Medical

The Economics of Ethics

Today is one of those days where I am again in a tough spot because of the effect of economics on business ethics. Not mine, but certainly those of some builders I once respected. I get that some find me a bit "pollyanna-ish" in believing ethics should stand tall and true no matter the environment. The reality in our region is a far cry from that notion and, the prime influence on the subject for today's blog.

This area of spectacular lake-mountain communities draws a mixed populace. Many are retirees building their final homes. Others have deep pockets and are building second or third "resort" homes. Some are locals who are raising their families here while pursuing their career paths. This last group either grew up here and want the family continuity of multi generations or, they moved here to provide a more relaxed , united, family first focus. Here there IS a real opportunity for a better family lifestyle at far greater affordability than many other areas .

All of these groups have been impacted by the current economic insanities.

In the residential- new construction arena, there has been quite a shift. Some builders who have been here for a couple of decades delivering a fine product to their home buyers, have perished. The consensus of why is mixed. The economic changes "snuck up" on them or,

they were over extended in investments of lots within developments or,

they out paced supply and demand for spec houses.

Whatever the cause, their businesses failed.

On the supply and demand front, you would think the elimination of maybe 20-25% of the competition would make the opportunities for those still standing a bit sweeter. This is strangely not so. Local families are waiting to build on their lakefront or mountain lots because there is not much market for their existing homes. Others are not building now because they have determined this is not the time to build their third resort home and they can still make do with two homes and quarterly getaway vacations. Or, they are declining to build now because they bought lots at peak pricing and are concerned about the wisdom of the investment and, do not wish to compound the "error" by building on the lot. Still others are delaying their projects because they do not see validity in the promised Obama "recovery" and are horrified with our current indebtedness. Our retirees are downsizing their retirement home plans; if they reduce the square footage by 1500 then they can "save" a quarter million. Also there is the very significant issue of the price per square foot for inventory of new construction homes not sold is below the price point for current new construction prices per square foot.

Lately, the increase in mortgage rates has created a bit of a tipping point in favor of building, rather than holding, the dream. Some are thinking NOW is the time to build, hoping to be just ahead of a possible recovery. Building materials have dropped prices a bit and so have the builders. Some lot owners are working to secure construction loans now that will roll into the mortgage loan upon completion, guaranteeing the current fixed rate. Most too, are securing bids from multiple builders, even those who had a gentleman's "understanding" to a specific builder in the past. Those builders are now having to competetively bid what was once a sure thing.

In this current environment I , as the specifier-designer of new construction projects, am encountering issues I have never had to deal with in the past. Some examples:

a) One home owner has a contract with a builder where the designated form of communication is via e-mail. This builder does usually build more spec houses than custom homes so , according to him, he is not accoustomed to adhering to clients wishes as he typically does his own thing. So sometimes he does his "own thing" without checking the blueprints or talking to the owners or reading the project specifications. His choices are not the homeowners "thing" and when they bring this to the builders attention he agrees to make the corrections but he bills them for "change orders". His defense of this is because he did not know the clients wishes because he doesn't read his e-mails and, ( unbelievably) because he only agreed to that form or communication in the contract to " get the project". Well, that house is nearly finished and I have received a call from the home owners attorney asking for copies of all the original specifications and e-mails our firm has sent documenting all the decisions the builder ignored. This builder recently sent the owners an invoice for "change orders" which exceeded $30k which, the homeowners are not going to pay.

Nor should they.

Today the builder called and asked me to NOT supply the attorney with copies of the specifications and the e-mails because he " makes his money on change orders".

This Pollyanna is shocked.

b) I met with three builders this week to review blueprints and all interior and exterior finish specifications for a custom home for which they are invited to bid. Everything is specified;

all finishes, all lighting, all plumbing fixtures, everything down to the location of every electrical outlet, every hose bib, drawer knobs and even the towel bars. The homeowners hired our firm to provide these specifications .... they are both busy physicians and will not have time or opportunity to have daily interaction with the project once it begins. They have hired us to do this for them. This will be our third project for these clients so a great working relationship is already in place. This also gives the homeowners the best shot at having apple to apple bids.

Two of the builders I have worked with before and the meetings were just great.

The third builder came highly recommended by friends of the owners but is not one I have met or worked with before. His first question was why was he in my office? I explained. He gave me a strange look and said , " well you need to understand I don't want to bid this project this way". He went on to explain his normal way of doing a bid is by category allowances and not by specifics. I explained the clients were settled on this approach and that while all bidders were certainly invited to make suggestions there would not be blanket approval of those recommended changes without a review. An example would be if Certainteed 30 year architectural shingles are specified but the builder indicates he can get the identical product through Elk for less then that is not just okay but great. However, if the Elk 30 year architectural shingle is a great price because the finish is PURPLE and Elk is practically giving it away to get rid of inventory , it isn't going on this house. The builder flipped our spec sheets down on the conference table and said, " Listen Lady, I am not missing this opportunity to bid on this project but I just plain am going to do it my way. I will be glad to call the clients and say I bid my projects on allowances only" .

So I took a breath and asked if he had any comparables I could look at?

Sure he did,

Appliances allowance was $2000 ! .... which will not purchase a refrigerator never mind a refrigerator, six burner range, wall ovens, microwave, warming drawers, dishwasher, icemaker, trash compactor, disposal, washer and dryer. There were numerous samples of this type of foolishness so I finally said to him that I was confused as the allowances were less than half the normals for a house that is expected to cost about $750k not including the lot.

He grinned big and explained he wrote his contracts as cost plus and the low numbers on the allowances meant he looked good on paper and so those extreme low numbers usually put him in the running. I was trying to understand and finally said,
" I am not sure I understand your approach. Are you saying you routinely underbid your projects in order to get them, knowing full well what the clients are expecting cannot be delivered at the price promised?"

His answer was not bashful in the least,

" Listen Lady, I am a fine builder with awesome references ( this is true) but in this crazy economic environment I am not going to fail my family by not winning the bids. The new game is not about how fine a product you deliver, no ma'am, the current game is 'get the project' and unless you do nothing else counts."

Pollyanna might be in shock.

There is more but unfortunately I have to leave and go to a job site right this minute because some painter elected to not use the paint specified but went elsewhere to have it "color matched. " Now the fool has gallons of the stuff and hours of labor invested in putting the wrong paint color on the clients home. Poor distraught client, poor desperately foolish painter, poor college kid at the paint store needing his summer job, poor builder who loses credibility with the owners for approving the substitution, poor designer who has to go make everyone peaceable. God help me.

Is some form of this happening in your profession too? Is this the new business norm?

CLASSIC SUMMER