54)

MBA-P (2009-12) PT
On 2nd Day o March, 2 of 2011.

Business Et B thics Prof. Sari Mattila P

Whether its bid shopping, reverse auctions, or payment games, the majority of construction professionals believe the business is tainted by unethical behavior
Bid Shopping: - A practice by which contractors, both before and after their bids are submitted, attempt to obtain prices from potential subcontractors and material suppliers that are lower than the contractors' original estimates on which their bids are based, or after a contract is awarded, seek to induce Reverse Auctions: - A reverse auction is a type of auction in which the roles of buyers and sellers are reversed. In an ordinary auction (also known as a forward auction), buyers compete to obtain a good or service, and the price typically increases over time. ... Over-Billing Overbilling on a job means submitting a bill for an amount that would make the total amount billed on the job larger than the amount of revenue earned on the job. 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? Since corporate financial scandals have become more commonplace, 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), 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,. 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.

The construction industry, in general, is tainted by acts they consider unethical, such as unauthorized use of equipment or supplies and mis-reporting of costs.

The industry was tainted by prevalent illegal acts, such as bribery, harassment, and alcohol use during work hours, a larger percentage disagreed.

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, 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. 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. Some advocates of over-billing cite the problem of withholding funds due contractors, especially subcontractors, as the reason a contractor must over-bill. Those 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. As far as enforceability of ethics goes, 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 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, 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, improving processes is also necessary. Citing some advice from Ralph James, author of The Integrity Chain, 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, 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.

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, 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. 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.

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 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.

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.

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 hardearned 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. References 1. en.wikipedia.org/wiki/Reverse_auction 2. newconstructionadvice.com/construction-terms/building-terms-b/ 3. http://conindedu.org/big41/viewManualPage.big?nextPage=/manual/overunderbilling.jsp

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