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It doesn't seem ethical or legal. Is it legal?

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It doesn't seem ethical or legal. Is it legal?

A local private nonprofit organization asked local architects to bid on the design contract for its new building. The architect who won the project is the husband of a board member of the nonprofit. I have always believed that a board member's family would be excluded from getting work from the nonprofit. It doesn't seem ethical or legal. Is it legal?

It isn’t illegal or, in my opinion, unethical for the spouse of a board member to provide services to a nonprofit organization.  The legal question is whether the compensation is reasonable and the spouse who receives unreasonably high compensation from a 501(c)(3) charity or (c)(4) community or advocacy organization could be subject to excess benefits tax.  (See Ready Reference Page: Charities Must Avoid Excess Benefit Transactions”

Unless the funder of a project requires bidding, the ordinary private nonprofit is not required to bid any part of the project, although it is clearly a good idea for major purchases.  Even though it is not illegal or necessarily unethical to hire a spouse or even a board member, construction projects are particularly susceptible to insider benefit even with a bidding process.  Selection of design is clearly subjective and a bidding process could be a charade.  The bid price for the actual construction could appear to be “objective” until the change orders start coming in.  In the end, you have to rely on the integrity of the organization in dealing with insiders who supply services to it.  You can increase the likelihood of a good outcome with a strong independent project manager who oversees the project for compliance.

Tuesday, May 10, 2011

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Comments

May I add one additional note [implied but should be explicit]:  the board should a priori, for the record, sign off on their awareness of the relationship. Recusal is a tricky category, but the board needs to be on record that it accepted the bid and assigned the contract with full knowledge of the relationship.  If it then can show that it did some due diligence on fees, all the better. --R.M. via e-mail

Good point. --Don Kramer

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