Construction
The construction industry has been through some turbulent times in the last few years, with a lack of economic momentum leading to a weaker construction demand.
However, there is promise for the sector over the next twelve months. In 2023, construction output increased slightly above pre-pandemic levels, rises in the interest base rate peaked (for now), and the cost of materials is began to fall. There’s reason to hope for some growth and renewal in the industry this year – while acknowledging that there are still some risk factors to grapple with.
Although the price of construction materials is finally decreasing, there are still shortages in significant areas (for example, bricks and concrete blocks) leading to project delays. Together with labour shortages and higher interest rates making debt finance more expensive, it doesn’t look like things are getting easier any time soon.
Collaborative working across the project team through alternative procurement routes and digital strategies may well be what is required to encourage innovative solutions which can help deliver successful projects.
Building Safety Act 2022
In addition to the tough economic conditions, 2023 was all about the Building Safety Act 2022 (BSA). The Act was bought into effect on Monday 1 April 2023, but still requires secondary legislation to be implemented fully. It looks likely 2024 will see the construction industry getting to grips with the new regime and the piecemeal approach to bringing the provisions of the BSA into force.
Procurement
As the changes brought about through the BSA start to become apparent, we suspect there’ll be a greater move away from design & build and traditional procurement. Instead, construction management is likely to be favoured, which is a trend we started to see towards the end of 2023. If inflationary pressures remain – particularly in an industry with notoriously tight margins – some may be forced to offer this solution. Contractors may be unwilling to take on added risk of compliance with an untested regime, especially with higher-risk buildings. Construction management can help reduce their exposure and offers potential budgetary savings for clients.
Principal Designer and Principal Contractor roles
With the new principal contractor and principal designer roles being introduced by the BSA. Taking effect from Sunday 1 October 2023, it requires the dutyholders to plan, manage and monitor works to ensure compliance with the building regulations. We expect that principal designers and principal contractors will need to update their internal processes and guidance to demonstrate they have the required competence to deliver. Developers will need to factor additional time to their projects so that duties can be discharged and accommodated within programme, all of which will have cost implications.
Insurance
The last few years have seen a tightening of the professional indemnity insurance market, with many contractors and consultants being offered restrictive and expensive cover. It seems unlikely that 2024 will see an improvement in this situation. One key point for developers to watch out for in 2024 is whether the Secretary of State issues regulations concerning s. 144 of the BSA. This is the requirement for all new homes to have the benefit of a new-build warranty for 15 years. Hopefully, pragmatism will prevail, and the regulations are not brought in before the insurance industry has sufficient products available.
Insolvencies and Building Liability Orders
Section 130 of the BSA introduced the ability for the High Court to grant a Building Liability Order. The order must be in relation to a liability arising under the Defective Premises Act 1972, Section 38 of the Building Act 1984 and/or as a result of a building safety risk. An order can extend liability from one body corporate to another associated company for a relevant liability, essentially providing a mechanism to pierce the corporate veil. Consequently, it is less appealing to employ a special purpose entity to ringfence responsibility.
With an increase in the number of insolvencies in the construction industry due to the economic conditions, we expect to see an increased number of Building Liability Orders made in 2024. As a result, companies with no involvement in the original development of a building could be left facing liability. Purchasers of a corporate vehicle from within a group of companies with developmental links will need to bear this in mind. It’s likely that any indemnity insurance to cover this risk will carry increasingly high premiums as we see more Building Liability Orders being granted.
Fixed Recoverable Costs
Changes to the Civil Procedure Rules from 1 October 2023 introduced a system of pre-determined Fixed Recoverable Costs (FRC). This extends to most civil litigation claims with a value of up to £100,000, and allocated to either the Fast or Intermediate Track. Currently, Technology and Construction Court claims (TCC claims) are allocated to the Multi-Track, and therefore provisions relating to FRC do not apply. However, as the rule allocating TCC claims to the Multi-track was introduced before the FRC, this may well change.
It's also possible that a court may reallocate a TCC Claim to an alternative track, and may well be more persuaded to do so with the introduction of the FRC. The main advantage of the FRC is that parties will have greater clarity over the recoverability of costs. It’s likely that FRC will also benefit losing parties, as they will now stand to pay less in adverse costs.
Contacts
Jo Preece
Partner, Real Estate & Construction +44 (0)755 455 2086
joanna.preece@irwinmitchell.com
Robert Tunningley
Partner, Construction & Engineering +44 (0)746 835 0263
robert.tunningley@irwinmitchell.com