Volume 46, Issue 8 - September 2011

GuestBook

 

Do You Pay Spec Fees?
Avoiding Conflicts of Interest
by Michael Collins

Would you offer a lavish gift in hopes of turning up in an architect’s spec? If you say no, others are saying yes. In recent months I’ve encountered stories from several manufacturers in the industry regarding architects and specification fees, or “spec fees.” These are fees given to an architect by a building product manufacturer. They are paid in exchange for the architect specifying the manufacturer’s products on, typically, a commercial or high-end residential project. Such product specifications usually bear the “no equal” qualifier. This means the specified manufacturer’s product must be used and no substitute will be accepted. That type of spec is appropriate if it generates from the architect’s genuine belief that the specified product is without peer and is the optimal solution for the project at hand. The problem arises, however, when the architect has essentially offered for sale the highest opinion he can pronounce on a building product.

Spotting Spec Fees
These spec fees can consist of readily identifiable items, such as cash or gold watches. They can also come in a form that makes it difficult to differentiate from thorough professional due diligence. For example, if an architect is flown to the Bahamas to inspect a manufacturer’s doors or windows in the field, who would know whether they could have inspected a similar product installation in their own city? Such trips can represent a soft spec fee and can lead to conflicts of interest.

The notion of a “conflict of interest” as a legal term is relatively new. According to a 2009 study by Michael Davis and Josephine Johnston, it was in 1949 that “conflict of interest” made its first appearance in a court case involving its modern meaning. Ten more years passed until any federal legislation addressed the term and its meaning. Two key legal dictionaries did not carry entries regarding conflicts of interest until 1967 and 1979. While they have only appeared in the legal lexicon in the past 40 years, conflicts of interest are relatively easy to spot. Like a beautiful piece of art, you know one when you see it. If one examines the economic transactions taking place in a given situation and is left feeling that it would be difficult to faithfully execute one’s obligations to all stakeholders, a conflict of interest most likely exists.

Condoning Conflicts of Interest
The National Council of Architectural Registration Boards (NCARB) and the American Institute of Architects have made their position on conflicts of interest very clear. The rules of conduct of both organizations state that conflicts of interest should be avoided whenever possible and must be fully disclosed when they cannot reasonably be avoided. More to the point, the NCARB rules state that an architect “shall not accept compensation for services from more than one party on a project unless the circumstances are fully disclosed to and agreed to … by all parties.” The concept behind such disclosure is that if the client is aware of the potential conflict and still proceeds, buyer beware is the controlling rule.

Everyone involved in a building project, especially the client, assumes that the architect’s loyalty is staunchly to the primary client compensating them. If this trust erodes, consumer confidence will deteriorate quickly, adding mistrust and inefficiencies to the building process. Who among us wouldn’t question an architect’s specification of a given product with no possible substitutions if we knew the architect had received lavish perks from the manufacturer of that product?

As in most professions, the vast majority of architects likely would refuse to accept a spec fee or similar kickback from a manufacturer. The fact that some of them are doing so, however, suggests that others might or will. There is a particularly high risk because the slowdown in construction has directly impacted architects’ revenues. It is incumbent on architects to adhere to the clear and firm rules put forth by their professional organizations—that conflicts of interest must be avoided or disclosed fully. Manufacturers must refuse to take part in such payments and should probably sever ties with architects that demand them.

There is no job or series of jobs worth allowing the fabric of trust in this industry to be twisted and torn. Left unchecked, spec fees would become a race to the bottom in which every industry participant’s integrity would be questioned by consumers. We owe it to ourselves to adhere to time-honored standards of conduct so this will remain an industry of which we can be proud.

Michael Collins is a Chicago-based investment banker with a specialized merger and acquisition practice in the door and window industry.


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