Tuesday, July 21, 2009

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?

22 comments:

rotty in exile said...

this is definitely happening with the health care bill. they are outright lying about the taxes if you opt out; the staying with private providers; death counseling instead of treatment for seniors...much more. and the money! "oh its not going to cost too much. it will SAVE money"

and then once the bill is passed they have us and then proceed with the original plan just like builder #2. interesting read, fishy. but no. im not shocked.

fishy said...

Rotty !

I had a similar thought today,
ie: builders are now acting like politicians.

I guess I actually am shocked with the speed of the transition from ethical practices to the opposite. Soooo disheartening.

Boxer said...

Sadly, this has been going on for a long time, but I think with shrinking bank accounts, Clients are actually taking a closer look at costs associated with projects and finally seeing how they've been paying more for a long time. And this happens in my business too... I bid an honest price and have been undercut by competition who later put through "change orders" to increase the bid far beyond what we bid.
Seattle just completed a huge Light Rail Project - recently, it was discovered that a contractor substituted metal for a lesser quality (any guesses why?) He even falsified certification from the steel factory. He's being prosecuted and "luckily" it did not impact the inegrity of our new rail system. Can you imagine what happens in other countries???

oh, and Rotty is spot on.

fishy said...

Boxer,
I cannot understand how your local contractor for the light rail EVER got to a point in his head where he could justify choosing to falsify records and jeopardize the safety of thousands. I have always believed things like ethics, principles and integrity were beyond price tags.

And sure, Rotty is correct!
But,
I just do not know how bankers justified using TARP funds for multi million bonuses to reward failure, I also just cannot understand the behaviors of Madoff or the heads of the auto companies or the heads of Fannie and Freddie or the politicians who protected and concealed or the populace who refuse to understand our country is being stolen without a peep or a fight!

I get that we are haywire in this country. There seems to be the horrifying mentality of grab what you can wherever and however you can. But for God's sake if the business people in this nation are going to act like street gangs WHO will there be to stand up to this
insanity? How will we reverse this horrible trend?

Somewhere in the back of my Pollyanna mind I guess I have been thinking the business communities, ie the Chambers, the Bureaus, the numerous professional organizations would collectively stand up and fight for this nation
because that cohesion is for the common good and because the general populace does not have the same clout as American Businesses acting as a united front against insane government practices.

Instead, business is now following the lead of government to implement lies and structured confusion as a business model!!!!!

I am ill.

Boxer said...

In March when I lost a government contract, I had similar feelings. We had done the work for years at a fair price, with excellent service. Then it went out for bid and we lost it to a company that had no idea what they were doing, so they came in far below anyone else. What did I learn? That the best company doesn't win, THE DUMBEST does and I have still have a bad taste in my mouth and will never participate in a government bid again. Too much room for stupidity.

fishy said...

Boxer,
My big anxiety is that now
the most dishonest company wins and the businesses who still have stellar practices and ethics are failing. It is more of the reward the bad and punish the good insanity.

kmwthay said...

I don't want to mention any other big nationally known NPO's by name, (even though I really, really, want the world to know about their games) but there is a form of this happening in the NP world too.

In order to receive donations, this nationally recognized NPO leaves out certain information in their promotions, focusing on 1 or 2 positive issues, all while letting celebrities do the advertising. I feel that if the mass public knew about the restrictions this NPO has, they might not be so keen to donate.

As a result, my small, but mighty NPO loses out on those donations - where ALL of our money raised stays local. And we don't mislead our donors or potential donors with false claims.

fishy said...

Kym,
I guess that confirms NOTHING is exempt from the current trends.
So awful.

I will mention we have a very strong NPO here dedicated to fighting one broad spectrum illness and to providing aid, education, etc to the families of the ill.

The local director got so extremely annoyed with the national organization she raised funds and did a mass mailing informing the residents that donations to the LOCAL NPO stayed in this community and aided those in this community. Whereas donations to the National NPO for said illness went to fat salaries, executive retreats, big bashes for the Names to come and invigorate donations, and very damn little of it made it's way back to our community. She brilliantly timed her mailing to just precede the annual national push.

As a result of her educate the populace blitz, donations to the local NPO increased about 42% while National donations from our county declined by about the same amount.

She is a local hero.
We need more of her in every realm.

moi said...

I'm not sure this is in the same realm, but the profession of writing has so devolved these days that beginning free lancers, desperate for clips and work, are regularly agreeing to provide "content" for Web sites for as little as a couple pennies a word, thus undercutting those of us with years in the business who are used to getting paid upwards of a dollar a word. Naturally, the quality of the research and writing is suffering, but, meh, journalistic integrity went the way of the free market long ago.

Speaking of which, don't even get me started on healthcare. Or I'll have to move to Costa Rica and mix cocktails for a living.

Aunty Belle said...

The whole dern nation is becoming the playground of the mafiamethods.

Aunty Belle said...

Ditto Moi's comments--

seasoned journalists doan git no respect--an lots of editors is no longer interested in content that has been checked an' rechecked fer accuracy. Nope--if there be the thinnest pretense to "truth" then they run the story.

In addition, "news" is balkanized. People go to news sites that reflect their philosophy even if it doan reflect nuthin' close to true reportin'.

fishy said...

Moi,
I think your comment IS the same realm as it again speaks to the issue of Economics assault on Ethics.

Aunty makes a great point too because the $1 per word was for accuracy, fact checking and hopefully journalistic integrity and neutrality, except for opinion pieces. Now the cents per word crowd are published without fact checking, without neutrality and without integrity because of the economics.

