Repair and maintenance contracts are starting to look rather tempting, now money’s thinner on the ground. But there are some particular challenges involved...
When times are hard and tower cranes thin on the horizon, a contractor’s thoughts turn from new build to other sources of work. Repair and maintenance may be the less sexy end of the procurement spectrum, but if it brings in reliable sources of turnover, who will be too proud to bid for it?
The latest figures from Constructing Excellence suggest that of the £125bn that was spent on construction in 2007/08, 45% went on the repair and maintenance of existing buildings. Broadly, that divides into £27.5bn on housing, £10bn on public sector buildings and £19bn on private sector buildings. These figures should hold up well through the downturn, as clients have no choice but to repair and maintain their built assets.
So what are the legal and procurement challenges involved in winning repair and maintenance contracts? Commercially, the biggest risk for contractors will be responsibility for any new staff they inherit under TUPE provisions. A bidder’s predecessors (whether the outsourcing clients or outgoing service providers) will transfer staff to them when the contract begins, so the bidder can only price competitively if it has full information on issues such as liabilities under local government pension schemes.
When bidding for public sector repair and maintenance work, the contractor needs to be satisfied that the client has got its procurement process right. To achieve a duration in excess of the EU’s four-year limit on framework agreements, contracts must permit orders to be issued against pre-agreed specifications and prices rather than acting as an enabling agreement for successive contracts. If a client gets this wrong, disgruntled bidders no longer hesitate to raise a challenge – which will lead to delay and wasted resources.
But how can a bidder gain competitive advantage? Repair and maintenance contracts are usually tendered on a mixture of price and quality, with demanding performance targets. Bidders need to prove their ability to meet those targets, but can also offer added value through cost savings and other efficiencies that the client has not thought of. For example, a client does not pay the VAT to its own workforce that it would pay to an external service provider, but there are contractual structures available that would enable a bidder to significantly reduce that VAT liability.
Repairs and maintenance may be the less sexy end of the procurement spectrum, but if it brings in reliable sources of turnover, who will be too proud to bid for it?
Clients with a close interest in the way their properties are repaired and maintained may wish to take an equity stake in the service provider and a share in its profits under a corporate or contractual joint venture.
Other clients may prefer a completely arm’s length approach and seek to transfer as much risk as possible. I have seen contracts where the client has sought a fixed-price annual sum under which the service provider takes responsibility for delivering all repairs and maintenance, irrespective of actual cost. A bid on this basis demands a high level of confidence in the quality of the properties that the service provider is taking on.
The pricing documents for repair and maintenance contracts can make dull reading, as they contain an enormous shopping list of rates for thousands of items. Clients may seek to simplify these into “basket rates” of grouped items and bidders will need to consider the risks they take on within those baskets against the benefits of much less number-crunching and a smoother cash flow.
Clients seeking a fully integrated approach to asset management should offer a financial reward to service providers for reducing the levels of responsive repairs. If the service provider has also been tasked with undertaking capital works or cyclical and preventative maintenance then, over time, the client will expect the level of responsive repairs to go down – and should attach a sliding scale of profit according to results achieved.
Finally, clients awarding long-term contracts will expect significant benefits in the second-tier supply chain deals obtained by service providers. The Audit Commission analysed this potential in their Better Buys report. They noted that the government’s National Change Agent initiative had achieved significant cost savings (and training and employment initiatives) through the large-scale consortium procurement of asset management, and recommended that its scope be widened so as “to offer all types of materials and services for the full range of repair and maintenance activities, as well as for new build”. This holistic approach remains to be put to the test – but for contractors bidding on asset management contracts it offers a route back to the new-build arena that may be their more natural habitat.
David Mosey is head of the projects and construction group at Trowers & Hamlins.
Original print headline: 'Can we fix it?'