Ethical Houston

Early in my business career my brother and I were commercial real estate developers.  As in all phases of life, there were lessons that we learned.  When you build a project such as an apartment project you go through a procedure to get it up and running.  You have the plans drawn, you find financing, make a cost estimate and then buy out the project.  In the years that we were building, Houston was in a tremendous building boom that often created a shortage of both materials and labor.  This latter shortage was the one that was most problematic.  The number of sub contractors available to bid on projects was limited even as we worked to bring the project in at the projected cost.  And therein lay the problem.  We often had to employ subs that we had never worked with and knew little about.  In many cases, subs were somewhat itinerate in nature so we couldn’t do much of a check on them.  At any rate, we would contract with them on an agreed price and proceed with the construction.  But then the next shoe would drop.  A few days into the subs work he would come back in and state that he was losing his “ass” on the job and needed to have more money.  Our position was that he had made a deal and that we were going to stick with the agreement.  After grumbling some, he would go off with us thinking that was the end of the issue.  However, within a few days he and his crew would not show up.  This created a problem with everyone else who depended on him to be at a certain point in the project.  This made them angry and the whole project would slow, sometimes to a snails pace.  Because we were financing the construction, it meant that every extra day that it took to complete the job cost us interest, not to mention pushing back the opening date of the project.  Then we would send out compliance letters stating that if the sub did not staff the job adequately, that we would cancel the contract and withhold his retainage.  After all, we had our ten page contract with him that gave us all sorts of power.  We generally did not have to do this, in as much as that would delay the project more, while we went to court and looked for a replacement sub.  So, we muddled through until completion.  Unfortunately this scenario was not that uncommon, not just with us but with other contractors. 

            One day, I was having lunch with a friend of mine who was one of the largest and most successful apartment builders in Houston.  He had built and owned over 5000 units in the Houston area.  He was noted for being able to begin moving tenants into one of his large new projects within ninety days.  This was almost unheard of and I asked him how he was able to get that kind of production.  He allowed that he had good subs.  So, how do you get and keep good subs I asked?  His answer was simple.  He said that he did a lot of work, but more importantly he paid them well and expected them to be on the job and to do good work.  He stated that the time saved by being able to start moving tenants in quickly and being able to start getting cash flow and stopping the interest clock more than made up for the extra cost of labor.  

            As I reflect on this now, I realize that in addition to paying more, he also had a long standing relationship with these subs.  He had worked with them for a number of years and not only did they work well with him but they also had a relationship with one another.  There was a mutual trust between them.  I’m sure they had a written contract and did the paper work required by the lenders and the legal statutes.  But having iron clad contracts doesn’t always get the job done.  My friend and his subs had made a covenant that went beyond the written documents. 

It’s also about ethics and trust.  In my case the ethical questions were two sided.  From my side, the ethics question was, is it ethical to squeeze the sub to where he couldn’t make a profit?  And from his standpoint, was it ethical for him to come back and try and play the “poor me” game.  Looking back on those incidents, I’m not sure what I would do today.  But I do know that sometimes ethics are two sided and that parties play destructive games that impede the resolution of problems.  Additionally, there are tipping points to ethical situations.  There are degrees of ethics and we don’t always know the boundaries associated with decisions.  Even if one party has the power to dictate to another party is it ethical and does it make sense?  I’ve been on both sides of these kinds of contractual issues and I know that at times it’s important to change the rules a bit in order to move forward. 

Currently, our country is faced with the sub-prime mortgage crisis.  Homeowners are defaulting and giving back their homes by the hundreds of thousands.  And our politicians and pundits play the blame game.  Congress is at fault, the lenders are at fault, or the homebuyer is at fault.    But, some loans are being renegotiated in order to help the home buyer but to me even more importantly to keep someone in the home to keep it from deteriorating and losing more value and effecting the surrounding neighborhood.  That’s a pay off for the lender.  The point being in these two scenarios is that ethics are not always black and white.  Situations change and rigid ethics don’t get the job done.  Ethics are also about the self interest of the parties.  Just because one party has the power over the other does it make it right to wield that power or does it make more sense to find an answer that creates a win-win situation?