Ditto to all who have linked this issue to proposed health care rationing by the government. I fear Rotty's projection of "death counseling" replacing senior medical services is all too probable. And for the soon to be Medicare covered Baby Boomers ... well there are a lot of them and it is cheaper if they die.
No pretense of ethics there.
The Boomers will be the first generation to have their life long SS investments stolen and / or denied and they will be invited to never retire and if they do retire, they will be scheduled to perish shortly thereafter.

I guess I need to be grateful Blowfish already has his coronary artery stents and his pacemaker. Course it won't matter if they soon take away his medicines.

Again, I agree with Aunty... behavior once associated with mafia thugs or street gangs is now
a fairly typical business model for governments, businesses, media and medicine.

I am trying to fight not despair.
Thank God for Blogs.

TROLL Y2K said...

In my industry, the metrics that measure success have changed. And the thinking has gone VERY VERY short-term. ALL and I do mean ALL of my clients expect to face a rougher regulatory and tax and benefit-cost climate in Years 2-4 of the Obamanation. So, they're taking steps to squeeze out some 2009 profits that you MIGHT describe as "unethical" but I'd say are more a matter of short-term thinking.

I think you can see the same thing in Macro Nationally as Stock Prices rise in spite of an abysmal current economic climate and bleak future prospects. Companies in every industry are taking steps to boost Stock Prices short-term that in many cases will harm their long-term viability and ability to compete.

There've ALWAYS been some dishonest operators in my industry. As of today, their percentage is just slightly higher than it was last year. Mainly due to some honest operators going out of business. And other honest operators (including my biggest client) getting entirely OUT of the riskiest segment of the industry. The one MOST prone to both ethical lapses and short-term strategy.

I expect their percentage to increase in the coming years. And, yes, to answer your question, I think some formerly ethical operators will turn dirty to survive.

fishy said...

Troll,
You sound a bit more optimistic than the rest of us. From where I sit it appears "unethical" is becoming more common and "ethical" the rarity.

Did you witness the Obama bait and switch presentation last night? Any comments?

Pam said...

Ooooooh, interesting post indeed. The gotcha's on the "changes" to a project is insightful. I always suspected certain folks of doing just that. We just bought a house a few months ago and the builder gave us a book of everything he did to build the house, the invoices, everything, and he just put 10% on top of that and that was the price of the house. Not much negotiating, but I respected how he operated.

Boxer's dealings with a government contract hit home as well, since my husband looks at contracts for the government and has seen some shady low bids and was probably right to be suspicious of them. Hmmm.

A quote from Gone With The Wind keeps coming to me lately. Rhett Butler says (paraphrasing here) that, "There is as much money to be made in the fall of a civilization as there is in the building of one." Double Hmmmmm.

fishy said...

Pam,
Rhett was smart about everything except Scarlett!

Thing is, if the businessmen turned gangsters are the ones who will be reaping the benefits of the fall of our civilization, well then even looking as good as Clark won't soften the blow!

Buzz Kill said...

I really don't think any of the described "ethical lapses" in everyone's comments are are anything new. I think it's the "old morality" that has been going on well before this current recession. That's how we got here. With more companies going out of business, the dishonest ones have less to hide behind and are now more apt to be caught.

Hell Madoff got away with it for 20 years and got caught because other companies went down 1st. This country's business ethics are not based on providing the best service or product for the dollar but how can I get the most for the least - even if it means screwing everybody involved.

I see it in the government contract world all the time. My department has lost 2 bids in the last 3 months that we were more than qualified to do but were beaten by lowball prices that no legitamate company could possibly perform under. When I say lowball I mean 20 - 25%. In these cases you have government employees making the award decisions only on price rather than best value. The low ball companies have lawyers and contracts people that then pick apart the contract wording (after award) and look for non-existent cost over runs to make up the 20- 25%. And the feeling is "shame on the government if thay didn't see what we were doing" or the right people were paid off.

It's downright discouraging. I have no solutions either. For every one that gets caught there are probably dozens that don't. It's the way its always been. *shrugs*

Haiku Master said...

Pollyanna Troll
expects to eat fattest goat.
Eat the skinny one!

TROLL Y2K said...

I didn't mean to sound optimistic. I thought you asked about MY industry and my assessment was ethics have slipped and will slip further but it's also a matter of short-term thinking replacing building a business for the long-term.

Illustration: Rough Numbers.

Distressed former Hilton-Flagged 250 room full-service hotel. Pre-Obamanation, success was judged longer term.

Put 250K into it right away so it can EASILY pass Holiday Inn standards. Budget an additional 250over the next 5 years. As things break down, fix them CORRECTLY. As things need to be replaced, replace them with as good or better stuff.

Five years later, you have an operation that nets 5-10 million, employs 300 people and is an asset to the community in many other ways. And THAT is when success is judged. Long-term thinking.

The Obamanation Economy way is:

Put 150K into just barely getting Holiday Inn flagging approval. Budget nothing for future improvements. Get a family of Pakistanis to "manage" it.VOILA! MISSION ACCOMPLISHED! A distressed property is off-the-books!

The reality is that the property will lose the Holiday Inn flag within a year and cease to be a full-service hotel. The next year it will lose a lesser flag. Say, Ramada or Days Inn.

End of 5 years, 2/3 of the building is virtually unused. It's essentially an apartment complex for 40-50 crack hos. A blight on the community that produces very little tax revenue for local government.

But the SHORT-TERM goal was accomplished and some money was made.

Pre-Obamanation, a handful of operators operated via the short-term distressed property model. Today, almost all have switched to that model.

Hope that clarifies what I meant.

fishy said...

Haiku Master,

Pollyanna Troll
Received the message:
Bleak is the new goat

fishy said...

Troll,

Short term profit now
Belays the coming
Harsh retributions

Aunty Belle said...

Fishy,

MEDICAL is the MM''whar's you?

All ok???