The evolving repairs and maintenance market is forcing contractors to up their games as an increasing number of social housing clients take matters into their own hands.
- Slow burn of change
- Merger nerves follow United-Bullock
- Subcontracting issue
- New breed of competition for contractors
- Many approaches to going in-house
- Wholly owned option
Times are tough for social housing providers in the UK, with budget cuts placing increasing pressure on the delivery of repairs and maintenance to their existing stock.
How they address this pressure has become a talking point over recent months, with a number of councils and housing associations taking the decision to deliver these services themselves.
Peabody and One Housing Group are two of the highest-profile associations to have changed the way they have delivered R&M over the recent years (see case study).
Islington Borough Council has also brought skills in-house, having cancelled a 14-year R&M deal with Kier in August, which had delivered services on more than 30,000 homes.
Slow burn of change
There are a number of key factors prompting these moves, including financial pressures, consolidation among contractors and dissatisfaction with their performance.
But it’s fair to say this decision by social landlords has not been quick one.
“It has been a slow burn,” one contractor tells Construction News, predicting that more housing associations will bring R&M skills in-house over the coming months.
So what is to be expected from the £7.5bn sector in the months ahead? Is this trend purely cyclical and, if not, what can contractors do to counter this?
Anthony Collins solicitor Andrew Millross agrees the move has been more of a “steady trend” rather than an “overnight” switch.
“The VAT change was when social landlords started to think about it. They were thinking, ‘Are there ways of delivering maintenance without it costing more than I’ve budgeted for?’”
Andrew Millross, Anthony Collins
He says the impetus came from the change in the VAT regime in 2011, which saw VAT for R&M raised to 20 per cent from 17.5 per cent.
By bringing skills in-house and employing operatives through a direct labour organisation, a housing association can avoid paying tax on labour costs, which is a big incentive.
Tellingly, councils do not pay VAT on R&M so this is not a factor in them bringing services back in-house.
“The VAT change was when social landlords started to think about it,” Mr Millross says.
“But it is not because the 2.5 per cent was significant – it just wasn’t in their budgets. So they were thinking, ‘Are there ways of delivering maintenance without it costing more than I’ve budgeted for?’”
The VAT change coincided with a few R&M contractors falling into administration, including ROK, Connaught and Kinetic.
An administrator was this month appointed to contractor RR Richardson Maintenance Ltd.
Merger nerves follow United-Bullock
In September, major R&M contractor United House merged with Bullock Construction.
Mr Millross says such M&A activity is making social landlords such as housing associations “nervous” due to the impact this will have on R&M contracts.
One Housing Group chief executive Mick Sweeney explains: “It would be a concern because the contractor you have done your due diligence on and have ended up being happy with would inevitably have a different approach.”
A source at a second major association agrees: “There are concerns within the sector regarding takeovers and consolidations.
“Registered providers need to be sure the new organisations can deliver the same services and standards as agreed under the previous contract.”
Case Study: Peabody Group Maintenance and Waltham Forest
Peabody is one housing association that is taking repairs and maintenance into its own hands, delivering services to 1,700 of its homes in north London.
Peabody Maintenance Group is a subsidiary of the Peabody Group based in Walthamstow, Waltham Forest, and was created in October 2013.
Within one year the group’s turnover reached £1.8m, enabling it to repay Peabody’s initial investment back in full.
PGM estimates that has been able to make cost savings of around 11 to 12 per cent, by cutting down on its use of subcontractors.
The business employs 28 local staff, including five Peabody residents.
Peabody plans to extend this service to other parts of the group. There are also plans to implement a mobile working IT system to increase working efficiency and productivity.
Bringing services in-house gives associations a greater control of the workforce, particularly over reactive repairs, where additional costs can be added if the work is contracted to an external contractor.
Certainly poor performance and dissatisfaction generally with the services provided under some contracts are seen as a consequence of ‘suicide bidding’ that took place in the troughs of recession, when many of these long-term contracts were let.
“Contractors need to stop bidding at unrealistic tender prices and then attempt to recoup money through extras when the contract is up and running”
Mick Sweeney, One Housing Group
As a result, there has been an increasing number of disputes over payments, Mr Millross says.
One Housing Group’s Mr Sweeny agrees this is an issue. “Contractors need to stop bidding at unrealistic tender prices and then attempt to recoup money through extras when the contract is up and running.”
This was one of the reasons OHG decided to set up subsidiary company, One Direct Maintenance Limited, six months ago.
It is already carrying out minor works, voids and major repairs and in March 2015, will have a newly procured IT system to help the group with reactive repairs.
ODML has a targeted turnover of £27m and 210 staff when fully operational.
“We would expect in three years’ time to have all our basic property work carried out by ODML except from our very specialist contractors,” Mr Sweeney says.
He says the key reason for pulling skills in-house was the sheer volume of work being subcontracted to other contractors.
“They need to look at seriously reducing the amount of work that is subcontracted out of which we have no influence or control,” he says.
“The way contracts are written up means we end up with a substantial amount of the work subcontracted – some of the people turning up to our residents don’t even know who they are working for.”
Mr Sweeney wants his repairs and maintenance team to think long term about the buildings they are working in.
“When we get ours established we will be quite happy to provide a service to other smaller associations”
Mick Sweeney, One Housing Group
“If we have our own workforce, they will get to know the property better and won’t just do the works order on the job sheet but will look at it more holistically, so if there is another job that needs doing they will do it.”
He is frank in his assessment of the current approach: “The whole model is broken, really.
