Construction—state of the industry review

Our panel of experts from Eversheds, Fenwick Elliott, Canary Wharf Group, Beale & Company and Silver Shemmings Ash review the state of the construction industry and make predictions for 2018.

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The experts

  • Rob McNabb (RM), partner, Eversheds
  • Jeremy Glover (JG), partner, Fenwick Elliot
  • Martin Potter (MP), Canary Wharf Group
  • Will Buckby (WB), partner, Beale & Company
  • Tim Seal (TS), partner, Silver Shemmings Ash
  • Ian Masser (IM), partner, Beale & Company

What is the current state of the UK construction industry?

RM: The market remains active despite the uncertainties created by Brexit. We have seen, to an extent, the uncertainties being offset by a weaker pound, which is encouraging international investors who are willing to take a longer-term view to invest. Certain sectors continue to grow, in particular student accommodation, distribution centres and data centres, and there is some upturn in residential new builds. These are generating opportunities in the market in addition to the larger-scale public sector lead infrastructure projects.

The industry is continuing to face both challenges and opportunities in fairly equal measure and, to date, it’s benefiting more from the opportunities than it is being impacted by the challenges.

What are the greatest concerns at the moment?

JG: The biggest concern for the construction industry is the prolonged uncertainty brought about by Brexit. The issue lies in the fact that we do not have any real idea of the government’s expectations of a post-Brexit construction industry, or its key objectives for construction in the ongoing Brexit negotiations. In more tangible terms, one of the biggest concerns is labour supply. The free movement of labour has been a major success factor in the UK construction industry, with EU labour helping to cover an ageing workforce and what some have seen as a failure to invest in training and development to encourage the best home-grown talent in entering construction. This uncertainty makes it difficult to Brexit-proof a contract.

Unless a construction contract expressly addresses Brexit-related risks, it is doubtful that a party will be able to use force majeure clauses or frustration arguments to try and withdraw from what could turn out to be a bad contractual bargain. One reason for this is that it will be difficult to establish what might and might not be considered as being reasonably foreseeable. Nevertheless, we have seen Brexit-related clauses seeking to address which party takes the risk for any changes in the law as well as exposure to fluctuations in materials, taxes, import duties and the supply of labour.

With the more long-term contracts, some of which will inevitably be taking place during and beyond the Brexit period, we may find that parties, in order to deal with the challenges thrown up by Brexit, are left with a choice between being dispute-conscious or adopting a more collaborative approach to contracting. The more successful projects are likely to be those where everyone adopts the latter course.

Is Brexit having an impact on the terms of construction contracts or consultancy appointments?

MP: Brexit is having an impact to a certain extent—the lower pound and the uncertainty surrounding Brexit are increasing demands for fluctuations (not seen since the 1980s). The reaction to this is that contract sums are being increased as contractors add significant contingencies into their pricing. A further alternative is the requirement for advance payments so that contractors can hedge against significant currency movements.

Another consequence is the reluctance of European contractors to undertake work in the UK until the future becomes clearer. This is leading to searches for contractors in other parts of the world and for UK contractors to seek higher prices and, perhaps more importantly, not having the resources to undertake activities within the projected time scale.

The skilled labour shortage is becoming more acute as European workers either return home or look for work in a more stable political and economic climate. Again, this impacts the ability of UK contractors to fulfil required time scales or to seek relief in the contract should shortage of labour or materials occur.

Due to the political uncertainty, there is suggestion that changes in the law should become an employer’s risk.

WB: Understandably, Brexit is on our clients’ radar. For short term and low value projects, it is business as usual and very little has changed. However, the Brexit risk is being considered for long-term projects—and not just those projects which plan to continue after 29 March 2019, but those which have longevity before that date. This is due to the government possibly deciding that EU-derived laws should be repealed sooner to encourage and expedite a softer transition.

The areas in which we have seen a greater focus when reviewing, negotiating and concluding construction contracts or consultancy agreements are:

  • change of law drafting—specifically whether the supplier is entitled to additional time and money
  • fixed-priced contracts—whether the supplier is entitled to price fluctuations due to higher wages, increased tariffs on imported goods and services and further devaluation of the pound
  • standards and codes which apply to the work carried out—as European standards and codes may no longer be relevant, and
  • whether litigation or arbitration may apply—as it may be more difficult to enforce a UK court decision in Europe following Brexit

Are there any types of dispute that have become more prevalent?

TS: Disputes have become more prevalent and these consist of claims that can be brought as quickly and cheaply as possible. This is due to the industry still being in recession and profit margins being fine, therefore limiting both one’s own costs when bringing a claim and one’s exposure to the opponent’s costs if one fails. A quick turnaround reduces the time for an opponent to go bust in the interim and makes the claim pointless. In my experience, adjudications and statutory demands appear to be on the rise again. In the former camp, so-called smash and grab adjudications are increasing, where a party tries to show default by an opponent in serving a non-compliant pay less notice or no such notice at all, resulting in a default entitlement to the whole sum applied for by the claiming party.

IM: 2017 has seen a further increase in disputes within the UK construction industry. On the domestic front, the three main claims trends we have seen are:

  • an increase in adjudication challenges and enforcement proceedings
  • an increase in personal injury claims against building surveyors and managing agents, and
  • an increase in litigated claims possibly a consequence of the amendments that were made in November 2016 to the Pre-action Protocol for Construction and Engineering Disputes

2018 is predicted to be another litigious year fuelled by:

  • stringent reviews of ongoing projects to ensure compliance with building regulations (with a focus on cladding)
  • the continuing fallout from the unravelling of Private Finance Initiative contracts, and
  • claims arising out of Crossrail finally starting to trickle down to consultants

What are your predictions for the UK construction industry for the next 12 months?

RM: The implications of Brexit will begin to bite harder with potential impacts on availability of labour and the cost of imported plant and material beginning to hit home. However, there remains plenty of opportunities for those who are able to adapt. There will be increased activity coming out of new technology associated infrastructure—the move to electric vehicles and the associated infrastructure, increase in demand for connectivity and data storage as well as the general energy transition—which will mean plenty of new infrastructure projects.

Interviewed by Stephanie Boyer. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Filed Under: Construction

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