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Why should developers get stuck into procurement?

Until recently, the need for developers to really get their hands dirty with construction was limited.

Much like ordering a book on Amazon, you could have your QS run a beauty parade of the usual suspects and come back with a nice fixed price, keeping you and your bank happy.

As the market has heated up post-recession and with the skills crisis growing worse, several changes have occurred. These matter because the cards inevitably get stacked against anyone without a massive balance sheet.

And in a land where we need diverse housing – and where David Cameron has promised 400,000 homes – structural issues are holding many back.

Before the financial crisis, large contractors were shifting away from direct contracting. The move to ‘management contracting’ coincided with an enormous hike in demand and a rampant subcontractor market.

The death of single-stage design-and-build tendering followed and this was a significant shift, as main contractors struggled to fix a price in one hit. Stories of bricklayers walking out to go to other sites and earn more money haven’t been over-played.

“We cannot just blindly employ a QS to undertake a tendering process”

Even two-stage tendering (where we select a contractor and then jointly work up the price) takes much longer as the main contractor seeks to back as much of their risk off against their supply chain before fixing a price.

Huge disadvantage

What this means is we cannot just blindly employ a QS to undertake a tendering process and hire Construction Company plc to carry the risk.

Lenders base their risk assessments typically on a borrower’s balance sheet and often, perversely, their turnover. This puts relatively new firms at a huge disadvantage.

Having a fixed-price contract with a large balance sheet contractor gives a lender comfort that a large part of their risk is mitigated, regardless of how much of that risk is priced in to the fixed price.

For a company like Hub, which was barely a year old at the time, the scale of delivering our £80m twin-tower Hoola scheme in Royal Docks was huge. Unsurprisingly, Carillion, who we appointed, had and still have a much bigger balance sheet than us.

“It’s not just start-ups like Hub whose balance sheets are over-shadowed by contractors”

We would have struggled to raise competitive finance to deliver that without having such a big gun strapped to our waist at a fixed price.

Given the nature of development, it’s not just start-ups like Hub whose balance sheets are over-shadowed by contractors; most, other than real estate investment trusts and volume housebuilders, will be too.

This is what makes them more acceptable to third-party funders: if the developer goes bust then the bank still has a fixed-price contract to step into, and ultimately flats to sell at the end of the process.

Know your risk

The solution for everyone is to take more of an interest in the process, understanding where risk lies. This means getting deep into the detail – particularly around structural design, building services and engineering.

Creating efficiencies early on – and involving construction professionals to ensure things can be built well and quickly – is utterly crucial.

Doing this has enabled Hub to create a pipeline of 1,250 homes from a standing start, lining up two of the UK’s first designed-for-rent PRS schemes with M&G in Acton and Fizzy Living at the Old Vinyl Factory in Hayes. 

It also means understanding the procurement process: acknowledging that tendering to a cast of thousands and picking the cheapest isn’t the way to achieve best value. Moving nimbly when negotiating a construction contract is what gives us the upper hand. 

“Therein lies the future: developers taking more control in order to minimize risk”

For our Material Store scheme at The Old Vinyl Factory, we (with our consultants Faithful & Gould) put the whole contract together ourselves. We worked with Henry Construction to build up a really detailed understanding of the shell and core.

We then brought in Interserve’s fit-out team to drill into the detail of the rest and bring everything into one contract under their name.

Take the reins

Rather than run a competition for the job, we got our hands dirty and dug away at the best deal. And therein lies the future: developers taking more control to minimise risk.

Just as development has been dominated by volume housebuilders, construction too has seen many family-owned, medium-sized contractors fall away, or consumed by larger multinationals.

It could be argued that this has been hugely detrimental to the sector on many levels. But with a bit of flexibility there are always ways of getting the best of both.

As a small firm delivering a sizeable portfolio of homes, being able to get an answer without going through a dozen layers of management is vital.

So just as we’ve seen value getting under the skin of construction and getting into the detail, big contractors would do well to remember that it is people and not process that get great buildings built.

Steve Sanham is the development director of Hub

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