CIH Repairs & Maintenance Conference & Exhibition Pricing Models Analysing your costs and achieving value for money Ark Housing Consultancy LLP John Fisher, Partner David Brown, Senior Consultant 15 th May 2014
Approach 1. The Client Perspective 2. The Contractor Perspective 3. Cost Model options 4. Some Examples 5. The Debate
Strategic Asset Management
HCA Value for Money Standard Registered providers shall: Understand the return on its assets, and have a strategy for optimising the future returns on assets including rigorous appraisal of all potential options for improving value for money including the potential benefits in alternative delivery models measured against the organisations purpose and objectives
Lifecycle Asset vs. Liability Asset Management is an art and a science!
Asset Management Scope Volume High Value Low Repairs Cyclical Customer Impact Immediate Business Impact Short Term Planned Remodel Low High Development Delayed Long Term
Ark s Asset Management Wheel implementation current situation Procurement is stage 5! procurement and mobilisation evaluation implementation planning prioritise and plan
Affordable Housing Landlords Business Model Surplus 5% Loans Management 25% 30% Responsive 15% Planned 25% Asset Spend = c.40%
Typical Unit Annual Costs Low Rise High Rise Responsive/Voids 443 Responsive/Voids 555 Gas/M&E 200 Gas/M&E 245 Cyclical Decs and Planned Elemental 977 1,620 Cyclical Decs and Planned Elemental 1350 2,150 Regeneration? Regeneration? Development? Development?
ASAP Model Data Availability? DEMAND DATA HOUSING DATA PROPERTY DATA MARKET DATA COMMERCIAL DATA STAFF ANALYSIS CBL Voids offers Waiting list Refusals Turnover % Void Spend ASB Age profile Tenancy length Arrears Actual rents collected Management cost Quality of public realm Responsive spend Voids spend Planned spend Cyclical spend Deprivation Crime Market share Tenure mix Geographic concentration Location EUV-SH OMV Market rents Yields Ease of management Ease of maintenance Quality of neighbourhood Quality of public realm
Responsive/Cyclical Typical Costs Low Rise High Rise Responsive Repairs: Unit Cost 3 Repairs @ 85 255 255 Additional One Off Costs Communal Areas 65 125 320 380 Voids: 7%-10% t/o @ 1,750 per Void 123 175 Gas: 3* Service 125 125 M&E Servicing: (e.g. Water Treatment, Asbestos Management, etc.) non service charge items, say 75 120 Cyclical Decorations: 57 100 (Exclude call handling and client function) 700 900
Typical Unit Costs and Life Cycles Planned Component Life Cycle (yrs) Unit Rate (incl.) Annual Unit Cost Low Rise Annual Unit Cost High Rise Bathroom 30 2,250 75 75 Boiler 15 2,000 67 67 Chimney 60 800 13 13 Consumer Unit 30 500 17 17 External Doors 30 800 27 50 External Wall Finish 60 3,500 58 83 Fascias/Soffits 30 750 25 83 Heating Upgrade 30 3,500 117 117 Hot Water Tank 30 500 17 17 Kitchen 20 3,800 190 190 Rainwater Goods 30 500 17 50 Roof Covering 60 5,000 84 100 Windows 30 3,200 107 107 Wiring 30 3,200 106 83 Other Building Repairs 10 1,000-100 Communal Area Works 5 540-108 920 1,260
Understand the Assets Ark s Strategic Asset Performance Model (ASAP)
Understand the Assets
Service/Contract Delivery Options
Asset Management Golden Thread CUSTOMER EXPERIENCE EXCELLENT CONTRACTOR (NEEDS ROBUST ORDER BOOK) ASSET MANAGEMENT STRATEGY / PLAN CLARITY OF SERVICE VISION AND STANDARDS
Service Delivery Structures Service Cost Profile Governance Management & Systems Delivery Supply Chain
Contract Critical Success Factors All Solutions Longer contract length Certainty of volumes in forward order book Clear Service & Technical Standards Simple/transparent cost model One team approach Understand cost, not price measure value Define and manage risk >50% is people
Contractors People Units Turnover Staff* Materials** 5,000 7.5m 130 1.65m 10,000 15m 260 3.3m 20,000 30m 520 6.6m 30,000 45m 798 9.9m 40,000 60m 1,050 13.2m 50,000 75m 1,310 16.5m * 80k t/o per operative + management/back office @ 40% ** Materials @ 22% of turnover
Operative Cost Comparison Private Sector IHC IHC IHC IHC Cost (Salary & NI/Pension etc) 26k 33k 29k 27k 30k Availability & Work Days 221 210 211 213 205 - Hours per week 42 42 35 37 36 Comparison to benchmark - +29% +29% +17% +35% IHC Private Sector Ts & Cs?
