On 5 June, Timothy G. Wentz, PE, HBDP | Fellow / Presidential Member ASHRAE, gave the second of a series of three presentations over three weeks to the South African Chapter of ASHRAE.
The second was on the topic of Money and ethics: exploring the ethical standpoint of the HVAC industry hosted by the ASHRAE Society Chapter Technology Transfer Committee (CTTC). The following is a relatively complete review of that presentation edited by Eamonn Ryan, with lecture three being covered in subsequent issues of RACA Journal. Due to the importance of this lecture and its length, it is split into Parts 1 and 2, with Part 2 to be published in RACA October issue.
Money, a topic near and dear to my heart, holds a significant place in our lives. Today, we delve into the ethical aspects of money and explore some of the challenges it presents in our industry. Core values play a vital role in this discussion, as they form the bedrock of our industry and endure through time. As we examine the ethical implications surrounding money, we find instances where individuals’ ethics shift alongside financial changes. This unsettling trend poses a significant concern.
Additionally, we must account for the intersection of risk and ethics. The inherent risks we face in our industry cannot be overlooked, prompting us to ponder how best to protect ourselves and navigate this complex landscape successfully. Regardless of our specific roles—be it consulting engineers, contractors, architects, suppliers, or representatives—we all share the burden of risk. Acknowledging our ability to assume risk becomes paramount for the industry’s prosperity. As an educator, I always emphasised to my university students that while I could impart certain skill sets, the capacity to embrace risk lies within each individual. Recognising which risks we can accept and which we cannot, and devising effective strategies to account for them, becomes critical.
Navigating risk at the interface is undeniably challenging. Ethics, as a personal criterion, varies from one individual to another, and money has the power to influence and bend these ethical boundaries. The malleability of ethics further complicates matters, making it difficult to quantify and impose concrete measures. Yet, an example comes to mind—one that attempts to quantify ethics.
Returning to the realm of our industry, it is crucial to acknowledge the risks we undertake and the low margins we operate within. Supporting this notion, a study encompassing various industries in North America revealed that the engineering and construction industry shares the same box in the bottom right corner of a margin chart. With a mere 2% net margin, our industry faces extraordinary challenges considering the risks we assume. The resulting disparity between the risks and the margins obtained underscores the demanding nature of our work. Industries with high margins include alcohol, tobacco, banking and financial services software.
Core values play a crucial role in shaping our perspective, and they have remained steadfast since the inception of our industry. Examining the interplay between money and ethics, we encounter numerous instances where individuals’ ethical principles wavered as monetary incentives changed – a pervasive issue.
Furthermore, we must account for the inherent risks in our industry and devise strategies to navigate them successfully.
The following is an illustrative court case in which I served as an expert witness. It involved two individuals, one a contractor and the other a developer, who had a long history of successfully building smaller structures. They embarked on a large federal project that required adhering to specific city requirements, such as a designated footprint and expandability. The astute contractor, seeking a competitive advantage, discovered an alternative plot of land owned by the railroad, allowing them to construct a three-storey building while others were confined to building five-storey structures. This substantial advantage enabled them to secure the bid with a healthy profit margin.
However, the relationship between the contractor and developer soured when the latter discovered the margin imposed by the former after three months of work had been completed. Demanding a reduction of a quarter million dollars, the developer threatened to have the contractor expelled from the job site by the sheriff. The contractor, maintaining the sanctity of their agreement, refused to comply. Consequently, the developer filed a lawsuit, resulting in a significant loss when the contractor was removed from the project.
During the court proceedings, the developer was asked why they had taken such action. Astonishingly, the developer responded under oath, “I like Steve, but only to the extent of USD25 000 or USD50 000. I don’t like him enough to accept a quarter million dollars.” This stark example demonstrates how ethics can be tied to specific monetary thresholds, highlighting the intricate relationship between money and ethics.
The construction industry is fundamentally people-based, relying on long-term relationships for success: meeting the expectations of clients.
