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Renovation, Renovation
Supply Management – 19 January 2006

Government targets for the provision of decent homes will entail an intense programme of refurbishment, including bulk buying, by social housing providers. Mark Smulian examines what the impact will be for procurement

Social landlords have only four years left to bring all UK social housing stock in line with the government's Decent Homes Standard (DHS). The standard demands that by 2010, homes must be in a reasonable state of repair. In most cases they must also have a kitchen no more than 20 years old, a bathroom under 30 years old, as well as adequate noise insulation and efficient heating.

Back in 1997, three years before the DHS target was introduced, there were 2.1 million homes in need of basic renovations, creating a 19 billion backlog of improvement work.

Progress has been made since then and this figure has been reduced to one million flats and houses. Nevertheless, if housing associations and local authorities are going to meet the 2010 goal there will have to be a "spike" in refurbishment over the next two years, creating a burden on procurement right at the time when the government is keen to promote efficiency to meet Gershon's savings targets.

To help procurement meet these demands, the Office of the Deputy Prime Minister (the architect of the standard) has set up the National Change Agent for Social Housing Capital Works (NCA Housing), managed by property firm Davis Langdon and solicitors Trowers and Hamlins. Its remit is to help social landlords, including housing associations, local authorities and partially and privately-owned bodies - known as arms-length management organisations (ALMOs) - to collaborate through the establishment of procurement consortia.

Until now, councils and housing associations have generally bought their materials for renovation individually. Although some choose to work together, this has not been common. But through better purchasing such as collaboration it is hoped social housing procurement will make savings of 340 million over the next two years alone.

But it is not plain sailing. Some social landlords are sceptical about the benefits claimed for consortia, and there is concern among contractors that bulk buying could hit their profits and create further problems in construction supply chain relationships.

Pros and cons

Five consortia have been established to date with more likely to follow Between them they expect to spend more than 2.5 billion - the sort of buying power that should give them substantial clout with suppliers.

John Connaughton, who heads NCA Housing, says: "The idea is that by aggregating demand, one can get a better deal in the marketplace and exert greater influence on the supply chain to deliver improved value and efficiency."

Another expected benefit is that consortia will help to lead a move away from the construction industry's rather combative approach to doing business by offering greater guarantees of longer-term contracts.

As Connaughton points out, the consortia will work with contractors that have been successful bidders so both sides will have a long-term commitment to collaboration and harmonious relationships.

But not everyone is a fan of consortia. Matt Cooney, chief executive of ALMO Solihull Community Housing (SCH), explains why his organisation has not taken part in the project. "Membership of a consortium means contributing to its overheads, and I am not happy to leave procurement to someone else. We could end up with the wrong specifications."

SCH has its own partnership with building firms Frank Haslam Milan and Mansell Construction Services, as well as Radway doors and windows and Excelsior lifts. With 115 million to spend over nearly five years, Cooney feels he can get acceptable prices on his own.

Ingrid Reynolds, development director at Notting Hill Housing, one of the UK's largest housing associations, says it will join consortium Buy4London, despite some scepticism arising from earlier experiences. It is joining because the scale of decent homes work appears to make membership worthwhile, but, she says: "We went through a consortium process previously for day-to-day repairs and new build programmes and we thought we could get better rates ourselves."

Another chief executive says the government's support for bulk procurement leaves little choice. "I'm very sceptical of the benefits, but when the government inspectors come you need to show you are bulk buying."

Connaughton concedes there are differing views and that there can be costs as well as advantages. Materials and labour can be procured jointly or separately, depending on the nature of the work and the deals on offer.

"Those agreements that separate materials and installation tend to need more management effort, but they give potentially greater rewards," he says. Savings can be made on both labour and materials and the consortium can organise the flow of both. "Some landlords are reluctant to join, but I hope the prices consortia achieve will make others look again and say 'we want some of those savings'."

How it will work

Two consortia, London ALMO Procurement Network and GM Procure, are working with consultants - Collaborative Working Centre and Valueworks respectively - for their procurement. The other consortia expect to rely on procurement professionals seconded from member organisations.

London ALMO Procurement Network, led by Gordon Perry, chief executive of Kensington & Chelsea Tenants Management Organisation, is also the largest consortium in spending terms, with a 1 billion war chest. Perry explains: "We will have framework agreements. There will be a variety of contractors, so that each ALMO will have several to choose from.

