By Patrick Hogan, CEO, Handle.com
When the COVID-19 pandemic significantly crippled the economy, ethical considerations in the construction sector also took a hit. Closures of ongoing construction projects and the economic uncertainty have put many construction companies on a rocky financial foundation. This financial insecurity, among other reasons, may push construction parties to engage in questionable practices, if only to keep their companies afloat during the pandemic.
The most common ethical issues in construction include unfair tender negotiations, questionable bidding processes, and late and short payments. These ethical issues are considered to be in the “gray area” between right and wrong, and even though they are perceived to be mostly undesirable, there are still people who might defend them and say that this is just how business works.
But among these ethical concerns are two key elements: 1) that at least one party tries to make more money at the expense of other participants, and 2) that there are no legal programs or sanctions to regulate such activities. When parties engage in unethical behavior, those on the lower end of the contracting chain are usually the ones who bear the brunt.
With the ongoing public health crisis, it is imperative that parties, especially subcontractors, stay vigilant and alert against potential unethical malpractices. Let us dive deep into some of the most common ethical issues and how you can navigate around them as the economy continues to reel from the economic devastation brought about by the pandemic.
1. Bid shopping
Now that many businesses are out of work, they might resort to bid shopping to secure a project. Bid shopping is when an owner or a contractor “shops” for the lowest bidder by divulging the offers made by the bid participants. By revealing to you the amount that the other parties have offered, they are spurring you on to beat those offers and make a lower bid. They may also do the reverse and disclose your offer to other parties.
This practice is highly questionable, but is not necessarily illegal. It only benefits the “shopper” and puts subcontractors at a great disadvantage. You may be tempted to reduce your offer once you are informed of your competitors’ bids. Unfortunately, there is also no easy way to know if an owner or contractor is divulging your bid to other parties.
However, you may want to consider including a provision in your proposal stating that your bid price may not be disclosed to any third party, and that doing so would automatically make the subcontract binding.
2. Overbilling
Overbilling happens when a party bills a payment that is worth more than what is actually accomplished. If, for example, a contractor has finished 20% worth of a project but asked for payment that is worth 30%, that is overbilling.
Some parties may say that overbilling is acceptable, especially since running a construction business depends on having a continuous cash flow. The “overbill” may therefore be used to purchase materials to be incorporated into the same project. During a pandemic, many contractors may choose to engage in overbilling just so they can augment their dwindling cash flow and also as a financial cushion in case a project closes down.
However, note that while overbilling may be justified depending on whom you talk to, this practice may lead you to run out of money to bill altogether. Running out of billing may happen if you keep “borrowing” money until you have no funds to bill. This issue can lead to further concerns, including late payment to your subs and even failing to deliver on your contract.
You must not lose track of your finances, especially during an ongoing crisis. Take advantage of all the legal protections you’re entitled to–like ensuring you’re filing documents like the preliminary notice in California and notices to owner in FL and WA to protect your lien rights–but limit stepping onto the gray areas. Engaging in small ethical gray areas may be tempting in the beginning, but they are always detrimental to your business in the long run.
3. Change order abuse
Change orders are a legitimate part of the construction business. When the scope of a project changes or when additional work needs to be done, change orders are issued to reflect these modifications.
An ethical issue typically arises when the change order system is abused during a bidding process. Parties may collude in order to make a lower bid, but once they secure a project, they will ramp up the amount that they can earn through change orders. Collusions among parties may happen between a project owner and a contractor, and also between a contractor and their subcontractors.
The scarcity of available projects during a pandemic may push parties to abuse the change order system. It doesn’t help that change orders are rarely checked and verified, and there are no systems in place to strictly monitor them unlike in the bidding process.
However, note that as with any ethical malpractice, abusing the change order system is largely frowned upon and it can cost you your reputation. It may be tempting to collude with a contractor so your business can stay afloat, but dilemmas like this require you to think long-term and make an ethical decision.
Conclusion
Even though these unethical practices may be common in the industry, there are serious risks that come up when you constantly engage in fraudulent activities. You may end up losing money and also damage your brand and entire business. Not only must you keep away from participating in such activities, but you are also encouraged to be wary of them — to be mindful when people around you are doing the wrong thing.
About the Author:
Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors, subcontractors, and material suppliers with late payments. Handle.com also provides funding for construction businesses in the form of invoice factoring, material supply trade credit, and mechanics lien purchasing.
Photo: https://drive.google.com/file/d/182x0h2EqLpUTaA4KQxWm-Ddb0p-bALrs/view?usp=sharing
