Under most construction contracts, the contractor takes on the ground conditions risk. However, a recent case has demonstrated that the risk can fall on the employer.
The revised Value for Money (‘VFM’) Standard and supporting Code of Practice, which take effect on 1 April 2018, were published last week, following the statutory consultation process. The new Standard will apply to all private registered providers of social housing (‘RPs’).
The revised Standard replaces the old self-assessment model with a more structured mechanism that places VFM at the heart of the business and involves reporting against a set of VFM Metrics. The Regulator of Social Housing (‘the Regulator’) has ultimately concluded that the proposed metrics remain broadly the most appropriate set of measures to capture performance across the sector. The Regulator has also published a VFM Metrics Technical Note to assist in interpreting the Metrics and how they will apply in practice.
The new Standard and Code do not deviate substantially from the draft Consultation documents, but there are some key changes to note that we discuss in further detail below. For a brief refresher on the Consultation document proposals, please see our September e-briefing.
Changes to the Standard and Code
A number of concerns were raised about the Standard and Code being too financially focused, as some RPs felt that they did not reflect the social value or impact of the sector. The Regulator has defended the Standard stating that, in order to set a Standard that is applicable across the whole of the sector, it was not appropriate to widen the scope of the metrics into these more subjective and contested measures. The feedback did, however, result in an amendment to the Code as outlined below:
- Maximising financial return - Under the Standard, RPs will be expected to ensure that financial return from resources and assets is “optimised” in so far as this is consistent with the RP’s delivery of its wider purpose (rather than “maximised” as in the consultation). This replacement was made as it was felt that maximising financial return would be difficult for businesses with a social purpose and could never effectively be achieved. It was easier to consider organisational objectives within the meaning of “optimise”. Additionally, it was acknowledged that RPs might also, at times, decide to accept a lower return from an asset to further their social objectives.
As part of the consultation, concerns were expressed that publishing the VFM Metrics in the accounts would not lead to transparency for stakeholders. Many RPs felt that there would still be a need for narrative reporting of VFM that would be too detailed for accounts. The following changes were made to the Code to reflect this:
- Reporting - The requirement for RPs to report against their five-year forecast has been replaced with “future forecasts, targets against forecasts” to reflect the fact that not all RPs use five-year forecasts.
- In addition to annual account reporting, the Code has been updated since the consultation to provide RPs with the ability to report outside of their annual accounts, in any way they see fit, to encourage transparency with stakeholders.
The only change made to the Standard itself was to paragraph 2(c), where it has been amended to clarify that where RPs invest in non-social housing activities, they should specifically consider whether this generates returns commensurate to the risk involved, and be able to justify where this is not the case.
The Regulator has emphasised that smaller RPs (those with less than 1,000 units) will still be expected to comply with the Standard, but the regulatory approach and level of engagement will reflect the size and risk profile of those organisations. The regulation of the VFM Standard will be proportionate and in line with the Regulator’s existing approach to regulating smaller RPs. The Regulator has confirmed that it does not intend to place any new requirements on small RPs to submit an FVA.
Changes to the VFM Metrics
The draft VFM metrics were initially published in September 2017 and drew on the Sector Scorecard exercise piloted by a number of RPs. The draft metrics have been amended following feedback from 84 respondents and to reflect the latest FRS102 reporting requirements. The changes are a refinement of four of the VFM metrics, namely:
- New supply delivered % - originally, the Regulator proposed that the metric should set out the number of new social housing units and non-social housing units that have been acquired or developed in a year as a proportion of total social housing units and non-social housing units managed at period end. The denominator of this metric has now been changed to ‘units owned’ to provide a fairer reflection of delivery within the context of assets owned. The denominator will not include the outright sale period end data, given that this stock is held for sale, and therefore does not constitute a long-term part of the provider’s asset base. The FVA template has been amended accordingly so that RPs separate out owned and managed stock.
- Gearing % - gearing will now be measured on a net debt basis to provide a meaningful measure of the financial position of providers who have raised funding from capital markets in preparation for a range of investment programmes.
- Headline social housing cost per unit – the denominator of headline social housing cost per unit metric has now changed and will be based on a measure of units owned and/or managed. This will allow a closer alignment between costs that RPs incur against the number of properties to which the costs relate. Leasehold units (non-low-cost home ownership leasehold units, which include right-to-buy) and fully staircased shared ownership units where the RP retains the freehold) are excluded.
- Operating Margin % – there will be an adjustment included that requires RPs to deduct the gain/ (loss) on disposal of fixed assets from the operating surplus in order to help identify the ‘core’ profitability and efficiency of an organisation more clearly.
Reporting against the metrics
RPs will be expected to report on the metrics across their whole group structures (not just core social housing activity within the RP(s) in the group) and should broadly categorise activities into “social housing activities” and “other”. It is, therefore, important to note that the metrics do not differentiate between other charitable and commercial activities carried out within a group structure and this will directly affect the results showing performance against the metrics. There is the possibility that this could lead to league tables that would not accurately reflect the diversity of the sector and differences in geography, structure, stock make-up, proportion of supported housing and organisational objectives.
The Regulator has acknowledged these concerns but still feels that it is important that comparisons can be made across the sector. It is unclear how this information will be interpreted by the Regulator and what, if any, action may result from a ‘poor’ performance.
It is to be hoped that the new Standard and Metrics will lead to greater transparency and easier comparison over VFM reporting within the sector. Our view is that it will certainly see a number of RPs looking to “sharpen their pencil” and assess the extent to which their current structures and plans remain fit for the future.
- A full copy of the Decision Statement for the new Standard and Code can be found here.
- The VFM Metrics Technical Note can be found here.
For more information on the new VFM standard, please contact Ellen Briers or call 0121 214 3598.
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