Agenda item - Overpayments on the housing repairs and improvement contract

a)    Cover report of the Acting Executive Director of Finance & Resources (copy attached). 

b)    Report submitted to Audit & Standards Committee on 12 January 2016 (copy attached). 

(1)          That the report and the committee’s comments be noted.

(2)          That it is agreed that a report be presented to the Committee on a biannual basis, demonstrating that the council and Mears Ltd have robust processes are in place to avoid any further overpayments. 

61.1    The Committee considered a report of the Acting Director of Finance & Resources which was referred for information from the Audit & Standards Committee. The report was also referred for information to the Members Procurement Advisory Board on 18 January 2016.  The report summarised the results of an internal audit review of overpayments identified by the council in respect of contracted housing repairs.  It summarised the audit findings; the actions taken by the council to recover amounts owing and to prevent any further overpayments; and actions being taken by the contractor (Mears Ltd) who were working with the council to prevent further occurrences.  David Miles (Mears CEO) and Lucas Critchley (Mears MD) attended the Committee to answer questions.  The report was presented by the Head of Internal Audit.

61.2    The Head of Internal Audit informed members that the report referred to work carried out by a sub-contractor working on housing responsive repairs.  Mears Ltd were responsible for overseeing the work. Following an audit of housing repairs in 2013/14, the Housing Contract Compliance Team enhanced its assurance processes by increasing the number of physical post-inspections and the way they were selected and carried out (with effect from February 2015).  In May 2015 these inspections identified a potential over-charging issue by a responsive repairs sub-contractor.  After initial investigation, the Housing Contract Compliance Team contacted Internal Audit with their concerns.   Internal Audit, working jointly with quantity surveyors from the council’s Housing Team, inspected 46 repairs completed by a single sub-contractor to identify the extent of any potential overcharging and to identify shortfalls in internal controls.  Further inspections were made by Mears Ltd and council surveyors.  Internal Audit estimate the potential overcharging was in the region of £300,000.

61.3    Internal Audit made a number of high priority recommendations as set out in paragraph 4.3 of the report. The sub-contractor had been dismissed from the contract and the council and Mears Ltd were working together to estimate and refund to the council the amounts overcharged for the work carried out by the subcontractor.  The money had not yet been repaid. 

61.4    Councillor Mears stated that when the Mears Ltd contract was let some years ago all checks and balances were in place.  However, the GMB union had expressed concerns a while ago and had been reassured by the former Chief Executive that there were no problems with the contract.  Tenants had also raised issues for some considerable time.  Councillor Mears stated that there was a need for everything to be transparent and clear and stressed that gossip reflected badly on the council.  It was important to consider that tenants were paying for the overpayments.  Councillor Mears noted that the contractors had not been named and was concerned that £300,000 was not an amount which would trigger a police investigation.  Councillor Mears considered that there had been no assurances about effective arrangements for sub-contractors and she was not reassured by the report.  Councillor Mears stated that she would like to see an external audit of housing management so tenants could be confident that their money was being used correctly. 

61.5    The Head of Internal Audit explained that although there had been strong evidence to show consistent overcharging had taken place, there had not been enough evidence to ensure that the police could secure a prosecution in court.  Meanwhile, officers had taken legal advice not to name the contractor in order to protect the funds which belonged to residents.  Naming the contractor could prejudice the outcome.  

61.6    Councillor Atkinson stressed that the matter had been discovered by diligent council officers and he understood that Mears Ltd had been pro-active in checking other sub-contractors.  Councillor Atkinson was uncomfortable with even 20% of work being sub-contracted.  He supported the recommendations in the report and stressed that this situation should never be allowed to happen again. 

61.7    The Internal Head of Audit noted members’ comments and stated that he was keen to have a high standard of governance.  When that did not happen it needed to be addressed.

61.8    David Miles, CEO Mears Ltd stated that all responsive repairs sub-contractors working on housing repairs would be audited for works over the 17 month period to which the internal audit mainly applied.  The issue arose around application of 5 schedule of rates codes by the repairs sub-contractor in question.  Around 20% of the annual Mears contract was responsive repairs of which only a proportion is carried out by sub-contractors.  Each job was worth about £2000.  The 5 schedule of rates codes charged for materials bought by the sub-contractor and not for what was fitted, as stated in the contract.

61.9    Councillor Wealls asked if Mears Ltd were paying the council compensation for the overpayments.  This matter had taken up a great deal of officers’ time.  The Head of Property & Investment/Head of Housing Strategy explained that Mears Ltd was paying the council for an additional quantity surveying resource. 

61.10  The Acting Executive Director, Environment, Development & Housing informed members that full costs would be recovered. This was confirmed by David Miles, Mears Ltd/CEO. 

61.11  Councillor Miller expressed concern that the contractor had not been named.  He felt that the case should be referred to the Crown Prosecution Service. Councillor Miller requested a workshop to look at the Mears contract.  The Acting Executive Director, Environment, Development & Housing replied that he was happy to arrange a workshop for Housing & New Homes Committee members to look at this important issue.  

61.12  Councillor Miller asked how officers knew whether the overpayments were not happening before the 17 month period examined.  The Head of Internal Audit replied that officers needed to investigate the earlier period and that this was set out in the report.  Meanwhile, the evidence the police required to take on the case was higher.  There was a gap between the conclusion that overcharging was taking place and evidence to secure prosecution. 

61.13  David Miles confirmed that although Mears were allowed to sub-contract works, the sub-contractors could not sub-contract work. 

          Lucas Critchley (Mears MD) informed the Committee that Mears had carried out additional post inspection work and had appointed a Quality Assurance Manager. The Mears Ltd business model was focused on direct delivery and moving forwards Mears aimed to deliver more of the repairs service in-house.

61.14  Councillor Gibson welcomed the suggestion to have a workshop for councillors.  He stressed that it was vital that the matter was dealt with openly.  He agreed with Councillor Mears’ suggestion that the matter should be looked at by external audit.  Councillor Gibson welcomed the fact that the overpayments would be reimbursed but stressed that the council had lost the interest they would have made on the money.  He was concerned at a system whereby Mears checked their own sub-contractors.  He felt this should be reviewed. 

61.15  Councillor Mears asked if leaseholders had been overcharged.  The Head of Property & Investment/Head of Housing Strategy explained that a very small element of the overpayment related to leaseholders and repairs to communal areas and that there would be a reimbursement to leaseholders for any overcharge. 

61.16  The Chair stated that she was concerned to hear about the overpayments which had been happening throughout successive administrations.  It was necessary to learn lessons and put in place new controls on the contract.  She would ask for a report back to the Committee every six months to reassure members that robust processes were working.  The Procurement Advisory Board would look at this matter in more detail.  In the meanwhile, the Chair appreciated the work carried out to quickly deal with the issue. 

61.17  RESOLVED:-

(1)            That the report and the committee’s comments be noted.

(2)            That it is agreed that a report be presented to the Committee on a biannual basis, demonstrating that the council and Mears Ltd have robust processes are in place to avoid any further overpayments.