Contractor ethics on budgets - should I choose and buy parts myself, or tell the client what I need and have them choose?

Question

I run a business where sometimes I'll go into a client's premises and install network infrastructure. Most of my clients are small business firms which have no IT staff. Nearly in every case they don't have the equipment they need (from routers and switches to server racks and UPS).

Usually I buy the equipment, or have someone from my staff buy them from local suppliers (after the client had approved the budget). One day my father scolded me for doing so. He says that since I'm doing the listing, price analysis and the buying, he would have reasons to believe I may be inflating the prices of the parts and materials, so as to collect the difference between what's in the budget and the actual price as profit, while masquerading my actual profit and labor costs to make them seem smaller. Or, in the case of some parts that we buy from local makers (i.e.: wires), it could be that I'm being paid off by the manufacturers. He said the honorable thing to do is to give the shopping list to the contractees, and let them buy everything on their own.

I always take what he says seriously because:

• I learned my job from him;
• He used to be my main client for a long time;
• He is my father, after all.

But I've done as he says before. Before having a firm I worked alone, and I once told a client that I need a router with some capacities. The client just bought the cheapest he could find in 10 minutes, which lacked the feature I planned to use. I wrote down the features I needed to complete the project, as well as a list of complying models, but that only led to a whole night having to explain to a laysperson why the cheapest options don't always do what we want them to do.

With another client, I just gave a list of parts I'd need for a few machines, and he said:

That's why I pay you the big bucks. I don't understand a f*** of what you've written here, and I don't want to. No one in my staff speaks tech language, so do your job and bring these parts here yourself.

So in one hand I see what I am doing as part of the service - if my clients were knowledgeable in IT they wouldn't need to hire me in the first place. On the other hand I understand my father's point of view. For the very same reason that I'm an expert and my clients are layspeople, the only thing keeping me from buying a $10 device and billing it as a $1,000 cost is my honesty.

What is the ethical way to go? Keep doing it as I'm doing? Giving the shopping list to the client and let them deal with it? Are there laws about this kind of practice in places like the US or EU?

Answer 1

First, you can likely find the products at a lower cost than someone who does not have your expertise. If you buy enough, you might even get volume discounts the customers would never get for one-time purchases. You are also much more likely to get the right thing the first time (I don't go buy parts for my plumber or electrician when I need work on my house) which can save time. So it is in your customer's best interests for you to buy the equipment you need after agreeing to the budgeted cost.

When you bill them, you can also provide the receipts for the equipment to show you haven't padded the costs. But honestly, you could pad the costs some to account for the fact that you are one one taking the risk of paying for the equipment before the customer pays you. That is not unethical, it is making sure your business costs are covered. Business through the supply chain adds to the overall cost of the item which is why wholesale is cheaper than retail.

Certainly you would not want to add a large amount to the cost of materials or you would lose the bids for the work. But it is not unreasonable to purchase wholesale and sell for retail or slightly below. as that money could be used to cover your losses if you get a client who doesn't pay you or to help you have the money available to purchase equipment for the next client before he pays you. The markup is also to help you cover the costs of your business that are not just direct labor (such as electricity in your office or the salary of the receptionist).

Answer 2

What is the ethical way to go?

As part of your initial consultations, find out what are the expectations of the client. Are they expecting you to become their IT department while you're on the contract? Are they wanting lots of records about what you did and how long it took? In some cases, it may be worth discussing with a CFO if there are advantages to breaking things down one way or another.

Keep doing it as I'm doing?

I'd advocate having a conversation at the start that clears things in terms of how are things done and what works best for everyone. It may appear a lot like what you are doing now, but it may be better to know that this is what the client wanted.

Giving the shopping list to the client and let them deal with it?

This may work for some places where in the discussion they want to know what they are getting or record things in the books for themselves.

Are there laws about this kind of practice in places like the US or EU?

Consult a lawyer on this as I'm not a lawyer and wouldn't consider this legal advice in any way, shape or form. There could also be tax implications that make consulting a tax specialist also a good idea.

Answer 3

I'm sorry, but I think your father is completely wrong here.

I'm not surprised that a client said "do your job and bring these parts here yourself" - that's exactly what I'd say! If I was hiring an IT contractor to set up network infrastructure, and he told me I needed to buy all my own gear and then he'd come to set it up, I wouldn't think "my, what an ethical chap he must be!". I'd think "what the hell, screw this guy, I'm hiring someone else who will actually make my life easier instead of harder!"

