The Ethics Advisor

Studies have shown that design-build is most successful when there is a high degree of trust. Trust is built on honesty, integrity and fairness – three essentials of ethical conduct. This is the first in a series of articles that will address ethical issues that arise in design-build for the owner, the designer, the contractor, and the entire design-build team. The first installment addresses the broad topic of “Conflicts of Interest.”

Future columns will address more specific ethical topics such as: Consenting to or Suppressing Code Violations; Actions Taken Against Advice of the Design Professional; Biased Participation on Owner’s Selection Committee; Changing Members of the Design-Build Team After Interview; Accepting Commissions, Free Designs or Discounts From Contractors, Subs or Suppliers; Contingent Fee Arrangements and Shared Savings; Acting as “Neutral” on Pay Applications, Completion Dates or Claims; Using Designs or Technical Proposal of Another Without Consent; Participating on More Than One Team for the Same Project; Bid-Shopping; Bid Rigging and Price Fixing.

It is DBIA’s hope that these articles will result in more open discussion between design-build teammates, and between design-builders and their clients on these sensitive topics. Best practices will result from ethical conduct by all participants on the project. To see other ethical questions addressed, submit topics to Richard Belle, editor.

Conflicts of Interest

Henry Ford once said, “Quality means doing it right when no one is looking.” Right or wrong, the construction industry has operated in the U.S. for decades under the premise that a contractor must be monitored constantly by a third party to assure quality. A frequent owner concern about design-build is not having an independent architect or engineer to “look after the owner’s interests.” Some owners feel that when hired by a contractor, or when acting as prime design-builder, a design professional loses his or her independent judgment due to a conflict of interest. This concern is not new and, in fact, has been around for over a century. For many years the professional associations for architects and consulting engineers prohibited their members from participating in design-build due to a perceived ethical conflict of interest. This attitude reflected a level of distrust, i.e., that if not watched closely a contractor will try to cut corners to save money and any design firm who participates as a contractor will succumb to the same temptation when “no one is looking.” Today, many reputable design-build contractors, design professionals, and teams have shown the skeptics that conflicts of interest can be managed and the process improved even when design and construction are offered by one entity or under one contract. To build client trust, we need to understand the perceived conflicts of interest and how to handle them.

What Conflicts? Consider this scenario: You are the architect on Project A, a small retail center in your city. You have a “traditional” contract with the owner to design and to perform construction administration services such as pay application review, inspections, and certification of completion. Jones Construction is hired by the owner to build Project A. Across town, you and Jones Construction agree to team up on Project B for a different small office project — as a design-build team, where your firm is a subcontractor to Jones and you will share in the savings. Ethical question: Should you tell the owner of Project A about your teaming relationship with Jones? When should that disclosure be made? And what if the owner of Project A objects? Conflicts also arise when an architect is required or asked to approve a design-builder’s pay application which includes the architect’s own invoice as a subcontractor. Or when an engineer working for the design-builder is designated as a “neutral” to review construction claims. And when that same engineer is required to certify completion on a job which has liquidated damages, especially if the team stands to earn an “early completion” bonus or to lose “shared savings.” Conflicts are not always easy to identify in practice, but most cause a knot in the stomach — a good sign that you have an ethical issue. Hindsight is 20/20 in ethical matters, so slow down, think about the issue and ask: “What would Henry Ford do in this situation?”

History of Conflicts. Concerns over ethical aspects of design-build have a long history. The AIA was founded in 1857 partly in response to what were then called “package dealers”, a term that at the time was synonymous with design-builder.¹ The AIA’s first Code of Ethics in 1909 barred its members from engaging, “directly or indirectly,” in construction, effectively prohibiting them from participating in design-build. This ethical restraint lasted up to the AIA’s 1977 Code of Ethics, Rule 404, which stated in part, “Members may not engage in building contracting where compensation, direct or indirect, is derived from profit on labor and materials furnished in the building.” The AIA’s position was that there were conflicts between the architect’s obligation to the client and a potential competing self-interest in economic gain as a contractor. Those ethical issues have not gone away, but this Rule has, after nearly 70 years. The AIA Code of Ethics from 1987 through 1993 instead suggested that architects engaging in design-build must disclose the nature of their relationship with the design-builder to the owner, a concept adopted by several state licensing boards. The 2004 Code is entirely silent on the topic of design-build, though it requires that architects avoid and disclose all “unavoidable conflicts of interest as they arise” (AIA Ethical Standard 3.2). What if the client objects? AIA’s Rule 3.201 says its members “shall not render professional services . . . unless all those who rely on the Member’s judgment consent after full disclosure.” Many state licensing boards take the same position on conflicts, much like the legal profession’s ethical rules about not representing adverse parties without disclosure, consent, and a written waiver.

