Councils must take on more risk to increase housing

26 February 2017

Improving the planning and delivery framework at local authority level to allow a more diverse range of construction providers would help meet a gap in supply, suggests Assad Maqbool.

Assad Maqbool

On 7 February 2017, the Department of Communities and Local Government (DCLG) issued its White Paper, Fixing our broken housing market. While the aim of the paper was to highlight a path to improve housing supply, there was implicit criticism of the construction industry’s failure to deliver.

The paper does, in part, recognise the commercial and legal risks placed on the construction sector which have led to the current crisis, but it lacks detail as to how these risks may be redefined to encourage growth.

DCLG starts with some basic economics: “Low levels of house building means less work for everyone involved in the construction industry.” The criticism of efficiency in the industry is tempered by the fact that economies of scale are lost because of low throughput.

At the microeconomic level, construction team members are bidding for limited work and spreading what are already small margins across few projects. Another view of this inefficiency is that it is a result of the way in which construction projects are procured. Bidding for one-off projects will necessarily incur costs that must then be factored into successful bids.

One way to reduce this would be to appoint the construction team early, before significant bid costs have been incurred, and work through the pre-construction phase whilst already in (possibly conditional) contract with the construction team. Without that, only the larger companies are able to sustain bids teams that can respond to opportunities.

"The White Paper continues the theme set out in the Farmer Review of the UK construction labour model."

This leads to another point raised in the White Paper: that the construction industry is “too reliant on a small number of big players”. Of course, there are many factors that would cause the market to move towards a reduced number of suppliers each with a greater market share. Again, though, the expectations placed in the procurement process on the smaller contractors and developers will tend to marginalise their opportunities.

Particularly of note are turnover tests as part of pre-qualification that are intended to protect clients from insolvency risk but instead arbitrarily cut out small- and medium-sized players. An alternative might be for the government to focus on the performance bond and latent defects insurance markets to ensure that clients have affordable security for smaller contractors and developers.

At the farthest end of that scale, the point is not addressed in the paper’s case study of Graven Hill. It cites Graven Hill as a transformational project in which Cherwell District Council and the Graven Hill Village Development Company have pioneered a 2,000-home self-build and custom-build scheme.

While the paper focuses on the relatively low proportion of housing in England that is delivered through custom-build, it does not address the security needed for purchasers to buy into and lenders to fund such a scheme.    

Instead, the paper talks about the Buildoffsite Property Assurance Scheme, which is a process of accreditation carried out by Lloyd’s Register to provide assurance to lenders in relation to “innovatively constructed projects”.

The White Paper therefore continues the theme set out in the Farmer Review of the UK construction labour model, Modernise or Die, (published in October 2016), that efficiency can be gained by promoting premanufactured solutions and offsite building.

Another point highlighted by the Graven Hill example is the need to engage with the planning framework to ensure that it is “more supportive of higher levels of development”. Some focus should be given to the work that Graven Hill has done in creating local development orders that support innovative delivery.

There is certainly scope to improve the planning and delivery framework such that a more diverse range of construction providers can meet a gap in supply. However, the paper returns on several occasions to the construction industry’s actual ability to deliver.

As with a number of preceding governmental commentaries on the construction industry, there is a fear about a lack of skills and an intention to implement renewed training programmes to “address skills shortages by growing the construction workforce”.

When talking about the investment needed to modernise, innovate, and become more efficient, the paper rightly states that “building at scale still exposes commercial developers to significant financial risk... [s]o, there is little incentive to invest…” The same is the case for investment in skills.

One answer must be for the government to encourage contracting authorities to share development risk and to create longer-term relationships with construction partners, to enable a longer-term view on investment in innovation and skills.

The government should consider bucking the trend of one-off lowest-cost tendered projects by encouraging the use of long-term strategic alliancing contracts and frameworks agreements at all tiers of the construction industry supply chain, which encourage investment.

Assad Maqbool is a partner at Trowers & Hamlins specialising in projects and construction

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