Who is Buying the Materials? TIER CLIENT 1 MAIN CONTRACTOR 2 WORKS SUB-CONTRACTOR 3 TRADES SUB-CONTRACTORS 4 MATERIALS SUPPLIER
CHIC s Approach TIER CLIENT (CHIC Members) 1 MAIN CONTRACTOR 2 KITCHEN SUB-CONTRACTOR 3 TRADES SUB-CONTRACTORS 4 MATERIALS SUPPLIER
CHIC Materials Savings Can they be achieved? Organisation Summary Materials Category What they would have paid What they pay ended up paying Money Saved ( ) Money Saved (%) IHC / 10,000 homes Doors 1,200,357 1,102,871 97,486 8.1% IHC / 5,000 homes Various 3,028,301 2,817,756 210,545 7.3% IHC /11,000 homes Heating 729,022 539,476 189,546 26% IHC / 4,500 homes Merchants 367,548 290,363 77,185 21% External Contractor / 6,500 homes External Contractor / 3,750 homes IHC / External HA Client Kitchens 288,256 227,722 60,534 21% Bathrooms 65,028 46,170 18,858 29% Electrical 71,466 62,809 8,576 12%
Typical Cost Models SOR Industry standard but high administration Price Per Property Popularity growing, focus on service but rules must work Open Book Cost Plus Culturally challenging for many contractors, often becomes... High risk for client
IHC / CSV Principles Parent/Subsidiary Relationship
Service Delivery Structure Board of Directors Managing Director Commercial Team Service Support Team Operational Delivery Team Responsive Voids Planned Gas
A Contractor s Perspective: Commercial Management David Brown, Senior Consultant, Ark Housing Consultancy
Aim and Background Aim To share my experience and knowledge of commercial contracting and help define the approach needed for effective commercial management of an IHC Background 30 Years as a Contractors Quantity Surveyor (often referred to as Angels of the industry) 11 Years as a Consultant specialising in Cost Management
My World (Contractor) Contractors manage their income and costs - High turnover - High risk - Low margin Robust cost management systems Nothing given away They know what they are earning and they know what they are spending
What are the key principles? Costs not Price
Price not Cost Tender DESCRIPTION QUANT UNIT RATE TOTAL Removal Provide all necessary dust sheeting and protection to tenants property and internal finishes, fittings and 1 item 50.00 50.00 appliances. Allow for the provision of crates so that the tenant can temporarily relocate kitchen utensils, crockery, provisions see risk account and other items during the course of the works. Carefully take out all existing kitchen fitments, sink, unit, wall and base units, built in units and worktops and clear 1 item 75.00 75.00 from site. Carefully disconnect and set aside for reuse all kitchen appliances. Including relocating daily as necessary. Allow for temporary connections to appliances such as freezers, fridges, washing machine and cooker during the course of the work. Allow for temporarily capping off any exposed plumbing, item 105.00 105.00 waste pipes or electrical services as work proceeds. No services are to be left unsealed during the course of the work. Temporary facilities are to be provided for the tenant for cooking and washing. Carefully strip all existing ceiling and wall coverings and remove from site. (one layer of wallpaper only) 1 item 108.00 108.00 Carefully remove all existing ceramic wall tiling and other fixtures not required and remove from site. (splash backs) 1 item 27.50 27.50 Carefully take up all existing vinyl floor and remove from site. (single layer) 1 item 28.00 28.00
Price not Cost Job Number 007 Address 10 Downing Street Ref Description Quantity Unit Rate Total 10000 Change tap 1 no 28.00 28.00 10001 Replace sink 1 no 38.00 38.00 10002 Repair door 2 no 15.00 30.00 10003 Repair door frame 3 no 12.00 36.00 10004 Remove plaster and replaster 4 m2 12.00 48.00 10005 Renew Bathroom suite 1 no 1,200.00 1,200.00 Total 1,380.00
Price Price = Contractors Income On many maintenance contracts the contractors income is built up using agreed SOR s, cost per property, activity schedules (you need to ensure it is not cost plus)
What Contractors do is: Understand their costs
Basic Cost Elements Net costs of works Net costs of preliminaries (Hub costs) Identification and understanding risk Overheads Profit What are the net costs of works ALWAYS made up of?
Cost of Works Cost of works are always made up of the following: Labour Plant Materials Subcontractors
Preliminaries Costs Still - Labour, Plant, Materials and Subcontractors Most contractors have a standard Preliminaries book Typical structure of Preliminaries Supervision Non Productive Labour Accommodation (Site Specific central location) Transport Plant Welfare (H&S) Quality Control Temporary Services (Utilities)
Overheads and Profit Overheads The costs of running the rest of the business The question is: What are you paying for? Profit Not a dirty word in contracting Surplus can be used as a driver for commercial awareness in any IHC
Risk (Commercial) Commercial Risk Key to the effective management of a commercial business is understanding and managing risk You need to define what the commercial risks are to your business You then need to, regularly, monitor and manage those risks
Where should you focus?
Key Drivers What is the key commercial driver for effective cost and performance management of a Contractor carrying out maintenance? Utilisation of Labour force It maximizes your income It reduces your cost per job Who does this?
Who Increases Productivity? Who increases the utilisation of the workforce? The Management The question you should be asking is: What can I/we do to help the workforce do more?
Characteristics of an Excellent Contracting Team (IHC) Effective leadership and management Responsibility for performance delegated to appropriate level in team High degree of commercial awareness Use information effectively Monitor and manage performance take action Continuous improvement part of the day job Learn from front-line staff
In order to maximise efficiencies you need a clear vision of what is coming up. With that you can plan and deliver efficiencies. If managed properly these efficiencies can be shared with the client in many ways including social benefit
How different is it as an IHC? It is the same
The vfm for an IHC is to use and utilise the same controls This does not need to be prohibitive. The IHC should be reporting (not relying on finance)
Typical Sector Cost Models SOR Old industry standard but high administration Price Per Property Popularity growing, focus on service but rules must work Hybrid Open Book Cost Plus PPP + SOR for exclusions Culturally challenging for many contractors, often becomes... High risk for client
Price Per Property Typical approach: a) Responsive repairs PPP + Exclusions b) Voids Base PPV + Exclusions c) Gas 3* PPP d) Planned elemental unit prices (e.g. 12.5 m/sq. kitchen) + one off works (e.g. plastering, DPC etc.) Materials can be bought separately via consortia with transparent transaction and price controls Minimises administration (regular reviews only on exclusions annual reviews of PPP) Regular cash flow for client and contractor Ideal solution for IHCs commercial open book internally
John Fisher, Partner 0121 515 3831 jfisher@arkconsultancy.co.uk David Brown 0121 515 3831 dbrown@arkconsultancy.co.uk