One year after the demise of Rok and Connaught hit the headlines, how far has the repairs and maintenance industry changed?
A year ago this week Rok became the second major player in the repairs and maintenance sector to go under in as many months.
Its collapse left 3,000 staff without a job and a creditors’ bill of £360 million. Coming just two months after Connaught’s failure hit 113 social landlords, the industry was left reeling. Between them, the firms had a turnover of nearly £1.5 billion and their demise looked set to have a lasting impact on the way landlords and contractors do business.
So how has the failure of what were two major repairs businesses changed the industry?
Initially, the predicted upsurge in new tenders didn’t emerge quite as forecast. Most clients had been well aware of Connaught’s problems and had drawn up plans to ensure continuity of services should the company fail.
Lovell bought the right to first refusal on nearly 100 of Connaught’s 113 social Housing contracts, and other players stepped in to offer short-term cover for Rok.
Starting to show
But one year on, more of the collapsed giants’ work is coming to market and the first signs of change are beginning to show.
Apollo chief executive Dave Sheridan, who estimates his firm has picked up around £25 million of Connaught work, says clients are taking a much more active interest than before.
“They have become much more inquisitive around balance sheets and financial standings. There is more rigour around the pre-qualification questionnaire and pre-tender process,” he says.
“There has been a lot of dialogue around risk and clients looking to protect their maintenance services. Some clients have fragmented contracts to smaller, more local players; some have looked at taking the service back in house, like Liverpool Mutual Homes; and others are simply engaging more on the finances of contractors.”
There is now reluctance to offer large packages of work to a single contractor. Some clients have split work by region and type, introducing strict limits on turnover and the amount of work any one firm can bid for.
One firm that has benefited from the shift to smaller packages is Breyer’s new maintenance arm, B-Line. Together with Mitie and DW contractors, Breyer has taken on responsive repairs work for the housing association A2Dominion that previously was carried out entirely by Connaught.
Breyer divisional director Neil Watts says other social landlords are following suit. “You see it again with the £1.6bn Circle framework out to tender at the moment: there are constraints on how much of the work you can bid for. Waverley split its work up a lot too – there was an interview for each lot so we had a lot of interviews.
“Mears picked up the larger parts and smaller firms picked up the rest so they split the risk.”
One symptom of smaller packages of work is that contracts are often shorter.
United House chief executive Jeffrey Adams sees this as a good thing. The firm scaled back its expectations for repairs, predicting a tight market, only to find it will beat its targets.
Larger players such as Kier don’t see the fragmentation as a good thing, particularly when providers face massive budget cuts and need all the efficiencies they can get.
Kier managing director for maintenance Peter Brynes estimates the company has picked up £20-£25m of work after the demise of Rok and Connaught. But much of that is what he calls “short-term pick-up”.
“Most of it is now in the pipeline for rebidding, so it still remains to be seen who benefits the most. But packages have got smaller and more fragmented and I don’t particularly think it’s the right thing.”
Whereas the likes of social landlords A2Dominion, Circle and Harrow Council have spread risk among a number of contractors, other providers have opted to cut them out all together.
Hull, which used Connaught and Kier, and Bromford Group (see p12), which employed Connaught, have taken work back in house.
Bromford director of asset management Alex Dixon insists the move is no reflection on Lovell’s performance but it is clear the group feels more comfortable trusting in-house teams than leaving tenants at the mercy of the market.
Other clients have opted for a halfway house via joint ventures. The JV model usually involves the establishment of a special purpose vehicle that is owned by the client but staffed by the contractor. This reduces the VAT burden on the contractor and helps spread the risk between parties.
Kier, which calls its version the ‘whole ownership model’, has been approached by a number of clients.
Mr Brynes said: “We have been involved in one or two and there has been an upsurge in enquiries – it’s a model clients are very interested in looking at.”
Not everything has changed, though, says Mears chief executive David Miles. For every example of a client doing something differently, there are “50 others doing things traditionally”.
He plays down the extent to which contract size, length or type has been affected, painting a picture of a market almost unchanged by the collapse of Connaught, Rok or latterly Kinetics, which finally succumbed and went into administration in July this year, with the loss of more than 600 jobs.
Rok’s downfall is usually attributed to a combination of poor management and suicide bidding. Has the industry learned anything or are low bids still a common occurrence?
Poplar Harca hit the headlines when it introduced an anti-suicide bidding clause allowing it to investigate tenders where the price was radically below others.
The clause was introduced by estates director Paul Dooley – a former Rok employee – who says the effect has so far been limited.
“We are seeing bids 20 per cent lower than what our pre-tender estimates were and that’s generally across the whole market. It’s not any particular contractor.
“There was one bid that was 10-15 per cent below even that so we did some further research there. But it was hard to discount because the contractor was adamant it could do the work for that price.”
Mr Dooley dismisses the notion the market has learned any lessons, arguing it is inevitable that some contractors will always need work more than others.
Contractors agree that low bids are still prevalent, though each points the finger at its rivals.
Indeed, Mr Dooley claims the market is flooded with rumour, with each contractor tipping the next to go bust.
But Kier’s Mr Brynes welcomes Poplar Harca’s move on low bids, lamenting the lack of clients emulating it.
“I’m still seeing silly bidding in the market and my biggest fear is that Rok and Connaught won’t be the last.”
Breyer’s Neil Watts agrees. “I don’t think there is any real evidence that clients have learned their lessons but to be fair they have got budgets to adhere to and their own individual reviews will require them to make efficiencies where possible,” he says.
Isolated examples aside, it seems little has been learned from the failures of 2010, which, given the sheer size of Rok and Connaught, might come as some surprise.
But, as Mr Miles points out, perhaps Connaught and Rok weren’t doing as much responsive maintenance as everyone thought.
“If you look at what’s coming back out to tender there really isn’t that much,” he says.
“About 12 Connaught contracts have come back to market in responsive maintenance.
“Maybe the rest of it wasn’t really that type of work. If you think of the size of their turnover you would expect the ramifications to be huge but, really, not much has changed.”
Light at the end of the tunnel
For PwC head of housing Richard Parker, the failures of Rok and particularly Connaught were the result of an over-reliance on a single market: the work that was done to meet the Decent Homes target.
The end of Decent Homes was compounded by a decline in the new build market, making life extremely difficult for a number of contractors.
But while those conditions remain true of today’s market, Mr Parker sees “a chink of light” for the survivors.
“We produced a report earlier this year that said if local authorities run their businesses as they should over the next 30 years then there could be up to £50 billion of net rental surpluses that could be invested in housing,” he says.
The report suggested that scrapping the housing revenue account will give English councils more control of their rental
income, allowing them to reinvest in new homes.
Under the HRA, the £7bn income from council rents is paid to central government and around £5bn redistributed among local authorities. The rest is used to meet the cost of the £21bn of council housing debt.
But from next April, under plans in the Localism Bill, councils will be able to keep their own rental income. In return they will take on a share of the £21bn housing debt as part of a 30-year business plan.
PwC found that if rent were to increase by just 0.5 per cent above inflation, as projected by the government, councils could be in surplus by £54bn over 30 years – £25bn in today’s money.