While business contracts are legally binding documents, they are only effective within an ethical framework that assumes most parties observe and fulfill their contractual obligations. Competing for, obtaining and satisfying contracts ethically is the basis for an efficiently functioning economy. If your company engages in unethical behavior, you may lose contracts, especially those with governments, and waste valuable resources in legal entanglements with contractual partners seeking damages.
Determining Prices Ethically
You have to have some basis for determining your prices, such as cost plus profit or market levels. Setting the prices for your contracts in this way is ethical, while basing your prices on manipulation or hidden factors is not. Once you have calculated the contract price, you have to ensure that you present it in a transparent fashion, without hidden costs. An ethically negotiated contract strikes a balance between the benefits to the supplier and purchaser. The successful execution of such a contract delivers advantages to both parties, and both parties have a stake in avoiding problems.
Avoiding Conflicts of Interest
Some conflicts of interest are ethically unacceptable, such as bidding on work for which you decide who is awarded the contract, but you can avoid other types of conflict of interest with transparency. When a conflict of interest arises because of factors beyond your control, such as your company considering a contract with a supplier in which a member of your family has an interest, you have to address the issue publicly. Ideally, you declare the conflict and refrain from participating in the relevant decisions, possibly asking the family member to do the same.
A competitive market gives you feedback on the value you are offering to customers as compared with your competitors. When you obtain a contract through fair competition, you know that you have been successful in presenting exceptional value. When a competitor receives the contract, you have to work on reducing prices or increasing quality. Unfair competition through collusion or price fixing, when you secretly agree on elevated bid prices with your competitors, is not only unethical but hurts the effectiveness of the market. Companies that don’t present good value receive orders at the expense of those with the best prices and highest quality. Market signals are distorted and all market participants lose out in the long term.
Observing Laws and Regulations
Laws and regulations protect the consumer, employees and other market participants. When you develop an offer and sign a contract, you have to keep legal and regulatory constraints in mind. Even if your adherence to laws is not likely to be verified, an ethical company prepares and executes contracts within such constraints. When you are in doubt as to the legality of contract provisions, it is good ethical practice to err on the safe side and avoid legal problems that come with trying to define the exact legal limits and coming too close to borderline practices.