This is the August 2022 edition of our monthly series of Ethics case studies titled What Do You Think? This series is comprised of case studies from NSPE archives, involving both real and hypothetical matters submitted by engineers, public officials and members of the public.
Your peers and the NSPE Board of Ethical Review have reviewed the facts of the case as shown below. And, here are the results.
Your opinion has been registered for the August 2022 edition of our monthly series of Ethics case studies titled What Do You Think?
Your vote is recorded as:
Want to know how your peers voted? We’ll send you an email with the poll results on August 23.
Your opinion has been registered for the August 2022 edition of our monthly series of Ethics case studies titled What Do You Think?
Your vote is recorded as:
Want to know how your peers voted? We’ll send you an email with the poll results on August 23.
A Review of the Facts
Engineer Nick is a licensed professional engineer and owner of a corporation providing engineering services. The engineering corporation performs building inspection services for a variety of clients in the public and private sectors. The services provided by the engineering corporation generally include the coordination of engineering services involving more than one engineering specialty.
Nick is asked by a client to coordinate multidisciplinary services to be provided by several engineering firms. Nick proposes to bill the client for the coordination services, and Nick will also charge each of the engineering firms a “referral fee” for selecting the firms on behalf of the client. Nick’s coordination and referral charges will be outlined in his agreements with the client and the engineering firms. The agreements will also assign professional liability insurance responsibility to the specific engineering firm providing the services. Nick is not providing any services directly to the other engineering firms other than the opportunity to perform the services for the client under the coordination of Nick.
Was it ethical for Nick to charge the other engineering firms a “referral fee” under the circumstances described?
Here is the result of our survey of your peers:
Applicable NSPE Code References:
Code II.2.c
Engineers may accept assignments and assume responsibility for coordination of an entire project and sign and seal the engineering documents for the entire project, provided that each technical segment is signed and sealed only by the qualified engineers who prepared the segment.
Code II.5.b
Engineers shall not offer, give, solicit, or receive, either directly or indirectly, any contribution to influence the award of a contract by public authority, or which may be reasonably construed by the public as having the effect or intent of influencing the awarding of a contract. They shall not offer any gift or other valuable consideration in order to secure work. They shall not pay a commission, percentage, or brokerage fee in order to secure work, except to a bona fide employee or bona fide established commercial or marketing agencies retained by them.
Code III.5.b
Engineers shall not accept commissions or allowances, directly or indirectly, from contractors or other parties dealing with clients or employers of the engineer in connection with work for which the engineer is responsible.
Discussion
Engineers provide a multitude of professional services in a variety of ways. In addition to their vast technical expertise, professional engineers are frequently called upon by their clients to offer project management, construction management, and other coordination and scheduling services as part of the design, renovation, and maintenance of constructed facilities (see Code II.2.c.). The education and experience of engineers make them uniquely qualified to perform these and other services for the benefit of their clients. However, it is important to distinguish the arrangements for the coordination of professional and other services for the benefit of a client and arrangements made between the engineering firm and the firms selected to perform the services being coordinated by the engineer.
The subject of a “referral fee” has been considered by the Board on other occasions. In BER Case No. 92-3, Engineer A, who performed building inspection services, was contacted by IJK, Inc., a firm that referred companies to professional engineers that perform building inspection services. IJK, Inc. and similar companies were involved in assisting relocating employees in the sale and purchase of residences. Typically, IJK, Inc. made contact with the client, took an order for a job, and passed the order on to the professional engineer available in the geographic area. Engineer A performed the services, prepared a report, and submitted the report to IJK, Inc. Engineer A invoiced IJK, Inc. for his services at half what he would normally charge to another client for the same services. IJK, Inc. invoiced the client for its services, twice the amount that is charged by Engineer A, a fact later learned by Engineer A. IJK, Inc. had no exclusive contractual or business relationship with Engineer A, and IJK, Inc. possessed no engineering expertise.
In determining that it was unethical for Engineer A to continue association with the referral firm after learning that IJK, Inc. was indicating a fee for Engineer A’s services to the IJK, Inc. client that was different from the fee charged by Engineer A, the Board noted that the fact that IJK, Inc. typically makes contact with the employer, takes an order for a job, and passes the order on to the professional engineer available in the geographic area suggests that IJK, Inc. was acting purely as a broker under the facts, and that Engineer A’s forbearance of his full fee constitutes payment for valuable consideration in order to secure work, prohibited by Code II.5.b.
In addition, under the facts, it was clear that Engineer A performed all necessary services and prepared the report for the actual client. IJK, Inc. provided no benefit to the client other than simply passing the professional report prepared by Engineer A to the client. IJK, Inc. appeared to be acting purely as a “go-between” and did not appear to be adding any value to the services purchased by clients even though such clients are paying a significant fee for the involvement of IJK, Inc. The Board was particularly disturbed by Engineer A’s continued association with IJK, Inc. after learning that IJK, Inc. had indicated a fee for Engineer A’s services on the IJK, Inc. invoice to its client that was different from the fee charged by Engineer A. On the face of it, IJK’s practice misrepresented Engineer A’s actual fee and was judged a deceptive practice.
Turning to the facts of this case, while there are similarities between this case and Case No. 92-3, there also are some differences. For example, unlike the situation in Case No. 92-3, in the present case, Nick is providing a service—coordination of services—for the benefit of the client. In Case No. 92-3, it is clear that IJK acted purely as a “go-between” and did not appear to be adding any value to the services purchased by clients.
