What's the state of remodeling ethics? Using a survey of 410 remodelers, we took the "ethical temperature" of the industry (see Reader Panel). Remodelers are independent minded. They feel comfortable combating government policies that go against decency, fairness, and common sense -- in a roundabout way, at least. Most probably wouldn't be comfortable fighting policies more openly. "I don't see them wearing their ethics on their sleeve," says William A. Ward, Ph.D., a business ethics expert and one-time carpenter who reviewed the survey results.

Remodelers have their own sense of what's wrong: 92% would never use illegal aliens as day laborers. They also have their own sense of what's not so wrong: 51% have worked without permits, for "good" reasons. Many issues fall somewhere in between. In everyday matters -- issues related to licensing, permitting, and workers' comp -- to these contractors, there are plenty of gray areas.

To further assess industry ethics, REMODELING talked to contractors, the Council of Better Business Bureaus, remodeling association members involved in ethics "enforcement," and regulatory officials. Ward, and Richard Coughlan, Ph.D., another business ethicist, reviewed survey results and provided responses to ethical dilemmas, answering: What's right, in this instance? Their answers are scattered, in boxes, throughout the story.

The reality of ethics

Stephen C. Gidley, of Stephen C. Gidley Inc., Darien, Conn., has a strong ethics backbone. His company was the second-ever remodeling firm to be singled out nationally by the Council of Better Business Bureaus for its Torch Award for Marketplace Ethics. But Gidley is first to admit, "There is no broad outline, no umbrella, no format or system of ethics by which remodelers throughout the country agree to operate."

NARI has an ethics code for all of its roughly 4,500 remodeler members, but only a few NARI chapters have committees enforcing ethics. Gidley, for instance, adheres to the BBB's code of ethics and NAHB's Certified Graduate Remodelors ethics code. But as he notes, there are only about 1,100 CGRs, and hundreds of thousands of remodelers, and the NAHB Remodelors Council has no ethics committees. About 10% of readers belong to the Rotary, which has its own code, and there are an unknown number of remodeling members at the BBB, with 300,000 total members.

David Merrick believes the "ethical temperature" in his metropolitan Washington, D.C., region is good, although his NARI chapter's ethics committee doesn't have much enforcement power.
Charles Steck David Merrick believes the "ethical temperature" in his metropolitan Washington, D.C., region is good, although his NARI chapter's ethics committee doesn't have much enforcement power.

Pledges to ethical behavior did little to stop the 37,863 complaints against contractors that the BBB reported last year. This is more than any other business segment, if you include all the BBB's contracting categories. While these complaints fit many descriptions -- unfinished jobs, unsatisfactory workmanship or service, failure to make repairs -- and are logged in local BBB chapters and not nationally, few are outright scams or "ethical complaints." Yet, overall, particularly if they go unresolved due to contractor fault, they contribute to a perception of the industry as unethical, says Ron Berry, senior VP of the Council of Better Business Bureaus.

According to those surveyed in our Reader Panel, the lack of a universal ethics code results in a checkerboard of decision-making nationwide. It seems that because most remodeling entrepreneurs came through the trades, where unlicensed, unpermitted side jobs are common and accepted, unethical practices are almost a rite of passage.

Then there are the laws that remodelers may feel are unfair, like those posed by antiquated licensing or permitting laws. The District of Columbia, for instance, assesses a flat 3.5% of job cost for a permit fee, which some argue is a remodeling tax for the wealthy, instead of a fee based on construction square footage. Laws like this argue for interpretations remodelers shouldn't have to make. The law should be fair, and not aimed at raising revenues beyond those dedicated to permitting issues. (According to Gidley, the D.C. permit fees are about three times higher than the national average.)

But whether deemed fair or unfair, Professors Ward and Coughlan see little for remodelers to waffle on. "I don't see a lot of gray stuff," Ward says. "I'm saying we have these rules. ... Let's make them work ... then work institutionally as best you can to improve things."

He adds that contractors aren't necessarily protesting the laws on ethical grounds. As a group, remodelers may be independent-minded, but "they don't see what they're doing as a civil disobedience maneuver. I think they see it as a business maneuver first."

