SABO's Kombohus proves that reduction of construction costs is possible

The Swedish Competition Authority highlights SABO's efforts in its report

Stockholm, 13 May 2015 | Published in Economy

An overview of the public housing companies' public procurement of housing construction projects. SABO’s framework agreement procurements of Kombohus demonstrates that it is possible to reduce construction costs.

Summary of the report issued by the Swedish Competition Authority

There is a housing shortage in Sweden. The National Board of Housing, Building and Planning’s latest housing market survey (BME) indicates that demand for local housing exceeds supply in 126 of 290 Swedish municipalities. One of the results of this excess demand is that house prices have increased considerably more than the Consumer Price Index over the last 15 years.

As the owners of public housing companies, the municipalities have an important role to play. The municipality owned public housing companies were responsible for around 13 per cent of new houses and around 20 per cent of new apartments built during 2009–2013. Since the public housing companies are major players in the housing market and large public procurers of housing construction projects, it is important that effective competition is promoted in the public procurement of new housing projects.

This report presents an overview of the public housing companies’ public procurement of housing construction projects. It describes competition between tenderers in the studied procurements, identifies award criteria, and also makes suggestions regarding how competition in public procurement of housing construction projects can be improved in the future. The report is based on a study of public procurement procedures published in the Swedish commercial public procurement database Visma and on a questionnaire targeted at those responsible for the studied procurement procedures.

The Swedish Competition Authority’s study aims at providing an overview of the relevant public procurement market; it also aims at showing that there is potential for improving competition in public procurements of housing construction projects. The study highlights the following in particular:

The average number of apartments built in a new housing construction project is around 51, and this figure is also the same for projects undertaken by private companies. The average value of each project was around SEK 66 million.
Over 80 per cent of the new construction projects in the study were procured as turn-key contracts. This contract form is chosen as it can provide certain synergies and better access to the contractors’ resources and competencies. Furthermore, the client’s organisational structure is often better suited to turnkey contracts.
The average number of qualified tenderers is around 4.1, which is slightly lower than the figure for the Swedish public procurement market as a whole.
The size of the new housing construction projects (relatively large) and the procurers’ choice of turn-key contracts indicate that many contracting companies prioritise competition based on competence and technical solutions ahead of competition based purely on price.
The municipal public housing companies use ”the most economically advantageous tender” as the basis for their award of contract in over 70 per cent of procurements, a figure which is considerably higher than that found in the Swedish public procurement market as a whole.
The number of review procedures conducted is less than 3 per cent, which is lower than the figure for the Swedish public procurement market as a whole.
The market is dominated by three major national companies and a number of large local companies. Relatively few small and medium-sized enterprises (SMEs) win contracts, and many contracting companies consider it difficult to encourage SMEs to participate in public procurement procedures.
The focus on relatively large projects and turn-key contracts,and the requirements made in respect of turnover, financialstability and other similar benchmarks, etc. give large companies a competitive advantage in the public procurement of housing construction projects.
The public procurement market for housing construction is national and the number of foreign suppliers competing in public procurement procedures is extremely limited. There are also several entry barriers. Additionally, there is a lack of knowledge among procurers with regard to foreign tenderers.
A shortage of land for development, the municipal planning and building permission process, and construction prices are considered the three major obstacles the public housing companies face in their quest to expand their house-building operations. The municipalities, which both own land and hold the municipal monopoly on planning, have an important role to play if the public housing companies are to increase the construction of new housing.
Major procurements of ready-to-occupy apartment blocks, such as the Swedish Association of Public Housing Companies’ (SABO) framework agreement procurements of Kombohus may present possibilities for foreign operators since these provide opportunities for larger procurement volumes.
SABO’s framework agreement procurements of Kombohus demonstrates that it is possible to reduce construction costs.
Improved coordination between the municipal public housing companies in the public procurement of housing construction and the development of ready-to-occupy apartment blocks can lead to better competition, as well as stimulating industrialised house building and reducing construction prices.