HC Deb 18 July 1966 vol 732 cc339-48

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Charles R. Morris.]

6.6 a.m.

Mr. Richard Sharples (Sutton and Cheam)

I am very glad to have the opportunity of raising a subject which is of considerable concern to every building and contracting firm in the country. It is the comparison of costs of construction by private contractor and by direct labour. I do not believe that the private contractor expects any special privileges in this matter, but what he does expect is that he should be treated fairly and where comparisons are drawn that they should be drawn fairly.

I put a Question for Written Answer to the Minister of Housing and Local Government on 24th May this year, to which he replied: Precise measurement of efficiency is always difficult, but statistics on the cost of local authority houses show that cost per square foot is less by direct labour than by contractor."—[OFFICIAL REPORT, 24th May, 1966: Vol. 729, c. 54] I draw the attention of the House to two words in that Answer. The first is "statistics". Everyone in the House knows what is meant by statistics. The second word is "cost". Those words were used without qualification of any particular areas or local authorities.

I was somewhat surprised to receive that Answer, because from my experience at the Ministry of Public Building and Works I do not recall any such statistics being maintained in the Ministry nor so far as I know in the Ministry of Housing and Local Government which would justify the Minister in giving a reply of that kind. I was not alone in my surprise at what the Minister said in his Answer. It was taken up to a large extent by the technical Press. I quote one example from the Contract Journal, of 9th June this year, in which "John Sumner's Notebook" said, in reference to the Minister's answer: As something of a student of the direct labour scene, I would like to know where Mr. Crossman got these statistics to which he refers. If his answer is that he got them from his Department, then there must be somebody at the Ministry of Housing and Local Govern- ment who is stringing his Minister along—and in a big way. The writer went on in this journal, which is widely read throughout the whole industry, to suggest that I should put down a Question to find from where these statistics were obtained and added: This is likely to give Mr. Crossman a bit of a headache. Not because a great deal of time would have to be spent in getting them, but because I happen to know that they do not exist. There was already at that time when the article was written a further Question on the Order Paper which was answered by the Parliamentary Secretary on 14th June. In answer to a Question asking him to publish the statistics on which these estimates were based, he produced some very detailed figures. He said: In 1965, the average price per square foot of local authority 2-storey, 3-bedroom houses built by contractors was about 55s. 7d. compared with 54s. 2½. for those built by direct labour. These figures showed a difference, if my calculations are correct, of only Is. 4½d. in the price per square foot according to the Minister's calculations.

I think that there are certain questions which we should ask about these figures which were produced by the Parliamentary Secretary. The first question that arises is: where do these figures come from? Are these the statistics covering the nation as a whole which we referred to by the Minister of Housing and Local Government, or are these the figures which have been produced from an examination of particular schemes such as that which was carried out by the Manchester City Direct Works Department?

The House should be told whether these figures are national or whether they are related to particular schemes where there are particular circumstances. I am sure that the Parliamentary Secretary will know perfectly well that if these figures, which bear a curious resemblance to those worked out by the Manchester City Direct Works Department, are taken from particular cases of that kind, his answer is wholly misleading. I hope that we shall have a clear answer on that point.

The other point which came out of the Parliamentary Secretary's reply was: I have no information about the percentage added for overheads either by contractors or direct labour organisations."— [OFFICIAL RETORT, 14th June, 1966; Vol. 729, c. 260

The question that arises, therefore, is: how was he able to produce a figure down to the nearest ½d. unless he had some information about the question of overheads, unless he had made some allowance and percentage addition for overheads?

In relation to this reply and the 54s. 2½d., the House should be told specifically, first, where these figures were obtained from: secondly, how they were calculated without the Parliamentary Secretary apparently knowing what percentage was added for overheads, because it would be impossible to do the sum without that and, thirdly, why he used the word "price" and not "cost" as was used in the Minister's original reply.