"Winning a framework contract is more significant than being on an approved list because firms are, in effect, guaranteed work and so should give our members better prices."

The Buy4London consortium has decided to procure materials separately from installation, because it expects to achieve better prices than a contractor that makes a conventional bid to provide both. Linda Campling, Buy4London's project manager and head of procurement at East Thames, says: "We will send a questionnaire to members on the range of materials they need."

Buy4London will soon pilot its framework contract for installation. "There is no guarantee, but obviously if you appoint a contractor to a framework it is someone you want to deal with and they can reasonably expect a flow of work."

She points out that while Buy4London members, in common with those of other consortia, are not obliged to buy through it, in practice they would need a good reason not to. This is because associations must submit annual statements to their regulator, the Housing Corporation, showing what they have done to improve efficiency. "They would have a hard time justifying buying outside the consortium in their efficiency statement unless they had found a really good deal," she says.

Another task for consortia is to try to plan workflows so that no site is swamped with materials, there is always someone available for installations and there is not a sudden excess demand for one commodity.

Connaughton says all supply chain members can help to avoid these spikes with a willingness to alter the start and end times of projects according to available capacity, keeping each other informed of progress and agreeing the order of works.

As part of its work with GM Procure, Valueworks will conduct supplier negotiations, although landlords will specify materials. Chairman Ian Perry says: "Once specification is agreed we will use Valuework's experts to do the buying and distributing so we get the benefit of their specialist skills. Contractors can call off materials as they need them through a website with password access." Some of the savings achieved will be devoted to a fund for community projects.

Mary Bennell, head of procurement and assets at housing association Amicus Group, chairs South East Consortium. Its priority is to source kitchens, bathrooms and heating systems, "but we are keen to expand into environmentally sustainable products for insulation," she says. "It is a fledgling market and we pay big premiums when we put in solar panels, for instance. By aggregating bulk we may be able to offer suppliers sufficient long-term work, it attracts investment in capacity and prices fall."

In the construction industry, labour shortage is always a more pressing issue than materials supply, particularly in the south-east of England, where the Olympic Games is likely to place additional stress on the industry's capacity. Most consortia hope to beat this problem by offering their own training in the skills needed.

Ian Perry says: "We will guarantee contractors that the right staff will be available from our training programmes. Materials and labour will be there at the right time, and that removes those risks for the contractors and so should be reflected in their prices."

The consortia do not account for the whole spend and other organisations have been established on similar lines.

Procurement for Housing (PfH) is not one of the new consortia but, as a collective purchaser for 330 housing associations, it has experience of collaborative purchasing. It took its initial steps to procure materials in late 2005, after spending its first year working on office suppliers, energy and IT.

Julie Craig, director of buying consultancy at PfH, says: "Timing is key to a smooth workflow, with everyone in procurement knowing who is doing what and when. Builders merchants will also play a role in buffering demand.

"Our members all need to procure materials and the best way to get the benefits of volume and standardisation is bulk purchasing."

She adds that despite the different styles, sizes and ages of social housing, it is easy to aggregate demand for central heating and bathrooms because standard systems can be installed. Because of variations, bulk kitchen, window and door components are "difficult, but not impossible".

"We are working towards having framework agreements, and merchants must take a commercial decision whether to work with us," Craig explains. "They will know what we want and the agreements will be there for our members to use, although they are not obliged to."

Contractor reaction

What do contractors think of consortia's plans to procure materials and labour? If, as is often the case, a contractor looks to profit from supplying materials and labour, its profit is reduced if a consortium does this instead.

For example, if a consortium buys windows and then presents them to its contractor to install, the contractor's own bulk-buying power for windows is reduced. Paul O'Driscoll, business development director for affordable housing at Wates, says: "It is fair to say we have been voicing concerns, principally for organisations such as ours, structured to run their business by supplying both labour and materials.

"To have materials taken out of the equation might create unusual dynamics. It damages our own bulk buying. No-one would argue against the benefits of bulk procurement, but is the market ready for it?" he asks.

If consortia supply labour, says O'Driscoll, "that would rewrite how we would offer our services, there would be fee arrangements rather than turnover generated by labour and materials which attract profit".

Lee Parkinson, Wates' head of supply chain management, calls the change agent's enthusiasm for consortia "a big ask". He explains: "The overall concept of consortia buying makes sense, but we have deals for affordable housing and they are complex enough when negotiated by construction procurement professionals with 20 years' experience.