Nonetheless, a key point in the present case is that Nick appears to be creating an arrangement that would force the other engineering firms to violate Code II.5.b. by requiring those firms to pay a “referral fee,” thereby paying what amounts to a commission and offering valuable consideration in order to secure work. It is clear that Nick is not a “bona fide employee or bona fide established commercial or marketing agency retained by those firms,” but instead is acting as the coordinating engineer for the benefit of a client. Nick is being compensated directly for the coordination service by the client, and the Board can see no basis to justify Nick’s requirement of a “referral fee” to be paid by the other engineering firms. There is nothing to indicate any basis for such a payment to Nick. In addition to being a violation of Code II.5.b., Nick’s actions create the appearance of an engineer exerting undue pressure on other engineers in order for the engineers to gain access to work. There also appears to be a not so subtle message being conveyed to the other engineers: Future work for your firm is based upon an understanding that you will pay a referral fee to me.” We believe that this amounts to a “kickback,” is unethical, and cannot be condoned under the language of the NSPE Code of Ethics.
The Ethical Review Board’s Conclusion
It was not ethical for Nick to charge the other engineering firms a “referral fee” under the circumstances described.
BOARD OF ETHICAL REVIEW
James G. Fuller, P.E.; William E. Norris, P.E.; Paul E. Pritzker, P.E.; Richard Simberg, P.E.; Jimmy H. Smith, P.E., Ph.D.; C. Allen Wortley, P.E.; Donald L. Hiatte, P.E., Chairman
Note – In regard to the question of application of the Code to corporations vis-a-vis real persons, business form or type should not negate nor influence conformance of individuals to the Code. The Code deals with professional services, which services must be performed by real persons. Real persons in turn establish and implement policies within business structures. The Code is clearly written to apply to the Engineer and it is incumbent on a member of NSPE to endeavor to live up to its provisions. This applies to all pertinent sections of the Code. This opinion is based on data submitted to the Board of Ethical Review and does not necessarily represent all of the pertinent facts when applied to a specific case. This opinion is for educational purposes only and should not be construed as expressing any opinion on the ethics of specific individuals. This opinion may be reprinted without further permission, provided that this statement is included before or after the text of the case.
I just don’t see why it’s unethical other than it goes against the code of conduct. If it was prearranged by the engineering company to gather a list of other engineering firms to do the work and the companies picked are asked to pay a referral fee and they agree to it, it shouldn’t be unethical. The engineering firm is putting himself liable for referring those other engineering firms however. I guess that’s another issue.
“I just don’t see why it’s unethical other than it goes against the code of conduct.”
It’s unethical because the Code is the very definition of the ethics. Not to be confused with morals, ethics in business are a set of principles of right and wrong conduct defined by the particular group to whom they apply and used by that same group to govern their own conduct. What is ethical for an engineer to practice may vary somewhat from what is ethical for, say, an attorney or an accountant in their practices based on the set of rules for conduct each profession upholds.
Easy choice simply based upon common sense.
If Nick wasn’t a Professional Engineer, it would just be business as usual with no ethical conflict. The firms paying the fee did it willingly in order to be awarded work.
We/I have been in this situation and resolved issue by providing consultation and support on behalf of the client. Tracking progress, attending meetings etc. you cannot pay yourself or pay someone else a finders fee in our profession. Lots of industries around us do and they will expect a finders fee for finding work opportunities but must be educated
Nick has the right idea, which is that he is entitled to make a reasonable profit for assuming some risk in putting the team together; however, the problem is with Nick’s business practices. What Nick needs to do is to negotiate a subcontract agreement with the other specialty engineers, then add them to his agreement with the owner by name as subcontractors. Then in Nick’s contract with the owner, Nick needs to specify that Nick’s fee will be based upon reimbursement of time for direct employees, and an additional fee of 10% (15% sounds a bit high) added for any costs or subcontracts passed through the contract, which would include subcontract costs. The specialty engineers would bill Nick for their services, and Nick would in turn bill the owner the subcontract cost plus 10%. I spent over 4 years managing engineering projects, construction management contracts, inspection services, and design-build projects, and it was standard practice in the industry to bring out-of-house specialty engineering firms on board the project in this manner. Nick’s intent is not unethical, rather he simply needs to get his business practices in line with standard industry practice.
Correction, I meant to say 40 years, not 4 years.
In the past I regularly experienced this situation when working with architects or contractors with architects on staff, only with a twist. The twist was the referral fee was not paid in dollars directly so much as it was in, ‘you bring us work and we will include you in the project, if you bring us enough work we may include you in one of our projects’. This is just another version of ‘pay to play’. I rarely work through an architect anymore and my business has survived and even thrived with exciting and challenging projects.
Another ethical conundrum. Is it ethical for an engineering consulting firm to propose a person for a project that is not an employee of the firm?
This may be legal but marginally unethical. Nick has been compensated for his work by his client. In the ” Old School” way of doing business, it would have been standard practice for the engineering firms receiving contracts from the referrals to offer Nick a commission; on at least the first project from that specific customer.
I think is unethical because the “referral fee” may bring in any company willing to pay any fee just to get the work. This company may not have the best experience to do a quality job impacting the job schedule.