I put down a third Question to the Ministry of Housing and Local Government, which received an oral Answer on 28th June. I asked the Minister then to publish detailed breakdown of these statistics. I received a reply which, again, was wholly at variance with the reply which had been given both by the Minister himself and subsequently by the Parliamentary Secretary. The Minister replied: No detailed breakdown of these estimates of costs is available… We have had "statistics". We have had "price". Now we have "estimates of cost". …The information is compiled from figures provided by local authorities". Which local authorities?

Was the Minister's original Answer referring to statistics of cost misleading? If it was misleading, the right hon. Gentleman himself should have come to the House and made a statement correcting the impression which he knew from the articles in the technical Press he had created.

In answer to a supplementary question from me, the right hon. Gentleman went on to say: The fact is that these are estimated figures, not actual costs. I think that they provide a good guide. We are getting further information to try to test this."—[OFFICIAL REPORT, 28th June 1966; Vol. 730, c. 1580.] Is this the basis of the statistics of cost to which the Minister referred in his original reply?

In the absence of any personal statement by the Minister to correct his original reply, the House must assume that these statistics of cost to which he referred exist in detail in the Ministry. Otherwise, his original reply was wholly misleading. I have searched in the Library of the House and other sources available to me for these statistics, and I have been quite unable to find them. The Parliamentary Secretary should tell us whether these statistics have been published and, if they have, where they have been published. If not, will he say when they are to be published and made available so that people outside the Ministry can make these comparisons?

How was the comparison made to which the Minister referred in his original Answer? Was it an estimate of direct labour cost against contractor's tender price? Was it an estimate of direct labour cost against contractor's final account? Was it the actual direct labour cost against the contractor's final account? The industry is awaiting answers to these important questions.

If it is based on actual cost, how is the actual cost for direct labour calculated? What percentage allowance is made for overheads, for the work done in local authority offices? I know the percentage which is added by the Ministry of Public Building and Works for work done for other Departments. Is it the same percentage which is added in these calculations?

Are these figures for direct labour cost based on serial tendering, or on separate contracts? There is a great difference. A local authority which is able to provide serial tendering for its direct labour costing has a considerable advantage. What allowance is made for the costs of plant and machinery owned by the direct labour departments? Are these written off in the proper way, and is interest allowed in the calculation for plant and machinery owned by the direct labour departments?

I hope that the Parliamentary Secretary will be able to give clear and definite answers to all these questions. There is no doubt that the Government have made the position of the private contractor very much more difficult since they came into office. It is much more difficult for comparisons to be made between the costs of building by private contractor and the costs of building by direct labour through the abolition of the one in three rule. They have given an advantage to direct labour, particularly in the case of the smaller contractor, through the advantage that the direct labour department has in maintenance as a result of the Selective Employment Tax.

The Minister is, I understand, to meet the house builders on 4th August, the original date having been changed. According to a hand-out issued by the National Federation of Building Trades Employers, The conference has been arranged at the request of Mr. Crossman, who has expressed his strong wish to arrest the decline in the number of houses being built and the loss of confidence amongst house-builders. I am sure that the industry in assessing the confidence that it has in the Minister will pay careful attention to the reply that the Joint Parliamentary Secretary gives to the points that I have raised.

6.22 a.m.

Mr. T. W. Urwin (Houghton-le-Spring)

I welcome the opportunity to participate in the debate, however briefly, and in the full knowledge that the Opposition, as represented on this occasion by the hon. Member for Sutton and Cheam (Mr. Sharples), are the traditional opponents of direct labour as they are of every other public enterprise. The inferences that I deduce from the hon. Gentleman's remarks are that direct labour is dishonest, that the application by local authorities of direct labour schemes is to some extent dishonest, that the costs are buried, and that the actual costs of contracts are not revealed by local authorities.

In my very long experience and very close contact with direct labour departments before I became a Member of Parliament I was able to gather some rather intimate knowledge of their working in my immediate area as a trade union officer. I shall quote one or two figures based on my local authority experience after a Ministry of Labour circular early in 1958 insisted that local authority direct labour departments should tender for every third contract in competition with private contractors. My figures, which are authentic, are most revealing. Time does not permit me to go through them in detail.