"Would anyone in a housing association have that degree of market knowledge? Boilers and radiators, to take two examples, are incredibly complex in their pricing with three or four levels for each," he adds.

Other contractors are less worried about the prospect of bulk buying by housing consortia. Stuart Black, chief executive of contractor Mears, says: "The effects of clients' bulk buying are not an issue for our buying power. We would rather generate turnover from the services we provide than from buying materials. It is a fundamental difference between us and other firms. Most of our competitors will build up turnover on materials and labour through subcontractors."

Julian Harajda, business development director of building contractor Durkan, doubts his purchasing colleagues would be unduly concerned by consortia because they would still bulk buy materials for other projects and so their buying power would not be diluted.

"If we are doing 1,000 units a year of something and a consortium is doing 3,000 it will probably get a better price."

Connaughton says contractors facing this issue could add their own materials requirements to those of consortia where appropriate.

"Contractors' profit has been raised as an issue, but I would be disappointed if they took the view that bulk purchasing will damage them," he says. "We are putting together a large volume of work and I would hope they would benefit from bulk purchasing themselves."

There is much activity, but can the target be met? Connaughton says: "We were appointed National Change Agent last summer and came into a process that was already running. I suspect the target will be difficult to meet."

Amid the mechanics of materials and labour supply it is sometimes easy to forget that people's homes are at stake, and some residents can expect to still be waiting for a decent home at the end of 2010.

THE CONSORTIA LINE-UP

London ALMO Procurement Network (ALMOs) Members: Kensington & Chelsea Tenants Management Organisation, Hillingdon Homes, City West Homes (Westminster), Hounslow Homes, Barnet Homes, Brent Housing Partnership, Ealing Homes, Ascham Homes, Homes for Islington, Newham Homes Total homes: 150,000 Planned spend: 1 billion

South Yorkshire Trailblazer (local authorities and their ALMOs) Members: Barnsley MBC, Doncaster MBC, Rotherham MBC and Sheffield CC Total homes: 120,000 Planned spend: 866 million

GM Procure (housing associations and ALMOs) Members: Harvest Housing Group, New Charter HT, New Prospect Housing, Northern Counties HA, Rochdale Boroughwide Housing, Stockport MBC, St Vincent's HA, Trafford HT, Willow Park HT. Total homes: 82,400 Planned spend: 446 million

Buy4London (housing associations) Members: Catalyst, Circle Anglia, East Thames, Genesis, Horizon, London & Quadrant, Metropolitan, Network, Peabody Trust, Southern. Four more to join. Total homes: 68,500 Planned spend: 160 million

South East Consortium (housing associations, ALMOs, council) Members: Amicus Group, Mhs Homes Group, Martlet Homes, Keniston, Gallions HA, Town and Country Housing Group, West Kent HA, Russet Homes, Threshold Housing and Support, Maidstone Housing Trust, Eastbourne Homes, Moat Housing Group, Shepway District Council. Total homes: 81,000 Planned spend: 88 million

HT= Housing Trust, MBC= Metropolitan Borough Council, CC=County Council Spends vary according to stock condition and work already completed. Source: NCA Housing.

LANDLORDS INVOLVED

Housing associations Some 2,000 groups, varying from a few dozen to 50,000-plus homes. Around 150 formed by taking over thousands of homes from councils. Associations can borrow on the money markets to finance works.

Arm's-length management organisations (ALMOs) Around 70 councils have these, or will. These are operationally independent with a contract from their parent council to deliver the standard. They can access extra government money. ALMOs are not used in Wales or Scotland.

Retained council housing Some 80 councils still directly manage their homes. They must meet the standard without extra government funds or private money.

MEETING THE TARGET

South Yorkshire Trailblazer's plan "is achievable by 2010" says assistant investment manager Chris Goodacre. "The hardest time will be 2007-9 when there will be a spike in the works."

Goodacre says the four members will collaborate to reduce this by planning renovations jointly. The consortium's main object is to "bulk up demand for materials and look for efficiency gains on the supply side".

Stuart Black, chief executive of contractor Mears, says: "Our view is that the standard will not be met by 2010 - it will be at least 2011 and possibly 2012." He said many councils had prepared plans to meet the standard late, and others had suffered funding problems.

Yvette Cooper, minister for housing and planning, told Parliament last October that she expected the target to be 90 per cent met by 2010. "We are now focusing our efforts on delivering decent homes for the remainder."

Mark Smulian is a freelance business journalist