The code of ethics that Tom Kelly, of Neil Kelly Co., likes best is one of the most widely quoted business ethics statements. The 24-word test was created in 1932 by Rotarian Herbert J. Taylor. It asks, of the things we all think, say, or do, Is it the truth? Is it fair to all concerned? Will it build goodwill and better friendships? Will it be beneficial to all concerned?
Jon Deshler The code of ethics that Tom Kelly, of Neil Kelly Co., likes best is one of the most widely quoted business ethics statements. The 24-word test was created in 1932 by Rotarian Herbert J. Taylor. It asks, of the things we all think, say, or do, Is it the truth? Is it fair to all concerned? Will it build goodwill and better friendships? Will it be beneficial to all concerned?

Gidley agrees with Ward that there's more black and white than gray when it comes to permits. Understating construction costs is fraud. He does think it's allowable, however, to not include markup in construction cost when stating that cost on permits. That's a practice followed by Tom Kelly of Neil Kelly Co. in Portland, Ore., the first BBB Torch Award winner in 1999. "That's reasonable," Gidley says, "but to take a $200,000 remodel and call it $120,000, that's fraud." Speaking about not including profit and overhead when stating job costs on permits, Ward says, "You can do that. I've seen it done. But it is one of the gray areas." He adds, "I wouldn't do it. It could cause subsequent problems for valuations down the road, with insurance and appraisals and all that."

Gidley says permit fees nationwide, at about $10 per $1,000 of construction costs, aren't insurmountable, so they should never stop someone from obtaining a permit.

Ward adds, "The sort of notion that it's OK to be in violation of the law or regulations and not have the permits and licenses -- the risk is way too big there. There's an enormous risk of losing your business.

"You've got to be in full compliance -- pay all the dues and get all the permits, the licenses. Even if it's an antiquated system."

Consumers bear some responsibility for supporting poor ethics, often hiring the cheapest (often unlicensed, unpermitted) contractors, which allows bad contractors to proliferate.

Ward's solution is to take the choice away from homeowners: "If all these guys were licensed and permitted and their organizations were successful in policing that, then you keep all these cheapos out. And the cheapo homeowner couldn't get that service anymore."

The reality of enforcement

Ethics enforcement comes sporadically through associations or through permitting and licensing agencies overloaded with administering programs.

Few of the 2,000 complaints heard in a year in Oregon are for unethical practices. But for those that are, Ken Keudell, retired administrator of the Oregon Construction Contractors Board, argues that remodelers are the key to catching the bad apples. "Our argument is, we can't catch them if [legitimate contractors] don't let us know where they are," he says.

Contractors, for their part, rarely adopt the role of whistleblower.

Kelly says he's struggled with whistle-blowing. He was taught in his childhood, he says, "that you don't rat out people." But he adds, "If you're aware of something going on that's going to negatively impact the consumer or the industry, you should do something. In Oregon, you can anonymously report a contractor to the Contractors Board. But I can't recall a time when I have." If that seems contradictory, Kelly is the first to admit it. "With ethics issues, they often are conflicting. And choosing the best decision is difficult. What I wasn't asked is, Was I ever faced with a situation like that and didn't report somebody. And the answer is, No.

"In most cases, if not all, I would make the decision to report somebody. I've been fortunate in that either when I was aware of something, I knew it had already been reported to the Construction Contractors Board or to another governing body."

Years ago, his company gave information to the Board. "So we assisted actively in the investigation but weren't the original reporters," he says. "I've been asked by employees in the past if we should do something like this, and I say, Yes, we should. But personally, I haven't made a phone call, so I guess there's a fine line there."

It's a slippery slope, and Gidley says he's never reported on other contractors, either, despite opportunities. "You'd have a rat's nest of people stabbing each other in the back," he says.

But Kelly says in the years he served on the Construction Contractors Board, he doesn't remember any back-stabbing. "That's going to be pretty obvious pretty quick," he says. "On an ongoing basis, I don't see how you could report competitors regularly and not get into trouble."