Engineers have a similar general rule about conflicts of interest, such as NSPE’s Code of Ethics for Engineers, Rule II. 4.a (Jan. 2003). Like the architects, when consulting engineers were first organized in the early 1900s, design-build was frowned upon by their organization. Engineers affiliated with construction firms were not be eligible for membership in the American Institute of Consulting Engineers (AICE).² It was considered a conflict of interest for an engineer to submit a bid for construction on work for which the engineer had provided professional services. This prohibition remains embodied in some procurement laws. See, e.g., Okla. Stat. Title 59 § 46.27; S. Car. Code § 11-35-3245; 48 C.F.R. §§36.209, 36.606(c). Like the AIA, the consulting engineers eventually repealed their ethical rule against design-build, though not rules against conflicts of interest.

Disclosure Laws. In 1991, the National Council of Architectural Registration Boards (NCARB) proposed a model law which permitted design-build as long as a licensed architect “participates substantially” in the project and there is written disclosure to the owner that the architect is engaged by the design-builder. A few states have adopted the NCARB model rule, such as Illinois, Nebraska, and South Dakota. In those states, the design-builder must give the owner a written disclosure identifying the architect so that there is at least informed consent by the owner that the architect works for the contractor. There are also Federal regulations about ethical conflicts in contracting. See, e.g., Improper Business Practices and Personal Conflicts of Interest (48 C.F.R. Part 3). Disclosure of conflicts is specifically addressed in Federal Highway Administration regulations which require that policies on conflicts of interest be stated in the RFP and that offerors disclose “organizational conflicts of interest” in their proposals, in the form of a disclosure statement or a certification. 23 C.F.R. §§ 636.116 - 636.118.

Owner Conflicts. Conflicts can even arise on the owner’s side of the table. For example, Arizona law prohibits a person who sits on the selection committee from providing any construction, materials, or services to the project. See, A.R.S. § 34-603. What if the owner hires an architect as a “bridging” consultant to prepare a design-build RFP; can that architect later participate on a competing design-build team for the same project? Some laws specifically prohibit this as a conflict of interest. See, e.g., Cal. Pub. Cont. Code § 20209.8; Fla. Stat. Ann. § 287.055. Federal Highway regulations bar consultants who assist in preparing the RFP from participating on a design-build team unless involvement was at a “low level.” 23 C.F.R. § 636.116.

Adverse Effects of Conflicts. Conflicts of interest can result in disqualification of a design-builder, as was the case in Illinois court on a waste water treatment plant.³ When just two bids were submitted, Contractor A’s bid of $13.9 million and Contractor B’s bid of $14.2 million, the city council rejected the low bid over concerns that Contractor A’s business relationship with a subsidiary of the project engineer would “create the appearance of impropriety.” The city’s engineer owned 79 percent of a limited liability corporation that had worked for several years with Contractor A on numerous design-build projects. The court ruled that the city’s award to the next higher bidder was in the public interest stating, “Maintaining the public’s confidence in a multimillion-dollar project funded with public monies was a legitimate consideration for the city council when determining the lowest responsible bidder.”

How to Handle Conflicts? Ethical conflicts of interest will come up on your projects. But ethical people will do the right thing regardless of whether they are involved in “traditional” project delivery or in design-build. One does not abandon his or her ethics at the door when doing a design-build project. General rules regarding conflicts of interest require: (1) disclosure to all affected parties; (2) informed consent; and (3) a written waiver. Participants in the construction process from owner down the contracting chain need to recognize conflicts of interest at the earliest stages, disclose them to others who might be impacted, discuss the issues candidly and openly, and resolve them during the contracting stage or as soon as they arise. Abraham Lincoln said it best: “I never had a policy; I have just tried to do my very best each and every day.” Ethical owners, designers, and contractors will succeed on the simple principals taught by Henry Ford and President Lincoln — do your best, every day, even when no one is looking.

Notes:

¹  D. Gordon, What is Design/Build and Why is Everyone Talking About It?, AIA Memo (February 1994); M. McCallum, Design/Build: Issues to Consider, AIA Supplement, 1993.

²  Stanley Cohen, Engineering the Future: A History of the American Consulting Engineers Council, ACEC Publication #304/9-93/5M (1993).

³ Joseph J. Contractor A & Son, Inc. v. City of Crystal Lake, 743 N.E.2d 713 (Ill. App. 2nd Dist. 2001).