Are you thinking about responsive maintenance payment methods?
Paying for maintenance works isn’t perhaps something we naturally get excited about but getting it wrong could spell disaster for your organisation.
Here, Paul Newman, a Regional Director of Poole Dick, uses his 25 years of experience in the sector to explore different aspects of two methods of payment to pique your interest!
It’s a fact of life that nothing lasts forever, and when it’s a central heating pipe on a cold evening in February, that fact is particularly poignant.
Maintenance of our homes is vital to the comfort and safety of the occupants and as a social landlord (Client), when you have thousands of homes in your care, you need a method of paying for responsive maintenance works that suits you and the Contractor (Provider).
Two such methods are reimbursement to the Provider for the actual work undertaken, based on a pre-agreed schedule of rates (SOR), and a fixed price per property (PPP) paid to the Provider to resolve the repair requirements, irrespective of what work is carried out, a sort of insurance premium.
Both methods have been around for a while and their use and popularity tend to fluctuate with factors apparent at the time.
What’s good for the goose isn’t necessarily good for the gander
All social landlords are not the same, and each payment method has characteristics that suit some and not others, as well as external factors that may influence the use of a particular method at any one point in time in the economic cycle.
The point about responsive maintenance is that it never ends and contracts run for consecutive defined periods (terms) of numerous years, so a bit of forethought is necessary.
It’s about the balance of risk between the parties, their appetite, and their ability to accept and deal with the risk, in any one defined contract term.
It may be attractive for the Client to push more risk to the Provider, as in the PPP model, but in accepting the risk, the Provider needs and deserves due compensation. This may well be checked through a competitive tender exercise, but a Provider that is here to stay must make financial allowances in their price to be able to accept the risk.
This transfer of risk in a PPP model gives the Client a flat line spend against their responsive maintenance budget, a nice feeling when there’s a force 9 blowing outside, but they may pay for the privilege.
Honest day’s pay for an honest day’s work
So, it’s largely down to if the Client feels safe in the knowledge, as in the SOR model, that they are paying just for the work undertaken, and no more, or if they are relaxed that in some cases, 12 Acacia Avenue, that they have paid the PPP to the Provider each year, hasn’t had an order in the last three years.
If either is done right, it works for both parties and everyone’s happy, if not then someone’s losing out and feeling pain, which cannot be tolerated.
Sometimes it’s good, sometimes not so good (Easier ways to make a living)
The way risk is balanced will have a lot to do with where we are in the economic cycle.
Whilst the Client must maintain their properties, the Provider may pick and choose depending on what’s on offer and at what terms.
When things are tight and confidence low, Providers are generally less willing to take on the risk that comes with PPP, more things to go wrong, and less cash to deal with it, as a competitive market squeezes profit margins to win work.
An SOR, on the other hand, pushes risk back to the Client and although there is less opportunity to increase Provider margin by increasing efficiencies and innovation than a PPP, that’s okay when you are weathering the economic storm. Conversely, when confidence is high and the appetite for risk is there for a Provider, PPP would work well and may promote innovation and efficiency.
You could say that in economic recessive times, when risk transfer is cheap, pass it all over to the desperate Providers but in this case, there are usually no winners and an inevitable sorry end.
It ain’t what you do, it’s the way that you do it
Responsive maintenance, as the name suggests, is responding to a defective component that’s not doing its job, stressing the home occupier (Customer) and causing inconvenience. Neither the Client nor the Customer wants to have to deal with the inconvenience of responsive maintenance, but things don’t last forever so there will always be a need.
Repairing the faulty component is just part of the solution. The service element and how satisfied the Customer is at least as important. It’s where they call home after all.
The different payment models influence the culture and behavior of the Provider’s operatives, management, and of the Client.
One of the main costs for the Provider is traveling to the property to carry out the repair, together with the inevitable no-access issues, and the PPP model should motivate the Provider to actively seek out and fix other issues found at the property at the same time, thereby reducing costs. This requires a specific mindset and culture of management and operatives alike to which bonus schemes for the operative may dilute or contradict if not designed with this in mind.
Similarly, PPP, theoretically, should motivate the Provider to invest in the stock over the term for their own economic benefit, for the Client’s reputation, and for the Customer’s enjoyment of the property, for example, upgrading light fittings to LED early on in the term, fit and forget. This takes a Provider willing to invest and a decent contract term to gain a return on the investment.
Whereas under PPP the Provider doesn’t want the orders and may be willing to invest to actively reduce order numbers, under SOR, the Provider needs the orders to make a return, it’s a different mindset and sometimes difficult for a Provider to switch between on different contracts and exacerbated when the Provider uses sub-contractors who may not share this important mindset.
Assume makes an ass of u and me
Under PPP, data is king. The Provider is asked to quote a PPP for a term, anticipating the average costs and number of orders per property to strike the fine balance between winning the tender and making a profit.
Despite all the published metrics and average data available, nothing can predetermine a Client’s stock, it is unique in its make-up, location, age, state of repair, and customer behaviors, and therefore clear, accurate data is essential to calculate sustainable PPP for the term. Similarly, exclusions, KPIs, administration, and IT requirements all differ from Client to Client so comprehensive specifications should be a major factor in the tender documents.
Another important and significant consideration between PPP and SOR payment models is the administration of the payments.
Under PPP, the rate is the rate irrespective of the value and number of orders. Under SOR, each order claim, made up of multiple items, quantities, and rates, is verified by the Client, with the inevitable back and forth to arrive at the agreed claim value.
This requires a QS on both sides to ensure the claims are bona fide which is a significant resource to cost into the tendered rates for the Provider and for the Client to bear this overhead as well as their own QS costs.
One person’s meat is another person’s poison
So, what is the right payment mechanism for you?
As ever in these situations, it depends!
The current economic cycle, the Clients’ attitude to risk, their need for cost certainty, and their appetite for administration all play a part in the decision.
What is for sure is that the answer isn’t necessarily what you did last time. Explore internal and external factors and how they may change in the short term, and define what’s important to your organisation:
A cost-certain, low-administrative model in which you may pay a premium for the transfer of risk but may lead to innovations and efficiencies, but may be unattractive to Providers in lean times, or
A pay-for-what-you-get model with more control over what work is undertaken may suit Providers who are just looking to do a good job and get paid for it.
Some areas you may wish to think about when deciding your responsive maintenance payment mechanism:
- Your attitude to risk
- Desired management of your maintenance budget
- The current point in the economic cycle
- The desire for innovation and efficiencies
- The type of Providers targeted
- Quality of your data
- Desired term
- Internal administration resource
Whichever the case, select your provider partner well, set out what good looks like, and make sure the data is sound for all parties’ benefit.
For more information or to discuss this in more detail call Paul Newman on 01782 443030 or email email@example.com