However, in December, 1958, 40 houses were tendered for. It should be remembered that this was a relatively small local authority and that it had a small direct labour department. The urban district council tendered £ 52,225, and the next lowest tender was £ 57,583. The completed cost by the direct labour department was £ 48,362, giving a total saving of £ 9,221, an average of £ 230 per house. In February, 1960, 42 houses were tendered for. The urban district council's tender was £ 57,080, and £ 9,642 was saved against the next lowest tender, representing £ 229 per house. In May, 1961, four houses were tendered for. The next lowest tender to that of the local authority was £ 7,422 and the completed cost was £ 5,818, a saving of £ 1,594 or £ 398 per house. In April, 1964, 12 dwellings were tendered for. The council's tender was £ 17,041, the next lowest tender was £ 18,756 and the completed cost was £ 16,835, giving a net saving of £ 1,921 and a saving per house of £ 160.

These figures appear to give the direct lie to the suggestion that local authorities are not competitive with private contractors. I appreciate the concern of contractors when they find themselves unable to compete with these highly efficient direct labour departments.

The gross saving to the local authority direct labour department, building 98 houses was £ 22,388, or £ 228 a house. In addition, there is the higher efficiency and better standard of workmanship. This money would have gone as profit to private contractors with the subsequent additional burden on rent and ratepayers. Another local authority in my area has built houses for sale at a much cheaper selling price than could any contractor in the locality. There are many examples which I could give.

By contrast, in the absence of competition in the new town of Peterlee, a contractor, contracted by the new town corporation, went into liquidation with liabilities close on £ 500,000 which had to be born by the New Town Corporation and the Ministry of Housing and Local Government. I wish that more contractors were as efficient as many of the direct labour departments with which I am proud to be acquainted.

6.27 a.m.

The Parliamentary Secretary to the Ministry of Housing and Local Government (Mr. Robert Mellish)

It is important to get the use of direct labour in perspective. About 1,300 local authorities, that is the great majority, employ some direct labour for building, but the bulk of these labour forces are employed on maintenance. There are 137,000 men employed on building repairs and maintenance against only 27,500 on new building work. Of this 27,500, only 14,500 are employed on new housing work.

The use of direct labour for repairs and maintenance is so widespread and well established that we are entitled to conclude that this has been found to be the most efficient way of dealing with the local authorities' large and growing maintenance responsibilities. I am not aware of any suggestion that the cost of doing such maintenance by direct labour is in any way unreasonable or that the work could be done more cheaply and more efficiently by private contractors.

The argument about costs arises generally in connection with new building, and more specifically new house building, undertaken by direct labour. During the first quarter of 1965 187 authorities, most of them large ones, did some or all of their house building by direct labour and direct labour accounted for some 9 per cent. of all local authority house building. Direct labour, therefore, plays a small part in the local authority programme. The question is whether the local authorities who use this method of building get as good a bargain as when they employ contractors. The short answer to this question is, "yes".

Any comparison of the costs of building by direct labour and by contractors must rely on figures provided by local authorities at the time when they seek loan sanction or subsidy from the Ministry of Housing and Local Government. At that point the figure of cost is based on the tender price, if the authority proposes to use a contractor or, if direct labour is to be used, on the direct labour department's estimate, which may or may not have been in competition with outside contractors. The point is that in either case the figure is not the final cost.

But directly comparable figures are available only on this basis and it was this basis that I used in my Answer to the hon. Member's Question on 14th June. I said that in 1965 the average price per square foot of local authority two-storey three-bedroom houses built by contractors was about 55s. 7d. compared with 54s. 2½d. for those built by direct labour.

It has been argued that, to get a true comparison of costs. we should compare final costs rather than tenders and estimates. It has been suggested that a comparison at the tenders-estimate stage is unduly favourable to direct labour and that the final cost of direct labour is generally much higher than the estimate, whereas the contractor can be held to his tender figure.

I cannot accept this. It is true that, in some cases, the final cost of a direct labour scheme exceeds the estimate; and those who dislike direct labour are quick to quote such examples. But there are other cases where the final cost is below the estimate as, for example, has happened in Sheffield—and we do not hear so much about this type of case.

