Cost model: Procuring social housing

<b><FONT SIZE=”+2”>Introduction: The future of social housing procurement</FONT></b>This article examines the Housing Corporation’s funding regime and its impact on the procurement strategies of housing associations. The principles of effective partnering are described, together with an analysis of the key features of the Association of Consultant Architects’ new partnering contract, PPC2000.
Two case studies describe Egan-compliant ways of procuring. The first is based on a project-partnering approach, taken by Avenquest Homes; the second on off-site fabrication, the approach adopted by the Amphion consortium.
The Egan report included an examination of the housebuilding sector. It concluded that the planning process, social housing funding and other factors introduced significant inefficiencies into housebuilding. The Housing Forum has responded by championing a series of demonstration and approved projects, currently numbering 54, which pilot best practices such as simplified approaches to partnering or benchmarking.
The adoption of best practice is expected to deliver benefits such as greater certainty of cost and time outcomes, improvements in quality and end-user satisfaction. But a reduction in costs is not expected immediately. The evidence from current demonstration projects is that although performance is improving in many areas, costs have risen on some projects.

<B><FONT SIZE=”+2”>Implementing the Egan agenda</FONT></b>From 2000/01, in common with all government expenditure on construction, social housing grants have been linked to Sir John Egan’s Rethinking Construction agenda: 60% of funds allocated in 2002/03 will go to projects assessed as being Egan-compliant. Consequently, the development of a skills-base in benchmarking, partnering and process/product innovation has become an important tool in the social housing development process.
The compliance measures, identified by the Housing Corporation for the 2001/02 funding round, included the use of industry-wide key performance indicators, organisational factors, such as membership of the Housing Forum, and project-specific issues. These project-specific issues include a commitment to partnering or to the use of prefabrication. The ability of a registered social landlord, or RSL, to comply is influenced by its size, the availability of resources and information, and the characteristics of its planned build programme. One of the objectives of the Amphion project is to pool the resources of a number of RSLs in order to make the investment in new technology feasible.
<B>Key issues in social housing procurement</b>
Although, from a construction perspective, most social housing is relatively simple, the procurement issues can be complex. The primary objective of social housing funding is to deliver the maximum number of units for a given amount of central government grant. In these circumstances, low unit costs and cost certainty are essential. Although an increasing proportion of RSL activity is focused on refurbishment and regeneration, new build remains an important component – 56,000 homes are planned for the three years to 2003/04. Other procurement issues include:

 

 

• An increasing need to demonstrate “best value” procurement, including wider consultation and measurement of performance
• Growing concerns about quality, defects and whole-life costs
• The need for accountability
• The facility to be able to work with developers in connection with section 106 (planning gain” agreements
• The need to be able to respond to an increasingly varied project load. Many RSLs are diversifying away from the development of social housing to a broader programme including shared-ownership schemes, key worker housing and student accommodation
• Managing the costs of Housing Corporation compliance.

<B>Trends in funding allocation for social housing</B>
Social housing has been recognised in the government’s recent green paper as essential to the success of policies dealing with social exclusion and the development of sustainable communities. The sector was a significant beneficiary of the 2000 public spending review, and overall expenditure is expected to reach £4bn a year by 2003/04. Housing Corporation funding for its approved development programme will increase from £762m in 2000/01 to £1.2bn in 2003/04.
Following the public spending review, Treasury funding is now allocated more strategically, based on co-ordinated investments in transport, healthcare, housing and so on. In response to the demands of more complex, multi-agency projects, the Housing Corporation has developed new approaches to investment management. These may assist the wider adoption of partnering and other initiatives that require financial commitment over a period of more than a year. The main initiatives are:

<B>Strategic allocation of funding</B> Fifty per cent of funding within regions is now being allocated in accordance with strategic plans rather than by indicators of housing need. As need does not respect administrative boundaries, this change has permitted flexibility to match demand, funding and the availability of land. However, as much of the land is obtained from private developers through section 106 agreements, RSLs are often restricted in their choice of contractor, and the extent to which partnering or off-site fabrication can be adopted. This issue will become more significant as the Egan compliance target reaches 60% of projects from 2002/03 onwards.
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• Joint commissioning</B> This involves RSLs and local authorities collaborating on joint development programmes. Currently, one-third of local authorities have joint-commissioning arrangements in place. Joint commissioning can be bureaucratic, but where it has been successful, it has generated large, long-term programmes that enable RSLs to invest in partnering or other initiatives, such as tenant liaison. Furthermore, by working directly with local authorities, RSLs can be more locally accountable.
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• Two-stage bidding processes</B> Two-stage bidding is particularly important for complex schemes that involve consortia. By providing clear guidance on investment priorities and a degree of certainty and security to second-stage bidders, the process is expected to assist in the development of large multiparty schemes that suit the implementation of Egan-compliant procurement.
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• Three-year allocation pool</B> The pre-allocation of funding will give RSLs a better idea of future workload, which should make it easier for them to plan partnering and product innovation programmes.
• In summary, the revised funding procedures will introduce greater continuity and will enable successful RSLs to plan for the long-term implementation of partnering, prefabrication and continuous improvement programmes. Where funding continues to be allocated on an annual basis, there is little incentive for RSLs to achieve any more than minimum compliance standards, and the process changes demanded in the Egan report are unlikely to be put in place.
• <B><FONT SIZE=”+2”>Learning how to partner</FONT></B>Partnering can be broadly defined as an agreed method of working by a project team in pursuit of shared objectives and benefits. The past year has seen significant progress in establishing a common approach to partnering, including the publication of the handbook Partnering in the Social Housing Sector and the launch of the first standard partnering agreement, PPC2000.
• The development of this core of best practice will help to reduce the partnering learning curve, an important issue for registered social landlords, who do not have the resources to reinvent procedures on a project-by-project basis. Despite these advances, partnering still requires a considerable upfront investment, as many problems have to be solved on a project-specific basis.
• The case for partnering is that, substantial performance improvements requires significant changes in procedure. However, the upfront costs and learning curve associated with partnering have, in the social housing sector, meant that cost-reduction targets have not generally been met. But the Housing Forum’s report, How to Survive Partnering, records that projects that use partnering have benefited from greater cost and programme certainty, have fewer defects and more efficient contract administration than the norm.
• The reduction of costs is only likely to be achieved if there are long-term partnership arrangements that directly involve the supply chain and that identify clear targets for performance improvements. For such partnering arrangements to succeed, there needs to be a commitment to both the process and the culture of the partnership agreement. The process needs to be followed to ensure that the key elements of the partnering relationship are in place, including a clear statement of objectives and critical success factors, preparation for partnering within the client’s organisation and the project team, development of an appropriate selection method and the conclusion of the partnering agreement. Furthermore, continuing investment in the development of the partnering relationship and the enforcement of improvement targets through performance measurement are essential to the achievement of long-term value.
• Up-front investment in a strategic partnering arrangement is particularly important, as the opportunities to achieve savings and product improvements will be affected by the quality of relationships and the level of commitment to the partnering process. In the race to conclude a partnering agreement, many of the soft issues that underpin a successful partnership can be overlooked.
• Key issues that should be taken into account during the development of a partnering agreement include:
• The need for partner organisations to fully understand the implications of the partnership arrangement
• The setting a clear brief, establishing selection criteria and measurements of performance
• The development of an appropriate selection process that balances accountability and quality-led selection criteria
• The importance of upfront investment in team building and relationship development
• The early involvement of the whole team in the development and implementation of the partnering agreement
• The selection of a contract that matches the objectives of the partnering agreement
• The development of trust and a belief in the relationship at all levels within the organisation
• The application of measurement and market testing to give the partnering relationship commercial rigour.

<B>The contract of choice?</B>
Since its launch last November, the PPC2000 form of contract, published by the Association of Consultant Architects, is being implemented on an widening range of projects. Many of these are in social housing, including Amphion projects worth a total of £200m, and the Whitefriars refurbishment programme in Coventry, worth £250m.
The key innovation of PPC2000 is that it integrates the partnering team and the procurement process in a single contract. But why does PPC2000 lend itself so well to social housing projects? The answer lies in the volume of social housing procurement and the imperative for RSLs to comply with the Egan recommendations. This has created a demand for a simple, accessible contract that is also a guide to partnering practice. RSLs need to satisfy their committees that they are not giving up key contractual rights, and contractors and consultants need clear incentives to justify their investment in the partnering process.
By encouraging the early appointment of a project team, the contract offers a system for the team to jointly tackle design, supply-chain development and risk management. It also demands from the RSL a new discipline in spelling out its own aspirations and perceived obstacles.
David Mosey, Trowers & Hamlins

<B><FONT SIZE=”+2”>Case study one: Avenham regeneration – choosing the right partner for your projects</FONT></B>The case studies on this page and page 70 illustrate different approaches to partnering and product improvement. In the first, a large-scale voluntary stock transfer to a registered social landlord made it possible for a long-term project partnering arrangement to be put in place.
In the second, the Amphion consortium is examined. This involved the use of strategic partnering to develop a factory fabrication process.
<B>Main features of the Avenham project</B>
A stock transfer from Preston council to Avenquest Homes, a subsidiary of Collingwood housing association. The transfer led to the demolition of 300 properties, the refurbishment of 800 properties and the construction of 112 new units. The Housing Corporation and private finance provided £10.5m of funding; the remaining £9.5m was sourced from the European Union.
<b>Principal objectives of partnering</B>
Collingwood housing association has been involved in strategic partnering with its consultants and contractors since 1996. Its key objectives are:

• To increase customer satisfaction
• To improve quality
• To reduce defects at hand-over and during the defects period.