In the realm of analysing balance sheets, valuable insights can be gleaned from various sources, such as the Risk Management Association and industry-specific data. By examining operating profit margins and returns, we can identify areas for improvement and devise strategies to enhance profitability. For instance, let’s consider the case of a mechanical contractor with USD5-million in revenue and an operating profit margin of 3.1%. If their goal is to increase their profit from USD155 000 to USD200000, a logical question arises: How can they achieve this?
Upon closer examination, it becomes evident that the most effective path to reaching the desired profit level lies in reducing direct costs by a mere 1%. Surprisingly, this seemingly minor adjustment yields a remarkable 29% increase in operating profit, pushing the margin to 4%. Although it may not represent an exceptional margin, it certainly constitutes a significant improvement compared to the initial figure. Consequently, I encourage each of you to return to your respective businesses, analyse your own balance sheets, and ascertain the relationship between direct costs and operating profit. The results may astonish you, reinforcing the notion that our core value lies in reducing direct job costs by 1% to achieve a substantial 29% increase in the bottom line.
We must account for the inherent risks in our industry and devise strategies to navigate them successfully. Images supplied by ASHRAE
SCOPE GAMES, PAYMENT REQUESTS AND CHANGE ORDERS
Subsequently, let us delve into three recurring issues that plague our industry: scope games, payment requests, and change orders. Regardless of one’s position within the industry, whether as a manufacturer, architect, contractor, or engineer, these problems continually rear their heads, demanding our attention and necessitating ethical resolutions. One common ploy employed by various parties involves attempting to disconnect scope from price, effectively violating the principle which asserts that ‘there is no such thing as a free lunch.’
Scope games manifest in a myriad of ways, such as requesting a lower price without a change in scope, effectively seeking uncompensated work. Some may even ask you to include additional expenses or services under the original price, masquerading as an innocent request. The all-too familiar scenario of being complimented on your exceptional work, only to be asked for a price reduction, is yet another example of these scope games. Moreover, the issue of change orders and their associated costs often emerges, wherein owners or others involved in a project argue that the changes were foreseeable and, therefore, the additional work should not be remunerated.
One particular trend gaining momentum is stealth design delegation, a practice where engineers are burdened with last-minute design changes imposed by owners or architects. In a rush to meet deadlines, some resort to including clauses in contracts, transferring design responsibilities to manufacturers or contractors. While this approach may appear expedient, it undermines the integrity of the design process and further severs the connection between scope and price.
The core lesson we must learn from these recurring challenges is to never allow scope to be disconnected from price. It is essential to establish a firm policy within your organisation that clearly communicates the principle: if the scope changes, the price must change accordingly. By adhering to this principle, we protect our margins and ensure fairness in our dealings.
Anytime a general contractor or owner approaches me with a request to lower my price, my response has always been centered on the importance of maintaining the integrity of the scope. It is crucial to understand that performing additional work without proper compensation is simply not feasible.
To illustrate this point, let’s consider the responsibility for unforeseen and unknown conditions within the scope game.
The answer to who should bear this responsibility depends on the contract’s provisions. In my view, if the contract is wellwritten, the owner should be accountable for such conditions. After all, it is their building, and they hold the vision for its
purpose. Any unforeseen or unknown conditions should rightfully fall under the owner’s responsibility. This is why it is essential to have a contract clause that addresses the discovery of concealed physical conditions or unusual physical conditions, ensuring that contractors, engineers, and manufacturers’ representatives receive an equitable adjustment in contract time or cost.
The key lesson here is to thoroughly read and understand your contract. It is crucial to identify clauses that enable price adjustments when scope conditions change. However, there are cases where contracts, either intentionally or inadvertently, shift the responsibility onto contractors. This can occur when contracts lack a provision addressing unforeseen or unknown conditions, and an express provision to the contrary is absent. It is important to be vigilant and ensure that such clauses are not removed, as
they can significantly impact your scope and liabilities.
While I am not a lawyer but an engineer, I believe it is generally legal for contracts to allocate responsibility for unforeseen and unknown conditions. However, from an ethical standpoint, transparency and integrity should prevail. If a party wants you to assume responsibility, they should openly communicate it rather than burying it in a contract or removing critical clauses. Upholding ethical boundaries and fostering honesty is essential in our industry.
Continued in Part 2…