Social landlords face significant challenges in retrofitting homes to meet the Government's minimum energy efficiency standards for the sector. While the benefits are clear (including addressing fuel poverty and contributing to the Government's Net Zero 2050 target), there are numerous challenges including lack of accurate stock data, pressures on funding, inflation and supply chain capacity.
Given the specific funding challenges, many landlords are seeking grant or third party funding to help accelerate the retrofit roll-out. The Government's flagship policy for the sector is the Social Housing Decarbonisation Fund (SHDF). A total of £778 million was awarded to 107 projects for SHDF Wave 2.1 in March 2023, and successful bidders are in the process of entering into delivery contracts. For those that were not successful in the last round, SHDF Wave 2.2 will open in mid November 2023 – but this is for a more limited pot of £80 million of grant funding.
Once the initial excitement of a successful SHDF bid dies down, attention turns to the practicalities of delivery – and in particular selecting an appropriate from of delivery contract. In this article, we'll look at some of the options, and outline why the grant obligations make flexibility and control important.
What are the grant funding requirements?
For SHDF Wave 2.1, the Department for Energy Security and Net Zero (DESNZ) has awarded grant funding through a Grant Funding Agreement, Data Sharing Agreement and Grant Offer Letter. Where landlords are part of a consortium bid, there is likely to be a Consortium Agreement (or similar) that flows down the requirements of the DESNZ agreements (including issues like monitoring and reporting, grant allocation, indemnities and liabilities, KPIs and milestones). SHDF Wave 2.2 will follow this format, so landlords can expect a similar exercise to review the funding obligations and flow these down to delivery contracts.
Under the SHDF Grant Agreements, DESNZ does not prescribe the form of delivery contract. Grant recipients (or indeed consortium members) are free to select their preferred form of contract for delivery, but they also are responsible for complying with the funding requirements. The choice of delivery contract is therefore important – and there are some contracts that fit better with the risk profile.
Our experience of SHDF programmes has underlined the need for a more flexible form of contract, which can build in pre-commencement surveys and retrofit assessments, and allow landlord control on the release of properties dependent upon the type of work, access and funding. While some providers propose fixed price project contracts (such as JCT Design and Build or Intermediate), these are often not properly aligned to SHDF or multi-site projects, and do not easily adapt to additional work being required or changes to requirements during delivery.
Any contract for SHDF works should reflect the funding obligations placed on the landlord by DESNZ (or the lead partner in a consortium). Many of these obligations relate to the delivery of the works themselves and are within the contractor's control (eg compliance with the agreed commencement and completion dates, achieving the KPIs and Milestones set by DESNZ, monitoring and reporting obligations etc).
Given that need for flexibility and control, we consider that a term contract is the most suitable starting point for SHDF delivery (and other retrofit works programmes in occupied properties).
Why term contracts?
A term contract is a flexible form of contract, often used where an employer has regular programmes of maintenance, improvement projects or minor work to be undertaken by a contractor over a period of time. The contractor is paid for the works pursuant to an agreed schedule of rates. It is commonly used to manage programmes of works to housing stock, as its inherent flexibility allows work to be instructed in sections under individual orders following completion of design and surveys when the location of works has been agreed with the employer. This allows properties to be added or removed from the works as necessary, dependent upon access for example, or particular types of work to be undertaken across the portfolio at particular times.
There are a number of reasons why a term contract is suitable for SHDF retrofit works:
- the employer issues work to the contractor through an instruction or order. The order will include a description or detail of the scope of works and the properties to which the work is applicable. The whole portfolio can be covered, but orders for different properties are given as and when needed (all of this being governed under one contract, with one contractor, on the same terms). This approach works well for grant-funded schemes as if the funding terms change (or funding is withdrawn/suspended), the employer has the ability to withhold orders. It also gives the employer control on the release of properties, particularly if there are concerns about performance or quality.
- payment is calculated in accordance with an agreed schedule of rates or agreed price framework, creating flexibility at the outset. If additional work is needed due to a change in the funding terms or otherwise, it can be instructed at a price which has already been agreed.
- performance management can be dealt with via a strategic core group. Both employer and contractor representatives will meet to review the performance of the contract and monitor KPI performance, and create a remedial plan if things are not going as planned. This aligns with the DESNZ Grant Funding Agreement which also sets out KPIs and Milestones that need to be met and requires compliance with remediation plans if performance targets are not being met.
- although a term contract approach does require more employer involvement, a contract administrator can be appointed to assist the employer with administering the contract, issuing orders and certifying payments.
- depending on how the PAS 2035 roles are allocated, the design and survey process required for PAS2035 assessment can be carried out prior to an Order being placed (or alternatively built into the contractor's scope under each Order).
- other pre-conditions before commencing work in residents' homes can also be included before Orders are placed, such as statutory consultation under Section 20 of the Landlord and Tenant Act 1985 where contributions are being recovered from leaseholders.
Which term contract?
The JCT Measured Term Contract (JCT MTC) is the most commonly used form of term contract and forms part of the well-known JCT suite of contracts. As a JCT contract, it uses concepts and terminology which are readily understood, and will be familiar to most contractors. While it requires some amendment to flowdown the SHDF funding obligations, most contractors are used to seeing amendments to the standard forms and this shouldn't cause concern.
The Term Alliance Contract (TAC-1) is an alliancing form of term contract published by the Association of Consultant Architects, and is used widely across housing asset management and improvement programmes. TAC-1 follows an order system process and can be used for similar work types as the JCT MTC. One benefit of the TAC-1 contract is that it can be used as a multi-party contract, incorporating consultant contribution and multiple contractors if needed. This is particularly helpful with the PAS2035 accreditation required for the SHDF since some main contractors are reliant upon their specialist sub-contractors being accredited. These team members can be included as a named Specialist under TAC-1, which helps simplify the contractual framework.
We recommend early discussions on the proposed form of contract, which will allow time to prepare the necessary flowdown drafting to address SHDF funding requirements. Given the challenging delivery milestones and timescales under SHDF, it is important that clients are familiar with the form of contract. Don't assume that contractors understand the SHDF funding requirements or have considered your obligations. If in doubt, seek advice.
