The social housing sector is facing a concerning trend – an increasing number of contractors are experiencing financial distress and going into administration.
As these companies encounter difficulties in fulfilling their contractual obligations, housing authorities, residents, and communities are left to grapple with unexpected challenges.
In this article, we delve into the pressing issue of dealing with social housing contractor shutdowns and explore how landlords and housing associations can navigate these challenges.
What is the Contractor Shutdown?
Unprecedented numbers of social housing contractors have been going into administration, with construction companies being particularly hard-hit. According to the Insolvency Service, 471 construction companies went under in May 2023, the highest number in recent years and a 34% year-on-year increase.
A range of economic challenges are contributing to the shutdowns. Issues were present during the pandemic and, more recently, inflation combined with labour shortages, rising interest rates and risk-averse lending has exacerbated the situation.
Despite the rising cost of living and inflationary pressures, construction workers have not seen significant increases in their wages. This may discourage skilled individuals from seeking opportunities in the construction sector, exacerbating labour shortages and hindering the industry’s ability to meet the increasing demand for housing.
With the narrow margins that construction companies work with at the best of times, these challenges make it extremely difficult for them to stay above water.
Material Costs and Availability
The prices of construction and maintenance materials had increased by 10.4% in January 2023 compared to January 2022, the greatest increases being for insulating materials, gravel, sand, clays, kaolin, and cement. Data from April 2023 shows an increase in prices by 4.7% compared to April 2022, with screws, insulating materials and ready-mixed concrete seeing the biggest increases.
In addition, there are shortages for certain raw materials including bricks and cement. These challenges (combined with those discussed before) may have contributed to a 0.2% reduction in construction output in May 2023 and, while there had been growth in previous months, it has been the weakest growth since August 2022. (Click for more about maintaining output during a downturn.)
How is the Shutdown Impacting Social Landlords and Development Programmes?
Many development projects are being delayed. Even prominent Housing Association, Sanctuary, is experiencing delays due to contractor shutdowns, despite being in a good position overall.
Even if a development project is not directly affected by firms going into administration, there is still a risk of delays due to the remaining available firms picking up additional contracts and becoming overburdened.
When firms are forced to cut costs and prioritise settling debts, the quality of housing units may be compromised (within the limits of regulations). As such, the long-term liveability of the housing units may be affected.
Inability to Start New Projects
Local Authorities are already scaling back on development due to a lack of funding. Combined with the shutdowns, affordable housing needs are not being met, and so the housing crisis continues.
It’s not just new developments that are being affected by the shutdowns; units that require maintenance are not getting the attention required.
This has been an issue for some time, and the Regulator for Social Housing stated towards the end of 2022 that 62% of Registered Providers had experienced delays, of which 60% stated that cost increases, or material and labour shortages, are a factor.
Lower Chance of Investment
A contractor’s financial collapse raises concerns about the stability and reliability of other entities involved in the development process. This could make it difficult for future social housing projects to secure funding and partnerships with investors, government agencies, and other stakeholders, further hindering the growth of affordable housing initiatives.
How can You Safeguard Projects Against the Shutdowns?
Some Housing Associations and Local Authorities are relying on their in-house teams to pick up the slack. For firms that don’t have that option, what else can be done?
Review Existing Contracts and Include Provisions in New Ones
The first step in planning ahead for these challenging times is to review existing contracts in case they contain clauses relating to insolvency. From there, firms may seek advice about their specific circumstances in light of those clauses – should their contractors go under.
Including suitable provisions in any new contracts is vital in the current climate. For example, step-in rights offer an additional layer of security and assurance to all parties involved, ensuring that the project can move forward even in challenging circumstances, and reducing potential losses in case of contractor insolvency.
Other clauses to include relate to inflation, helping to address the potential impact of rising costs during the course of a project. When contractors price their services well in advance of starting the actual work, they may face a situation where the costs of materials and labour increase beyond what they initially anticipated, posing a significant challenge for both parties.
To mitigate this risk, contracts can include clauses that allocate the burden of increased costs due to inflation between the contractor and the client. These clauses are often known as “price escalation clauses” or “price adjustment clauses.”
A price escalation clause allows the contractor to adjust the contract price in accordance with the changing costs of raw materials and other items of the job, and may be based on a construction cost index.
However, these clauses can also take into account falling costs, allowing for a decrease in the contract price, bringing cost savings to developers and helping to protect profitability. (For this reason, price escalation clauses are sometimes referred to as rise and fall mechanisms.)
The inclusion of such contractual clauses helps to create a fair and balanced allocation of risk between both parties. It allows the contractor to mitigate potential losses and helps the client to better anticipate and manage project costs. As such, both parties can approach the project with greater certainty and a more stable working relationship throughout.
Monitor Contractor Stability
It’s essential to understand how contractors are faring in order to ensure to be prepared and mitigate potential risks. This means regularly monitoring their financial health and proactively identifying warning signs, such as mounting debts, delayed payments to suppliers or subcontractors, or a significant drop in project progress.
This heightened vigilance allows developers to take timely actions, such as diversifying their contractor portfolio, establishing contingency plans, or securing additional financial safeguards, to protect their projects from potential disruptions.
Fostering open communication and transparency with contractors about their financial status can encourage a collaborative approach in addressing challenges, promoting mutual trust, and enabling more effective risk management strategies to be implemented.
The Shortage Occupation List Grows
The government recently announced that certain trades would be included on the Shortage Occupation List so that foreign workers may be recruited to make up for the deficit. This may help slow the trend, allowing more contractors to stay in business.
The surge in social housing contractors facing financial distress and going into administration is presenting significant challenges for the housing sector. The industry is grappling with delays and an inability to start new developments, exacerbating the housing crisis.
To safeguard against these shutdowns, Registered Providers and housing associations need to take proactive measures. Reviewing existing contracts and including provisions that address insolvency and inflation risk is crucial. In addition, monitoring contractor stability and maintaining open communication can help identify early warning signs and facilitate better risk management.
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