Cityscape Manchester

Design-and-build: time for a re-think?

Adam Cutler, Director, VAT 
Cityscape Manchester
Following recent events, and given future plans, HAs should consider bringing design-and-build in-house, argues Adam Cutler.

It has become increasingly common for housing associations (HAs) to procure design-and-build contracts from builders, rather than employing various professionals directly. They can be cheaper and reduce much of the risk of a development. They also provide some of the VAT savings that would be achieved by the HA operating its own design-and-build subsidiary, without the associated set-up and running costs. However, recent events should cause HAs to reconsider if this is the right approach.

Two themes have dominated my conversations with HAs over the last few months. Firstly, many have uncovered significant defects with some of their properties that have been built, with poor quality materials used and corners cut. In most cases, these have only been uncovered in the aftermath of the Grenfell tragedy; several HAs have reported that they took remedial action to remove potentially hazardous materials from their buildings only to find the sub-structure crumbled away when the cladding was removed. Stories of defective mortar, inadequate safety features, unsafe foundations and other aspects being ‘not fit-for-purpose’ have been reported regularly in Social Housing and other publications in the last few months.

Once the immediate emergency is repaired, talk inevitably turns to how to ensure there is better quality control on future builds. Suggestions include having a more extensive service from the employer’s agent, and/or a return to having a clerk-of-works on site. 

There are also recommendations to re-think procuring design-and-build contracts from builders. While these provide the benefit of outsourcing much of the risk of cost overruns, it can mean the HA has less visibility over the quality of materials, workmanship and professionals involved. Without the professionals working directly for the HA, the question becomes, ‘who watches the watchers?’

Professionals working directly for a HA will have to charge VAT. However, most developing HAs have set-up a design-and-build subsidiary which can recover this VAT. Those HAs who have held back on creating these, or do not use them for all developments because they are using design-and-build contracts with builders, should reconsider this.

Having your own in-house design-and-build company does not stop you going for design-and-build contracts with builders, and these may still have their place for certain developments. However, if one procurement route will immediately cost 20% more, it could lead to decisions being made for the wrong reasons.

The second theme has been that while projects are temporarily stalling due to Brexit uncertainty, plans to ramp-up development are still in place – and, if anything, are getting more ambitious. Whatever the outcome of the political stalemate, its eventual resolution seems likely to unleash pent-up demand.

So if you wanted to change your arrangements so that the professionals on the build are working for a subsidiary of the HA, rather than the builder, this temporary period of calm provides an ideal opportunity to get your corporate structure ready. I recommend:

  • If you concluded a few years ago that a design-and-build subsidiary was not viable, work through the figures again with your updated assumptions on how many homes you plan to build in the next five years, and how you will ensure the quality of these units.
  • If you already have a design-and-build subsidiary set up, but have not used it for some time (and you would be surprised how many HAs have gone through the trouble of setting one up only to never use it in practice), get this up and running again. If someone decided that the costs of running this were too high, look at these figures again in the light of your new assumptions.
  • If you have been through a merger and find yourself with two or more such companies, have a plan for rationalising these and ensure that everyone knows which one to use for future developments.
  • If you are unsure about which arrangement might be the most suitable for existing or future projects, consider seeking specialist advice.

Adam Cutler is a VAT Director and Head of Social Housing at national audit, tax, advisory and risk firm, Crowe UK.

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Adam Cutler
Adam Cutler
Director, VAT and Customs Duty Services