Enforcement, Gidley insists, is the responsibility of the Department of Consumer Protection and the Attorney General's office. "And that's where the weakness exists now, in enforcement and monitoring."

And so, less rigorous, less dependable, and less objective systems of enforcement come from association ethics boards, which try to implement what they believe is needed.

Tom Madden, of the New Jersey Remodelers Association of Cherry Hill, N.J., with 100 contractor members, claims one of the stronger association ethics codes, backed by consumer lobbyists and advocacy media. He says his Consumer/Contractor Arbitration Board (CAB) has resolved 150 cases over 22 years. Its Operation Good Samaritan has cleaned up $1 million in remodeling jobs "gone bad." Its model contracts were developed with consumer advocates, and membership mandates adherence to those contracts.

"We've been trying to take the 'con' out of contractor for years," Madden says. But it's uncertain what the association's effect has been on the region's remodeling ethics or on efforts to get remodeling contractors licensed in New Jersey.

"Based on the non-member problems, it's horrendous out there," Madden says of ethics in general. He continues what seems like a fruitless, politicized quest to get state licensing, with proper enforcement. He says after 22 years, his members and officers "know they have to get off their duffs," to recruit others to their code. "Too many people in the industry think one man can be an island."

Terry Quinn of Almar Building & Remodeling Co. of Hanson, Mass., says laws in his state attempt to punish unlicensed, unpermitted contractors, but no one enforces the law. Local building inspectors work part-time. His state's home improvement contractor registration requires a $100 renewal annually. "The money goes into the general fund, to be used for anything," he says. "Nobody leaves an office to go look at any jobs."

Ethics committees do what they can. David Merrick of Merrick Design & Build, Kensington, Md., serves on the ethics committee of NARI, Metro Washington, D.C., chapter. Merrick feels the regional "ethical temperature" is good, in part because homeowners in the market know to work with reputable contractors and to use background checks like those offered by the BBB. Merrick would like to see a greater affiliation between NARI and the BBB, and more chapter promotion of the association's standards.

Larry Schaffert is the president of the Frederick County (Md.) Builders Association. His group used to have an ethics/dispute resolution committee, but the association attorney and the NAHB advised them to steer clear of those practices, because of liability issues.
Charles Steck Larry Schaffert is the president of the Frederick County (Md.) Builders Association. His group used to have an ethics/dispute resolution committee, but the association attorney and the NAHB advised them to steer clear of those practices, because of liability issues.

But that introduces a liability; if the chapter vouched for a member's ethics and something went wrong, the chapter could be held accountable. In fact, Larry Schaffert of Schaffert Construction in Myersville, Md., president of the Frederick County Builders Association, says his association used to have an ethics/dispute resolution committee. The association attorney and the NAHB advised them to stay clear of dispute resolution, because a homeowner could sue if the matter wasn't satisfactorily resolved.

Some believe associations shouldn't be in the enforcement game anyway. Todd Swezey of Island Designs, Savannah, Ga., says "associations are there for education, not to be a police force."

John Van Dame of Van Dame Custom Builders, Lansdale, Pa., might agree -- and take it even further: "I don't think anybody can police remodelers. We're generally strong individuals who got into business because we want to do things our way. That can be good and bad."

Still, 78% of our Reader Panel say the industry doesn't do enough to police its own.

What should be done

Gidley strongly believes associations can influence permitting and licensing issues and cooperate with authorities on enforcement.

He has worked with his attorney general and department of consumer protection to resolve three consumer complaints against contractors. These cases involved contractor/consumer disagreements and not ethical breeches, but Gidley says participation of this sort with authorities would be appropriate on the ethics front, as well. On a larger scale, contractors should work to reform licensing and permitting issues. He recalls his Remodeling Contractors Association efforts to repeal a 6% tax on certain contracting types. The same effort could go toward reforming antiquated systems regulating contractors and their work.

Companies should recognize good ethics are good business, Gidley says, particularly in the wake of the Enron and Worldcom scandals. "You can market ethics in a tasteful way that will increase your bottom line but not make you look like an evangelist," he says.