As Ramhound suggested, keep the purchase orders/invoices/receipts. Itemize the purchases on the invoice you give to your client. Then there will be no suspicion that there was any padding or profiteering on your part. Indeed, the invoice should err on the side of a pleasant surprise, if you warn the client that gear will cost a round number (say, $500) it should be more than enough to cover it, so they're pleased when the actual invoice lists $471.39 or some such for gear.

Answer 4

Well, first off, this isn't an ethical issue unless you are goughing your clients. At worst it is an appearance of impropriety.

Secondly, the solution is to talk to your clients in advance and determine what they desire.

Basic scenarios:

1.  You do it all.  Pick, buy and install.
2.  They pick and buy, you just install.
3.  You pick and then they buy (either by letting you use their account, directly or via reimbusement of itemized invoices).
4. They pick, you buy and install.

Which one they want will depend upon their abilities and priorities. Think of this as a chance to improve customer satisfaction.

Answer 5

There is a simple solution to this delima you have. Keep all purchases orders and provide them to your client. If they have hired you for a task, and you have determined they required certain hardware, its your job to implement the solution, this assumes you base your quotes on your intial projections for these costs.

As for your legal responsibilities I would contact a lawyer. It all comes down to the expectations of your client, if they want to purchase their new toys, then allow that to happen. Otherwise take your past experiences, continue to purchase the hardware, put keep all purchase orders.

Answer 6

There is nothing wrong with markup on parts your clients buy through you - just be fair or it will come back to bite you.

1. Get a contract

2. Get a contract

3. Get a contract

In that contract, stipulate that the parts recommended for installation are per your stipulation and that lesser inferior components could void any service contract, and if those parts incur additional troubleshooting time or effort to complete the project that you are not responsible.

As part of your service contract, stipulate that you will supply new or refurbished parts at YOUR discretion, and that you are the final arbiter of the solution or the contract is voided. "I'm sorry, we can't support that product, it's not on our list of supported items in our contract, we'd have to charge you extra for using it, and it has caused us grief, that's why we never use it or allow it on our contracts"

"No user serviceable parts inside".

I always give 3 possible solutions: The Cheap Gawd Awful Junk, Mid-priced Does The Job, and The Super Deluxe Country Club Solution.

Then base the outcome on the choice they make. I know it sounds like extra effort, but for non technical people, they need to see what happens at different price points.

For example, they choose The Cheap Gawd Awful Junk, well that includes additional support time and additional installation costs.

Try to get them steered towards the solution you want by making the middle look awesome and then if they get the middle or deluxe you win, and even they go for The Cheap Gawd Awful Junk then you still win by covering their bad choice with additional support money to YOU for their bad decision.

Get EVRYTHING in writing. In business, "friends" often become enemies overnite, and that contract will save your ass.

You can find some good service contracts out there, that may appear harsh when you read them, but realize the people who wrote those contracts got screwed over too many times. Your contract is your friend. If they won't sign a contract, walk away.

Answer 7

I sometimes have to get IT installations done (as a customer), and have found the following to be a very nice procedure. Basically the supplier offers to take care of everything, but there is good transparency and the customer has all the power.

1. Customer and supplier discuss the needs
2. Suppliers makes an offer including equipment+prices
3. Customer, replies with acceptence (go to 5), potentially minus a few items (either by stating to buy them directly, or by stating by which alternatives they will be replaced)
4. Supplier confirms that the alternatives are fine or discusses the consequences
5. Customer signes the final offer and the supplier gets started

Sidenote: if the supplier buys the item he also manages the warrantee, logistics etc, so I typically let them add a small margin on the buying price.

Answer 8

It seems pretty clear you are on safe ground here. You gave the client a budget and they approved it. If they had an issue with it, they would have raised concerns then.

If they raise an issue later, you have the receipts etc.

Since you are dealing with non technical people, you can't trust them to buy the equipment, and as you pointed out, they usually don't want to.

The only time you may have an issue is with Government work, in that case you just have to refund any amount you did not spend. You could do this with any client really as a gesture of good will.

Answer 9

Since you asked "are there laws": There might be trouble with warranties if the company is not the original purchaser of the goods. So one possibility would be that you select and collect everything, but that you are not the actual purchaser, which might put both of you into a better position if something goes wrong with the purchase.

On the other hand, companies often have problems with budgets. The department hiring you might have no problem paying you $2,000 more than your work is worth to cover for materials, but might have a real problem paying $2,000 for materials because it is a different budget. Truly stupid looking things happen because of budgets (I said stupid looking, not stupid).

If you are self employed in the UK, you have tax advantages and an easier life if your revenue is not too high. Buying for the client will increase your revenue. Imagine charging £2,000 to install a £10,000 item - suddenly you have £10,000 additional revenue which means you're a "bigger" company and will be treated different by the tax office. Similar things might happen in other countries.