FM CONTRACTS
The cost-of-living crisis is a household issue for the NHS
The cost of living has been increasing across the UK since early 2021 and through 2022, placing unprecedented pressure on operating budgets for NHS facilities and service-providers alike. Dr Rachel Dick, FRICS, an associate director at Archus, outlines the ways NHS Estates and Facilities teams can address inflationary pressures in their FM supply chain, and protect service delivery standards, while maintaining the spirit and principles of partnership and social value.
The UK Consumer Prices Index (CPI) rose by 9.4% in the 12 months to June 2022, up from 9.1% in May. One way to understand a price index is to think of a very large shopping basket containing the goods and services typically bought by households. The price index estimates changes to the total cost of this basket. When we think of this ‘household basket’ in the context of our own lives, we might list food, transport, gas and electricity, property maintenance, and improvements etc. Scaled up, all these cost pressures exist for the delivery of hard and soft FM services across the NHS estate too.
Diseconomies of scale While the previous Chancellor’s statement has seen fuel tax concessions for the NHS, inflationary pressures on the NHS were left unaddressed. As a result, the Institute for Fiscal Studies estimates that the NHS England budget is now expected to grow by 3.6% per year in real terms, compared with 4.1% in October. This will have a significant impact on the NHS’s ability to meet efficiency targets and reduce the backlog. (NHS Confederation, 2022).
What choices exist? Particularly with new FM contracts, one obvious and straightforward solution might simply be to cap indexation to a relatively low percentage (such as 2.0%), with a fixed rate periodical uplift, before the contract is agreed. However, based on the legacy of the financial collapse of the some of the large FM providers, we know that unduly pressuring the contractor is not an effective, long-term, or sustainable strategy. The notion of ‘squeezing’ the supply chain in times of financial
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The Bank of England said in mid-June this year: ‘The rate of inflation is forecast to keep rising this year, but we expect it to slow down next year, and to be close to 2% in around two years.’
pressure is completely out of kilter with the ideology and ethos of collaboration, and the generation of economic social value when it comes to public sector expenditure. Even if such principles are set completely aside, without a sufficiently robust contract and careful ongoing management, suppliers will simply look to protect their margins through workforce rationalisation and stifled investment, ultimately leading to reduced levels of service delivery, and therefore poorer patient experiences and outcomes. In any case, what about existing
…based on the legacy of the financial collapse of some of the large FM providers, we know that unduly pressuring the contractor is not an effective, long-term, or sustainable strategy
contracts where there is not an option to impose new restrictions on contract inflation any time soon?
Annual indexation lifts Hard and soft FM contracts rely on annual indexation uplifts, but when it comes to FM contracts, there is more than one type of indexation used. This means that the costs between Trusts and FM contracts can become polarised and challenging to compare, even in the same patch. Typically, newer contracts, and those let via frameworks, use CPI for indexation. Older contracts, typically those associated with the FM provision at PFI sites, are indexed based on the Retail Price Indices (excluding mortgages) (RPIX). At the heart of these contracts is a mechanism to ensure that providers remain competitive, with pricing and innovation to ensure ongoing value for NHS money, achieved
September 2022 Health Estate Journal 43
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