The race to the bottom is over

Comment30 May 2018Neil Butters

As underbidding becomes unattractive, Neil Butters says construction firms are thinking twice about signing social housing contacts

Neil Butters

It’s a familiar story. Construction firms involved in a ‘race to the bottom’ when it comes to costing responsive repairs contracts. They price at low or negative margins in order to secure future planned or capital works where there is more chance of earning a profit.

But things are changing. Following Carillion’s demise and with Brexit 10 months away, it feels like the construction sector is thinking twice when it comes to social housing projects.

What I’m hearing from housing associations is that it’s becoming increasingly difficult – particularly in some parts of the country – to outsource building and maintenance projects. In some areas, social landlords are competing for contractors rather than the other way around.

This doesn’t surprise me. The economic and political landscape has changed hugely over the past 24 months. Contractors recognise that a business model built on rock-bottom prices is no longer sustainable. They are de-risking; taking a closer look at the potential for margins upfront rather than jumping at tenders and then relying on future work to deliver profits.

The current labour market exacerbates the problem. With the UK’s EU exit looming, it’s becoming more expensive for building firms to fill vacancies for planned and reactive work. Research from the Construction Industry Training Board (CITB) shows that one in three British construction firms employ migrant workers. The sector’s ageing workforce and inability to attract younger workers is fanning the flames.

Add to this the fact that material prices are increasing rapidly, impacting earnings. A recent survey from the Federation of Master Builders shows that nearly one-fifth of contractors report making losses on their construction projects due to material price increases – up from one in 10 last year.

The result is a perfect storm that won’t end well unless social landlords take action. Contractors will start leaving social housing, looking for more attractive, margin-rich ways of doing business. This could lead to a severe lack of supply, price hikes and more contraction in the market.

So, what can be done? There are some practical steps that landlords can take now.

Be a better client

The social housing sector still thinks it is attractive to construction firms. This used to be the case, pre-austerity when housing associations benefited from Decent Homes funding. Despite the landscape changing, many social landlords haven’t adapted. They continue with their price-only, adversarial approach, arguing about invoices and lengthening payment periods.

But with today’s diminishing construction sector, landlords can’t work in the same way. There needs to be a culture change where they support SME builders to grow, encourage innovation, invest in training and engage positively in partnership with contractors, developing long-term, equal relationships.

Work together around overspend

If a contractor comes to you saying they are going to spend over the budget on a project then work with them to find solutions – identify savings elsewhere rather than insisting that they always bear the financial hit.

Offer longer-term contracts

One of the worst things a landlord can do is hand out one-year contracts. If you are happy with your supplier, then longer contracts provide more security, encouraging contractors to grow and invest in staff, apprentices and a local office.

Get better at contract management

The social housing sector has a ‘let and forget’ culture that needs to change. Landlords are quick to complain when contracts don’t go to plan, yet they do little supplier management to make projects successful. Careful contract management involving open and respectful communication can prevent costs escalating.

Some landlords aren’t happy with their suppliers, but they keep them and slash their prices, all because changing contractor is perceived as too risky – they fear change. This short-termist approach won’t maximise efficiencies. If a supplier is no longer meeting your needs, then bite the bullet. Go back to market and control the change process as opposed to simply squeezing a supplier out.

Be open to innovation

New methods and products come to market all the time, potentially saving landlords time, labour and cost. Take the time to explore these, ask contractors to show you new approaches in situ and be open-minded to new innovations.

Manage the subcontractor risk

A recent Deloitte survey revealed that 65 per cent of procurement executives lack visibility beyond their tier one suppliers. Considering the construction market is predominantly made up of subcontractors and technical specialists in tiers two to four, this should worry landlords. They must have a clear idea of what the risk profile is under their main contractor and do enough to manage this.

Supporting SMEs is one such mitigation strategy. It is not enough to have a social value policy to attract SMEs. Procurement and development teams must work together to address skills gaps, improve demand planning and develop financing options to build a sustainable SME supply chain.

Understand procurement’s role

Many social landlords still believe that procurement should police purchasing rather than inform business strategy. Across the sector, there is a lack of analytics, strategic sourcing and effective supplier management.

If landlords recognise the part procurement could play in addressing the construction crisis, they would be one step closer to solving it. For example, giving the procurement team full visibility across all spend data (including asset management figures) would help landlords control costs, boost transparency and increase quality. Contractors would benefit from better structured programmes of work, cutting the number of disputes and improving performance through collaboration.

Market failure could be on the cards if housing providers continue to work with contractors as they have always done. Stimulating the marketplace, enabling it to invest and grow, is one way to avoid the inevitable. But providers must act now.

Neil Butters is head of procurement at Procurement for Housing