Pricing Models – Analysing

your costs and achieving

value for money

Ark Housing Consultancy LLP

John Fisher, Partner

David Brown, Senior Consultant

15th May 2014

CIH Repairs & Maintenance

Conference & Exhibition

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

Asset Management is an art and a science!

Lifecycle – Asset vs. Liability

Asset Management – Scope

Volume

High

Low

Value

Low

High

Business

Impact

Short

Term

Long

Term

Customer

Impact

Immediate

Delayed

Repairs

Cyclical

Planned

Remodel

Development

current

situation implementation

evaluation

prioritise

and plan

implementation

planning

procurement

and

mobilisation

Ark’s Asset Management

Wheel

Procurement

is stage 5!

Asset Spend = c.40%

25%

Planned

Responsive

Management

Loans

Surplus

30%

5%

25%

15%

Affordable Housing

Landlords Business Model

Responsive/Voids

£555

Development

£?

Cyclical Decs and

Planned Elemental

£1350

Gas/M&E

£245

Regeneration

£?

£1,620

Responsive/Voids

£443

Development

£?

Cyclical Decs and

Planned Elemental

£977

Gas/M&E

£200

Regeneration

£?

Low Rise High Rise

£2,150

Typical Unit Annual Costs

ASAP Model Data Availability?

• CBL

• Voids offers

• Waiting list

• Refusals

• Turnover %

• Void Spend

DEMAND

DATA

• 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

HOUSING

DATA

PROPERTY

DATA

MARKET

DATA

COMMERCIAL

DATA

• Ease of

management

• Ease of

maintenance

• Quality of

neighbourhood

• Quality of

public realm

STAFF

ANALYSIS

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

£700 £900 (Exclude call handling and client function)

Responsive/Cyclical – Typical

Costs

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

CLARITY OF SERVICE VISION

AND STANDARDS

ASSET MANAGEMENT

STRATEGY / PLAN

EXCELLENT CONTRACTOR

(NEEDS ROBUST ORDER BOOK)

CUSTOMER EXPERIENCE

Asset Management – Golden

Thread

Governance

Management &

Systems

Delivery

Supply Chain

Service Cost Profile

Service Delivery Structures

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

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%

Operative Cost Comparison

IHC – Private Sector Ts’ & Cs’?

Who is Buying the Materials?

TRADES SUB-CONTRACTORS

WORKS SUB-CONTRACTOR

MAIN CONTRACTOR

CLIENT

MATERIALS SUPPLIER

1

TIER

4

3

2

CHIC’s Approach

TRADES SUB-CONTRACTORS

KITCHEN SUB-CONTRACTOR

MAIN CONTRACTOR

CLIENT (CHIC Members)

MATERIALS SUPPLIER

1

TIER

4

3

2

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 Kitchens £288,256 £227,722 £60,534 21%

External Contractor /

3,750 homes Bathrooms £65,028 £46,170 £18,858 29%

IHC / External HA

Client 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 Culturally challenging for

many contractors, often

becomes...

Cost Plus High risk for client

Parent/Subsidiary Relationship

IHC / CSV Principles

Board of Directors

Managing Director

Service Support Team Operational Delivery

Team Commercial Team

Responsive Voids Gas Planned

Service Delivery Structure

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

• 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

My World (Contractor)

Costs not Price

What are the key principles?

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

appliances. 1 item £50.00 £50.00

Allow for the provision of crates so that the tenant can

temporarily relocate kitchen utensils, crockery, provisions

and other items during the course of the works. see risk account

Carefully take out all existing kitchen fitments, sink, unit,

wall and base units, built in units and worktops and clear

from site. 1 item £75.00 £75.00

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. item £105.00 £105.00

Allow for temporarily capping off any exposed plumbing,

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

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

£1,380.00Total

Quantity Unit Rate Total

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)

Price

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 are always made up of the

following:

• Labour

• Plant

• Materials

• Subcontractors

Cost of Works

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)

Preliminaries Costs

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

Overheads and Profit

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

Risk (Commercial)

Where should you focus?

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?

Key Drivers

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?

Who Increases Productivity?

• 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

Characteristics of an Excellent

Contracting Team (IHC)

• 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 PPP + SOR for exclusions

Open Book Culturally challenging for many

contractors, often becomes...

Cost Plus 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