Procuring from small businesses – what is the role for social landlords?
Small construction firms are in choppy times, with many at risk of insolvency. What role can social landlords’ procurement approach take in better supporting SMEs? James Wilmore reports
While there are signs of economic green shoots, the landscape remains tough for construction firms. The sector continues to top the list of those most affected by insolvencies. Figures published in January by The Insolvency Service showed that 4,371 construction firms went bust in 2023. The situation has improved in the first quarter of 2024, but not by much.
Meanwhile, according to latest research by consultancy Begbies Traynor, more than 40,000 UK companies are on the brink of insolvency, with construction among those sectors particularly at risk.
What does this mean for housing associations and their procurement teams? With around 90% of construction firms being small and medium-sized enterprises (SMEs), should they be doing more to help in these dire times?
Neil Butters, head of procurement at Procurement for Housing (PfH), says that while he has seen an uptick in the use of SMEs in social housing in recent years, things are changing as the effects of the economic climate take their toll. “With all the demands on housing associations, the legislative changes and building safety, budgets are more squeezed than they have been in recent years. We are also seeing requests from our customers to show more value for money.”
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He adds: “My concern is over whether housing associations and councils will revert to type and do what always happens in times of hardship and try to pass on risk to somebody else.”
Mr Butters says that PfH had previously seen more use of dynamic purchasing systems (DPSs) – a procurement tool that is different to a traditional framework because it allows suppliers to join at any time.
Frameworks, meanwhile, are normally procured every four years. He says DPSs are “more tuned” to SME providers compared to frameworks as they typically have a lower barrier to entry and there are not “swathes of documentation” to fill in.
“DPSs are often regionalised too, so it’s more suited to SME suppliers who can’t fulfil national contracts, but operate in a particular region,” he says. However, DPS activity has slowed down, Mr Butters says, with more landlords reverting to traditional frameworks.
Tom Jarman, a director at consultancy Low Carbon Journey, is also concerned. “One thing that some landlords don’t do, and could do easily, is look beyond their tier one contractors,” he says. “Some social landlords have no idea what’s sitting beneath the surface in terms of how those SMEs are managed, how they’re being treated, what their payment terms are.”
Mr Jarman believes there is a “deep structural problem” and there needs to be a shift in thinking.
He adds: “If you have a set of organisational values that drive us towards improving conditions in the communities that you serve, you have to pay attention to what’s happening to SMEs.”
Mr Jarman believes social landlords should be taking more of a lead on the issue. “Social landlords commission the best part of 20% of all new build housing every year,” he says.
“If you have responsibility, or at the very least an influence on 20% of all new build housing that was built, you can do something really quite exciting with that.
“You should not have to wait until the government tells you what to do with that because you carry so much weight to that marketplace.”
Others argue that landlords are already aware of this. “I would say that housing associations are well aware of the transformation capabilities and capacity that they have,” says Rebecca Rees, head of public procurement at law firm Trowers & Hamlins. “I think it’s more of an issue of housing associations being able to articulate the value of a diverse supply chain.”
The thorny issue of payment times also still plays a key role. Ms Rees says: “In the public sector you have a maximum 30-day period, but I think that should be shorter. Cash flow for SMEs is absolutely key and needs to be sped up. Often the administration around payment delays things.”
“Some local authorities also ask contractors to pay a percentage to guarantee faster payments,” says Ms Rees. “They say, ‘If we paid you in 10 days rather than 30 days, how much would you knock off our bill?’ Which to me is morally abhorrent.”
But she questions what approach housing associations should take.
She says: “Do you want all your eggs in one basket with one large firm? Or do you want to hedge across with lots of small firms? People have traditionally thought that using a big company is less risky than supporting local contractors. But if you can improve cash flow [of SMEs], it’s best to spread that risk over a number of contractors.”
What else can be done?
The government and its affiliated agencies have been well aware of the issue for SMEs for some years now.
As Homes England notes in its latest strategic plan, nearly 30 years ago, SME house builders developed 39% of all homes in England. As of 2020, that figure had fallen to just 10%.
“SMEs and new market entrants face many barriers and constraints to their growth and are more likely to struggle in an economic downturn, which could further reduce the sector’s diversity,” the strategic plan said.
However, the agency vowed to “continue to diversify the sector, supporting ambitious SMEs and new market entrants to grow”.
So what are the advantages of using SMEs, particularly for housebuilding?
Helix, an SME house builder, says smaller firms are able to invest quickly and then deliver homes at a faster pace, particularly on smaller sites.
