Accurately Tracking and Reducing Costs to Housing Associations

Over the years, the National Association of Home Builders (NAHB) has periodically *conducted “construction cost surveys” that collect information from builders on the various components that go into the price of a typical single-family home. In 2009 they sent out 1000 questionnaires to a representative sample of homebuilders, and received just “54 usable responses”.

Now, this could simply be down to the lack of response from the invitees, but the use of the word “usable” does imply NAHB had responses that simply didn’t or couldn’t answer the questions they’d asked for one reason or another. This perhaps gives us the first indication that extracting relevant and specific cost data may not be as easy as it should.

Hearsay evidence from speaking to numerous Housing Associations, big and small, indicates that tracking line item costs to individual housing units has until now proved challenging at best, and impossible at worse. Costs are often apportioned at the higher level of Scheme or Project, not individual housing unit. Accurately apportioning costs to where they actually fall is a rare event; instead estimates or straight line apportionment is used e.g. if a length of guttering is bought in a 30ft run and is used on 6 properties, it is assumed all properties have had 5ft each, whereas the reality could be 3 had 3ft each and 3 had 7ft each.

Further challenges are thrown up when it comes to Goods Receipting, a critical activity for ensuring costs are accurately recorded and organisations pay for what they’ve actually received rather than what they ordered – which could be two very different things. It’s also critical to try and resolve any disparities on the spot to avoid disputes at payment time. Addressing concerns as and when they arise ensures both parties are immediately aware of an issue and action can be taken to ensure the rest of the order is processed smoothly and without delay.

So what activities that, if performed properly, can ease the burden of collecting this data and could end up saving an organisation – possibly your organisation – significant sums of money?

The first and most obvious one is sourcing. Given the need for compliance with Public Contract Regulations many Housing Associations take the easy route of simply accessing a buying consortium’s pre-tendered Framework. Whilst this usually ensures the requirement for compliance is met, it automatically introduces an overhead management fee that can be quite severe. There’s a balance between the benefits the aggregated buying power of the consortium can bring versus the cost of the management fee or rebate. And while the Housing Association doesn’t pay the rebate, the Supplier does, and this is therefore cost he could have taken off his prices. The management fee charged by the consortium is also something outside the control of the Housing Association. There is also room for debate as to whether the Supplier absorbs the rebate cost or passes it on through his pricing – but that is a discussion for another day.

There is also a valid argument that a small number of Housing Associations collaborating to build volume, using one lead procurement department to cut out duplication, and taking a clear specification with a guarantee of definite business to the market could not only achieve equivalent or better pricing (remember a Framework offers no guarantee of business), but could also generate their own revenue through charging a smaller management fee to cover their procurement overheads.

Then there is the introduction of an efficient and effective purchasing system that will provide you with visibility and management control throughout the procurement process. The system should then make data collection and, equally as important, data access, relatively simple…assuming you have the right system that is. All too often organisations opt to use a system with its roots firmly embedded in finance, which has then been adapted or developed to encompass ordering and invoice payment. Unfortunately many of these systems do just that – they enable orders to be raised and invoices to be paid, and forget about managing the order process, tracking goods and costs to enable stakeholders in the projects and schemes to see exactly why and what issues may arise, and where exactly the costs should fall. How often have we seen a large invoice being held for payment for the want of a single line item worth a fraction of the total value? This in turn can lead to your organisation being put on ‘stop’ by a key supplier at a critical time with all the hassle and bad-will this generates, and possible unintended consequences. When in fact some sensible, flexible order management could have avoided the whole situation.

Of course there are a number of efficient and effective purchasing systems around, most of the fairly expensive ERP systems either offer a purchasing module within them, or an affiliated alternative like SAP and Ariba. These are fine if you really have the need for all that they offer, and of course the money to spare to pay for them. For smaller organisations and SMEs (which the vast amount of Housing Associations are) ERP price tags and the lack of genuine need for the complex integrated support they offer usually means looking elsewhere. When you search the market here are some things to consider:

  • how easy is the system for users to use
  • is it mobile i.e. tablet and/or smart phone enabled for use on site
  • can you track cost by line item to individual housing unit
  • be sure to speak to your stakeholders first to find out what data they want ready access to, then make sure it’s easily available
  • check what flexibility is needed within your purchasing processes to meet the common day to day issues you encountered
  • compliance with PCR15 – is this required?
  • how can you tell if you’re buying from the cheapest supplier
  • can your contractors access your special pricing deals for materials
  • are you getting value for money
  • does the system reduces dispute
  • how easy it would be to add features to the system
  • is the system a finance system with a procurement add on or it is a procurement system which will also provide financial information
  • does the system provide you with the visibility and management control throughout the purchasing process

Finally, remember that this is a software environment where innovation and new developments happen frequently – don’t be afraid to be the first to embrace something new if it gives you what you need.

* Breaking Down House Price and Construction Costs Special Studies, March 5, 2010
Paul Emrath, Ph.D, Vice President for Survey and Housing Policy Research
Economics and Housing Policy, National Association of Home Builders

Author: Ian Beverley J6 Managing Director
Ian is a Fellow of the Chartered Institute of Procurement and Supply and a Chartered Member of the Institute of Logistics and Transport. Following a full career in the Supply Branch of the RAF, Ian ran Northern Procurement Group for eight years before becoming the Director of Strategic Procurement for the States of Guernsey, returning to the mainland in February this year to take up his current post with J6 Ltd.