These objectives have been incorporated in partnering agreements on individual projects.
<b>Selection of partners</B>
Contractor partners have been selected using criteria such as company experience, track record of team members, project approach/methodology and price.
<B>Basis of appointments</B>
Contractor partners are employed on the basis of a two-stage tender. The first stage looks at quality criteria and price (the contractor’s preliminaries, overheads and profit).
In the second stage, the team uses the contractor’s advice on buildability and its buying power to agree a lump-sum contract price. This is done on an open-book basis. The project team also collaborates to identify and manage risks. The initial projects have used standard forms of building contract, amended to reflect the partnering agreement. A dispute resolution forum, comprising the principals of the key project partners has been implemented for each project.
<B>Performance on the project</B>
None of the projects has yet reached practical completion and no benchmarking data is available. Performance targets have been set for defects, customer satisfaction, health and safety, and cost. Initial indications show that although most targets will be achieved, performance targets for defects reduction may not be met on some projects. A review is currently being undertaken to ensure that lessons are learned and transferred to future projects.
<B>Continuous improvement</B>
In the second phase of partnered projects, it is planned that risks and rewards will be shared more equitably. Negotiated contracts with key subcontractors, modified payment terms and the removal of retention clauses are some of the changes being considered, as is the adoption of the recently issued partnering contract, PPC2000.
<B>Key issues for successful partnering</B>
Based on the experience of the Avenquest Homes schemes, the main success factors are:

 

 

• The personnel involved
• The front-end resourcing of the project
• The overcoming of resistance to cultural change, and the operation of a no-blame culture
• Development of collaboration, and the avoidance of confrontation
• Ensuring that the team keeps an open mind when considering alternative process and product solutions
• Exploitation of the latest technological developments
• Full involvement of the supply chain In cost assessments and the management of risk
• The need to generate sufficient volume and programme to sustain the partnership.

<B><FONT SIZE=”+2”>Case study two: Amphion – strategic partnering, technical innovation and continuous improvement</FONT></B><b>Main features of project</B>
A consortium of 23 registered social landlords has pooled some of their development programmes to provide volume for factory production of high-tech timber dwellings. The partnering agreement runs from 2000 to 2004. In year one, 315 units are in contract; 600 are forecast for year two, commencing on 1 April 2001. Funding is through the approved development programme, private finance and the cash reserves of RSLs. Limited funding has been received from the kick-start programme.
The recent takeover of Beazer Partnership Homes, the consortium’s contractor, by Persimmon Homes has introduced a level of uncertainty
to the project. This has occurred just as real benefits to the partners were beginning to accrue. This situation illustrates that even the most innovative and potentially successful initiatives can be vulnerable to outside forces.
<b>Selection of partners</B>
The contractor partner was selected largely on the basis of quality criteria, including organisational issues, technology solutions and customer-care record. Construction costs were considered during the second stage of tender, and were given a weighting of 25% in the final assessment.
<B>Basis of appointment</B>
The first-stage tender was based on an open invitation, with assessment based on quality criteria only. Six contractors were interviewed at the first stage, and three were invited to proceed to stage two. This featured an assessment of the contractor’s technical proposals together with their indicative costs. Based on a weighted quality/cost assessment, Beazer was identified as the preferred bidder and an open-book pricing mechanism was agreed. Early projects have been let on an amended JCT98 with contractors’ design form, incorporating a two-year defects period and no retention. Later projects will adopt PPC2000.
<B>Performance on the project</B>
The table below illustrates actual and planned performance for the first three stages of development of the Amphion system. The costs of the first phase of projects are at a premium to conventional construction, but are lower than originally forecast. In particular, leading consortium members who have committed large schemes to the programme have benefited from an economy of scale. Other achievements include:

 

 

• The consortiums have provided the motivation for the housebuilder to make a significant investment in off-site fabrication technology
• Quality standards are higher than for conventional construction
• The contractor has secured a reasonable profit
• A programme of innovation was mapped out with the supply chain.

<B>Continuous improvement</B>
This is focused on a number of areas:

 

 

• Technology improvements including the application of lightweight cladding, pre-fixed dry lining factory-fitted windows and doors
• Partnering improvements, including the adoption of PPC2000; the extension of partnering arrangements to include groundworks, electrical and plumbing contractors; and the passing of the contractor’s group buying power to the consortium
• Greater use of key performance indicators.

<B>The crucial issues for successful partnering:</B>

 

 

• The generation of sustained volume to support the investment in new technology
• The investment in an effective selection process
• The development of effective partnership arrangements
• The importance of collaborative working
• The need for active consortium membership and effective consortium management.