I don’t envy any future GCSE student studying history for the period mid 2019 to 2022 – you wouldn’t believe it if you weren’t there!
We live in a turbulent time where challenges we have not seen in our lifetimes (well most of us), have culminated into a world that is hardly recognisable to the one we enjoyed in those heady, carefree, summer days of 2019 – where all we had to worry about was Brexit – remember that old chestnut?
So, as we say goodbye to 2022 and welcome in 2023, it must be with bated breath for most of us. Certainly it is for those that work around the construction and housing industry and I imagine for the rest of the country, whether it’s in the work or home environment.
Between January 2021 and September 2022, housing construction costs in the UK rose by 19.6% (ONS, 2022). Costs vary widely in the UK, but my experience is that pre-Covid, we could build an average development scheme in my area of the south west, under a design and build lump sum contract for something around £1800 /m2. I was told by a friend who runs a construction firm, this morning, that they weren’t prepared to sign any D&B contracts at the moment for below £2500/m2. Of course that doesn’t only represent crystalised, actual cost increases, it also shows how nervous contractors are of the supply and labour markets. They aren’t prepared to take a risk on that with the world environment being so unstable and so they ‘price’ that risk. I also heard from another friend at a different contractor that they are not prepared to sign any fixed price contracts without a BCIS linked inflation clause (so not a fixed price then!) – we’ll come back to that.
We ought, also to mention that D&B levies, the fee that contractors add into the contract to ‘cover the risk’ of entering into a D&B contract, have gone from somewhere like 3% pre-Covid to, what I have heard on the grapevine, being 10 to 15% now. These are added in addition to any contingency, overhead and profit or specific risk pricing (see above) - they just go onto the contract sum.
I’m old enough to be able to remember the affordable housing construction market around 2007/2008 and I remember, through gritted teeth, contractors gleefully spouting about 25% profit margins they were making on affordable housing construction contracts - of course they didn’t tell the clients that, but I heard it on good authority from a bloke down the pub! They achieved that because RPs insisted on lump sum D&B contracts, even though we could see a recession coming which would likely lead to construction prices coming down, and so they fixed their contract sums and made a mint when the market collapsed.
Most economists are predicting some kind of recession to come shortly, the housing market has started to slow and some are also predicting a house price fall, fuelled by interest rate rises and crippling mortgage costs – although it has to be said that there are various opinions saying any recession will be different this time, due to high employment and cash rich companies.
So popular opinion seems to suggest some kind of recession is coming, which usually means construction prices fall, hopefully they won’t rise much more, so the smart money would be on this point in time being around about the top of the price curve. Notwithstanding that, of course we do have the new 2022 building regulations to deal with (c. 7-10% additional cost based on traditional/timber framed construction) and then the Future Homes standards in 2025.
It doesn’t take a genius to surmise that fixing a price on a 2-3-year contract now might mean we end up paying too much and the contractor ends up making extra profit as well as that nice D&B levy!
So, in my humble opinion, maybe it’s time affordable housing providers started to challenge their ingrained thinking about cost risk. We insist largely on D&B contracts because we want to know that the job will be completed for the price we have at day one (it only will be if we don’t change anything in the scope AND there are NO provisional sums in the contract). We want price stability and for that we are prepared to pay a premium - understandable considering how we are funded. However, that obviously means we don’t get the best price - that would mean taking some risk that costs might be higher at the end of the job that when it started.
If some are signing contracts with BCIS adjustment clauses, then I assume they are only doing that if the clause works both ways i.e. both contractor and employer share the pain and gain. That means that they have come away from the key benefit of D&B (the price stability) and effectively entered into a supplier reimbursement contract (cost plus in normal language).
Apologies for teaching you to suck eggs, but this should mean the employer pays the contractor what the job costs with an agreed percentage or fixed fee on top to cover profit, overhead and preliminary costs. In this case there ought to be no D&B levy or contractor's risk budget, everything is open book and we therefore should be able to build for a significantly lower price. Granted there is little motivation for the contractor to squeeze the price, but that should be down to our Employers Agents, us as good Project Managers and more than anything, good employer/supplier relationships.
My questions are:
- Why aren’t we all doing that – or are we? Cost plus is surely a more sensible strategy in this current market?
- Why aren’t organisations such as the GLA and HE encouraging and working with us in that regard to make their grant go further – or are they?
- Are some of us just too set in our ways to change? - Discuss!
We have a quarterly online meet up where we talk about things like this, issues of the day, things that people working in the industry are experiencing or worried about. They started as a follow up to our training sessions for questions that come up after, things people have forgotten etc. but we are now widening them to include whatever people want to talk about, whether its training needs or that annoying consultant.
Next session: Friday 5 May
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Neil Clements has worked in the housing industry since 1997, most of that time within the affordable sector but also with a main contractor, consultant and private developer. He now runs the M3/HATC training programme, which focuses on AH development and related staff covering the whole development process and project management (APM syllabus). The training covers lots of legislation and procedure but also comes from years of learning the hard way.