Keudell, the retired Oregon official, agrees that while permitting and licensing agencies ought to use funds only for permitting and licensing, he believes contractors should still follow the laws, then fight for change. "Once you do the opposite, you put yourself in jeopardy. If you have a consumer that expects that, get a different consumer."

Until there is change, remodelers will follow their consciences -- wherever it points them. Until it's a collective conscience, ethics will always look, to them, like a checkerboard in shades of gray.

What Would You Do?

William A. Ward, Ph.D., is the Alan R. Warehime distinguished professor of business administration at Susquehanna University in Selinsgrove, Pa. He served on the White House staff under two presidents, and his "Real Crooks" program uses white-collar felons as classroom instructors. Ward also has worked in his family's construction businesses, as a carpenter and electrician.

Richard Coughlan, Ph.D., is an assistant professor of management, Robins School of Business, University of Richmond, Va. His research on decision-making has been published in the academic journals Organizational Behavior and Human Decision Processes and the Journal of Behavioral Decision Making.

1. A subcontractor you know is working without a license, but his work is good. Another sub is licensed, yet does shoddy work. If you had to report one, who would it be?

Coughlan: I'd really want to report both. Forced to choose, I'd report the one without the license. The sub who is licensed but doing shoddy work will eventually be dealt with by authorities if his or her work reaches a dangerous level.

2. Some policemen and firemen are doing side jobs. They carry no contractor's license nor do they get building permits. Meanwhile you pay for permits and licenses. You feel if you reported them to authorities nothing would happen. Should you report them, confront them, or do nothing?

Ward: The risks are too big of physical violence here. What I would do is document this to the maximum extent possible: times, issues, photos, notes. Then I'd go to the authorities, by the informal network, or formal network, if I had to, just to say, "This is going on and we're getting screwed here and you need to do something." If you're worried about the Old Boy network, you need to get to the state level.

3. In your locality, opening a wall to run a new switch automatically requires the entire electrical service to be updated. You view this as an unfair burden for your client, so you don't get a permit. Did you do the right thing?

Ward: You're going to run into resistance with cheapo clients, but you have to err on the side of safety -- get the permit and update the service.

4. You work in 10 localities. Each requires a license, as much as $240 each per year. You pay for a state license but don't pay each locality's because you'd be forced to pass on an unfair cost to clients. Is your decision justified?

Coughlan: You ought to be able to recoup the $2,000 from clients over the course of the year, even if you believe these fees unfair. To me, that's the cost of doing business.You might have to explain to the homeowner why your quote is higher [than the unlicensed contractor's].

Ward: What would you say if a homeowner hired you and an inspector shows up and says, 'Hey, you don't have a license," and you get into this big hassle? And the homeowner gets wind of all this. He's going to try to get out of that contract. You just make a hell of a lot of trouble for yourself not being licensed.

5. In your locality, permit fees are based on job costs, so fees for a $100,000 remodel are significantly higher than those for a $25,000 job. The fee structure was established to cover administrative costs before there were large disparities on materials costs for most projects. Scope of work can be identical with only materials, labor, and profit higher. Do you understate job cost on larger jobs to save clients money on fees?

Ward: Don't understate the cost of the job to save your client money. You've got to be in compliance because the risks are too enormous. What you could try to do, politically, is enlist the customer as ally. Then the customer can raise hell with you down at city council [to change the fee structure] and be sympathetic to the contractor's viewpoint.

6. Your locality requires a permit for any job over $50, yet the permit process takes six weeks and your client could be without essential plumbing or electric for want of a $2,000 repair. The fine for proceeding without a permit is $250, which your client can afford. Knowing your licensed electrician and plumber perform exemplary work, do you work without a permit?

Coughlan: That's a "utilitarian calculation." What are the general harms and the general benefits? Somebody without electricity and water -- there's more harm done to that person, which takes more precedence than anything else.

Ward: Every jurisdiction has some kind of exceptions process. You shouldn't accept any fine or variation as a cost of doing business. Get the exception, even if it takes more time and more effort, and you need to explain to the customer and get the customer's help. Can you imagine some bureaucrat or politician being hoisted up on TV, this no good S.O.B., because he kept people in the dark for six weeks?