“It’s not an unreasonable assumption to say that the smaller the site, the smaller the cash resources required, the quicker the delivery of homes, and the sooner we can invest the proceeds in the next site,” according to Charlie Scherer, co-founder and director of Helix Partnership Homes, and Nic Davies, the group’s chief executive, in a blog on the firm’s website. “When looking at new sites like these, SMEs can be very flexible as we have nimble governance frameworks. That means that decisions can be made without lots of red tape, and we can provide responses to stakeholders more quickly.”
39%
Proportion of homes delivered by SME house builders in England 30 years ago, according to Homes England
10%
Percentage of homes delivered by SME builders in England in 2020, according to Homes England
4,371
Construction firms that went in bust in 2023, according to The Insolvency Service
Of course, procurement covers many areas and there are plenty of other challenges around repairs and maintenance and landlords meeting net zero targets.
As social landlords look to make homes more energy efficient, there is the challenge of finding suppliers to do the work.
“All social landlords have struggled across the board in terms of availability of resources,” says Lorraine Sawyer, director of procurement at Anchor. “But particularly in terms of decarbonisation and retrofit, as everybody wants the same works doing and everybody’s got the same target.”
She suggests that landlords should work more collaboratively to identify gaps in the market and how it can work with suppliers to fill the gaps. “A lot of it can be done through apprenticeship schemes to bring people into those new jobs,” she says.
The contractor side
But there are issues for contractors, too. As Mr Butters says: “You can’t just train all your boiler repair teams up on low-carbon technology because you also still have to repair or maintain existing boilers.”
He says he has been aware of efforts to create a localised retrofit supply chain, but it is “really hard” and “takes a lot of time and effort”.
So what is central government doing to tackle the issue of procurement and SMEs?
The post-Brexit Procurement Act, which will officially come into force this October, is partly designed to make it easier for SMEs to win work.
The government has described it as the “most significant changes to the way public sector organisations buy goods and services for a generation”. It has claimed it will help SMEs to secure a “greater share” of around £300bn of expenditure per year.
According to government guidance published last November, the new regime will “remove bureaucratic barriers and level the playing field for smaller businesses, so they can compete for more contracts”.
John Wallace, director of procurement at housing association Clarion, who is also the sector’s lead on liaising with the Cabinet Office over the changes, believes it will make a difference.
“It’s more sympathetic to SMEs and will allow landlords to procure smaller volumes, more regional volumes, through the new process,” he says.
“We have an opportunity to attract SMEs in particular areas, when before there was more of a requirement to put all your volume in one place. The new act is going to help that.”
Mr Wallace also flags an initiative called ProcureCo. It is social enterprise-led software that is aimed at finding engagement opportunities between SMEs and buyers.
“Although we are required by the new Procurement Act to publish our pipelines or procurement requirements, we’ll also be publishing them on ProcureCo where suppliers can register and get access to both,” he says.
Ms Sawyer believes the new act will be significant. “It will be a huge change to the way things are done,” she says. “And I think it can only be beneficial to SMEs. There won’t be supplier qualifications on every single contract, so that will mean not as much work for SMEs to get them through the door.
“The intention is that it will bring more transparency as we will have to publish a pipeline of works that are coming up. The act is intended to really support transparency and to support SMEs where they might have struggled with current procurement regulations, because there are quite a lot of things to do to get into a regulated organisation.
However, she acknowledges that there will be challenges. “With transparency come resource challenges,” says Ms Sawyer. “If you’re publishing public notices, pipelines, we have to think about how we do that effectively. For bigger-sized organisations with decent-sized procurement teams you can factor that in, but there are a lot of others in the sector that will have smaller teams.”
She adds: “I wouldn’t say everybody is 100% ready, but there is some great work going on to get everybody up to speed.”
However, not everybody is convinced that the legislation will have the desired impact. “I’m not sure it will achieve the objective of making it easier for SMEs to access the public purse,” Ms Rees says.
“There’s a lot of work to do to ensure that housing associations use the new flexibilities under the Procurement Act. Plus, there’s no training being provided by government to get bidders up to speed with the new reforms.”
She suggests that social landlords could themselves educate their supply chains about the new legislation. “Maybe it should be incumbent on housing associations to upskill their SME supply chains on the reforms,” she says.
As for the overall impact that social landlords can have on helping SMEs, it remains to be seen how significant that can be.
“They can have a positive impact,” says Mr Butters. “But it’s probably unlikely over the next 12 months or so given the ongoing economic challenges.”
Recent longform articles by James Wilmore
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