On the other hand, when a contractor undertakes a project it is extremely rare for the final cost to be below the tender and very frequent for it to be above it. By no means all contractors' tenders are firm price. In the first quarter of this year, over 15 per cent, of dwellings in tenders approved were to be built under contracts with fluctuation clauses either for labour or for labour and materials, mainly because they were large schemes with a contract period of more than two years.

Moreover, it is well known—and the hon. Member for Sutton and Cheam (Mr. Sharples) will remember this from his experience as Parliamentary Secretary to the Ministry of Public Building and Works—that, as a result of variation orders and claims, the final cost of a job is often not settled until many years after the tender and proves to be quite considerably in excess of it.

The figures that I quoted in my Answer to the hon. Member on 14th June included overheads. There is an important point here. It is often alleged that, while contractors have to include overheads in their tender as well as profit, the direct labour departments of local authorities are able to conceal many of their overheads in the general accounts of the authority. This is the sort of allegation which is very difficult to prove or disprove and I cannot at the moment do either.

However, I can say that it is, in general, improbable. If the full overheads of the direct labour department are not borne by that department, they have to be borne by some other department. In the nature of things we can expect other departments to resist this and the treasurer of the local authority to make as sure as he can that overheads are borne where they fall. The direct labour department may have an incentive to pass on its overheads to some other department, but the rest of the local authority organisation has every incentive to see that this does not happen.

It is, of course, not always easy to audit direct labour departments and we are concerned to make such audits the instruments for ensuring that overhead costs are properly apportioned. Accordingly, the District Auditors' Society, in collaboration with the Ministry's Chief Inspector of Audit, is now embarking on an internal review of the audit problems of works departments, and I hope that this will throw up any weaknesses in the present arrangements and suggest methods of overcoming them.

The contractor's books are not subject to district audit in this way. His tender may include all the overheads applicable to the project or it may not. Contractors sometimes tender at a loss merely to get a particular contract. Conversely, they may seek to recoup themselves for loss on other contracts by including in their tender—and it may be the lowest—more than those overheads which this particular job will give rise to. So, in any particular period, the estimates submitted by contracts and direct labour departments may vary in relation to each other.

But whatever the difficulties of making a comparison, we must accept that direct labour for new building is justified only if it is efficient and, in the last analysis, competitive. I believe that it is both these things. There has been a lot of misunderstanding about this. People talk as if private contractors obtain local authority contracts only by competitive tender. This is not so. Between 40 and 50 per cent. of local authority houses now under construction by private builders are the subject of negotiated contracts.

Such comparatively unorthodox contractual procedures have frequently to be used for industrialised building. This flexibility in contractual method was recommended by the Banwell Committee, which reported in 1964. The hon. Member will recall that his right hon. Friend who was then Minister of Public Building and Works told the House, in answer to a Question, that his Government were in general agreement with the main lines of the Committee's Report.

One of the ways in which to make building efficient and cheap is to have continuity of employment for any building organisation, whether it is run by a contractor or a local authority. It helps to get such continuity if one is prepared to depart from fixed price competitive tendering on every occasion. This is the thought behind Circular No. 50/65 of 16th November, 1965, which relieved local authorities with direct labour organisations of the obligation to go out to competitive tender in one case in three The circular gave direct labour departments freedom corresponding to the freedom of private contractors to enter into negotiated contracts.

Mr. R. Chichester-Clark (Londonderry)

rose—

Mr. Mellish

I cannot give way. The hon. Member for Sutton and Cheam said my reply would be read by private builders.

Mr. Chichester-Clark rose—

Mr. Mellish

If the hon. Gentleman will keep quiet I will answer the question, although he may not like it because he does not like anything nice to be said about direct labour.

The Question having been proposed after Ten o'clock on Monday evening and the debate having continued for half an hour, Mr. DEPUTY SPEAKER adjourned the House without Question put, pursuant to the Standing Order.

Adjourned at twenty-four minutes to Seven o'clock a.m.