“There tends to be an approach where a bid team will present all the quality side of what we might get from entering into a relationship, but when the job is won and the thing is set up… the bid team has moved onto somewhere else.”
He adds that “behaviours” have not changed, with contractors failing to address these concerns that most housing associations have.
But Mr Sweeney believes most associations that make the move will be the large organisations with the capacity to do so.
New breed of competition for contractors
Perhaps worryingly for contractors, housing associations like One Housing Group that have set up their own in-house service could now be looking to compete in the market, offering services to other social landlords that don’t have capacity or skills to do the same.
“When we get ours established we will be quite happy to provide a service to other smaller associations,” Mr Sweeney says.
Not everyone feels the threat is so stark, however, as one anonymous contractor puts it: “These things are cyclical; we’ve been here before.
“When things get tough all clients think they can run R&M better and cheaper themselves and this may be the case for a year or two.
“But then they lose touch with market forces and with what’s happening in the marketplace and all of a sudden they get fatter and fatter because they have got nothing to keep them on their toes.
“So you’ll find there’ll be another cycle of outsourcing again.”
Case Study: Osborne Property Services and Dacorum BC
- Client: South Hertfordshire Council
- Awarded: March 2014 for services to begin on 1 July 2014
- Value: £236m
- Scope: 10,500 homes
- Length: Five years, with the option to extend annually
- Works: Housing repairs, planned refurbishment works, call centre services, technical services and strategic asset planning
For OPS managing director Nick Sterling, investing time and money in early engagement is key to winning and retaining a successful contract.
The team invested a six-figure sum in the mobilisation of a £236m contract with Dacorum Council, Hertfordshire.
OSP says it has achieved 98.9 per cent of routine repairs on time, completed 100 per cent of emergency, out-of-hours calls and cut the turnaround time for void properties to be re-let to 7.8 days.
“Some of the DLO decisions are being made for the wrong reasons,” Mr Sterling points out.
“If you go back to the start of the contract, with the correct specification, choosing the correct partner to work with, you’ll find you get better value for money and a better service all round, rather than forcing the need to go DLO.”
OPS set out 10 targets for each main area of the Dacorum contract to manage the client’s expectation on performance. They included zero redundancies and working closely with residents.
On IT – described by the firm as the “Achilles heel” of responsive repairs contracts – OPS extended its IT system to Dacorum council.
The contractor also used existing stock data on Dacorum’s homes, merging it with its own surveys to ensure planned maintenance began on 1 July, and engaged a new, local supply chain after holding a suppliers’ day in partnership with the council.
He says that when conditions begin to improve, social landlords will not want the “hassle” of managing a DLO and will believe they can get it done more cost-effectively elsewhere.
That said, with increased competition, market consolidations and restricted budgets, there is little doubt of the need for some contractors to up their game to work harder to win and retain relationships with clients.
As Osborne Property Services managing director Nick Sterling observes: “Trust is hard won but easily lost.
“The better organisations are those who never become complacent but continually seek to innovate and challenge the status quo.
“Most importantly, they listen to their customers and work with them to shape the service to their needs.”
OPS is one organisation that has offered a different approach to competitors in this space in recent months, investing heavily in early engagement with clients.
“Good contractors have evolved their approach to be about true partnership. This means full transparency, banishing a blame culture”
Jane Nelson, Mears Solutions
Likewise, contractor Mears has set itself apart from other, offering a more tailored approach to its clients.
Mears Solutions executive director Jane Nelson says: “Good contractors have evolved their approach to be about true partnership.
“This means full transparency, banishing a blame culture by looking to find solutions to problems by working together, and by both partners putting tenants and residents at the forefront of service delivery.”
Many approaches to going in-house
The trend to move away from outsourcing repairs and maintenance contracts is taking many guises as housing associations look to save money and contractors respond.
A simple option is a direct labour organisation, where the housing organisation employs the maintenance workforce within the housing organisation itself. The housing organisation is in control.
But there are models where either an external contractor is employed to provide consultancy advice on running the DLO, or the “insourcing” model where the contractor is employed to run the DLO on behalf of the housing organisation.
This approach has been pioneered by Mears Direct – Mears’ insourcing business – which was contracted by Epping Forest District Council as its repairs management contractor to look after its housing repairs service.
The contract was said to be one of the first of its kind in the country and was created to bring together the local authority’s public sector commitment and the private sector’s best practice, cost savings and efficiencies.
Mears Solutions executive director Jane Nelson says her company understands that some social landlords prioritise risk transference and external investment, whereas others prefer the control that direct delivery brings.
“Mears Direct provides social landlords with another option by offering support to manage DLOs or subsidiaries,” she says.
The group has also developed its own IT ‘works order management system’ for social landlords looking to self-deliver a repairs service. Ms Nelson says the system reduced the average time to complete a repair from 33 days to six.
Wholly owned option
Another approach to bringing skills in-house is where the workforce is in a separate organisation that is a wholly owned subsidiary of the housing organisation – like One Housing Group’s ODML.
A variation on this is where the workforce is in a wholly owned subsidiary, but that workforce delivers their work under the direction of an external contractor.
Social landlords can also form JVs with contractors.
The joint venture could either be nothing more than a contract with an external contractor or a joint-venture organisation jointly owned by an external contractor and the housing organisation – but this is quite rare.
Typically these are 50/50 owned, although the housing organisation sometimes has a slight majority of the shares so that a VAT group can be formed between the JV organisation and the housing organisation.
The proof of whether contractors are evolving to see off in-house competition will become apparent in the next 18 months when many long-term R&Mcontracts come up for renewal.
In the meantime there is much to play for.