As noted in The Big Picture for Business 2023, 2022 was another important pivot point for the global economy. Most, if not all, of the key issues for businesses which are likely to persist in 2023 have an impact on the construction and engineering industries. This includes in particular the Russia-Ukraine conflict which continues to affect the way in which the industries operate by restricting access to fuel, goods, materials and labour, and causing supply chain disruption as well as global energy turmoil.
Further, in the UK there has been particular focus on the overhaul of the building safety regime, which was brought into sharp focus by the Grenfell Tower tragedy, and which has now made its way into legislation with the passing of the Building Safety Act 2022, which came into force on 28 April 2022.
We consider below a number of themes that are likely to be of key importance to the construction industry in 2023.
Building safety
Over the last few months of 2022, the focus has been on the implementation of the new, more stringent building safety regime in the Building Safety Act 2022 (BSA). Our podcast - How We Live… Safely - Building Safety Autumn Update covers the latest position. The proposed gateway regime and overhaul of the building control regime in respect of "higher-risk buildings" will be set out in detailed secondary legislation in 2023. We describe what is currently known about these proposals, based on a Government consultation, which closed in October 2022, in this insight. A response to the consultation and draft regulations are due to be issued in the first few months of 2023. Hot off the press is a partial response to the consultation published on 24 January 2023, in respect of the in-occupation phase for higher-risk buildings, accompanied by the draft Higher-Risk Buildings (Key Building Information etc.) (England) Regulations 2023, which have been laid in Parliament at the same time.
In addition, the Government has recently published draft secondary legislation which sets out the definition of "higher-risk buildings" in England: the Higher-Risk Buildings (Descriptions and Supplementary Provisions) Regulations 2023 are expected to come into force in April 2023.
In conjunction with the changes being brought about by the Building Safety Act, the fire safety regime has also been further strengthened by the introduction of the Fire Safety (England) Regulations 2022. These came into force on 23 January 2023 and will expand the duties of Responsible Persons for multi-occupied residential buildings.
The Department for Levelling Up, Housing and Communities (DLUHC) also has an open consultation, due to close on 7 February 2023, in respect of its proposed Building Safety Levy. The scope of the levy has been significantly expanded since it was initially proposed (when it was thought that it would apply to higher-risk buildings only): it will now apply to all new residential developments in England that require building control approval, irrespective of their height.
Finally, it is likely that in 2023 we will start to see cases working their way through the courts involving the new types of orders that may be made by the First-tier Tribunal (FTT) under the BSA, including Building Liability Orders (which we described in our recent insight), Remediation Orders and Remediation Contribution Orders. Indeed, the FTT recently made what is understood to be the first Remediation Contribution Order under the BSA in connection with the remediation of building safety defects at a high-rise residential block at 9 Sutton Court Road, in London. Whilst Sutton Court was ultimately decided by the FTT without a hearing, and a number of matters concerning interpretation were not subject to any legal argument before the Tribunal, we expect that as more cases work their way through the system, the various statutory definitions to be applied by the FTT in making such orders will be subject to detailed legal argument which will assist all involved with better understanding how the BSA will be applied in practice.
Amendments to existing causes of action and extended limitation periods under the BSA
One of the most well-chronicled changes implemented by the BSA is to widen the scope of the Defective Premises Act 1972 (DPA). Prior to 28 June 2022, a claim under the DPA could only be brought if it related to the "provision" of a dwelling (i.e. the original construction or conversion works). The BSA inserts a new section 2A into the DPA which expands this to cover claims arising out of "any work undertaken on an existing dwelling, provided that work is done in the course of a business". The duty is owed both to the person for whom the work is done, and "each person who holds or acquires an interest (whether legal or equitable) in a dwelling in the building". Moreover, the limitation period for claims under the DPA 1972 has been significantly extended:
- for claims under section 1 only for works which were completed on historic projects from six to 30 years retrospectively; and
- for claims under section 1 and section 2A of the DPA, the limitation period has been extended from six to 15 years prospectively i.e. for any project which completes on or after 28 June 2022.
Just before Christmas 2022, we saw the first decision of the TCC granting leave to a claimant to revive previously time-barred claims, following these amendments to the DPA limitation periods, in BDW Trading Ltd v AECOM Infrastructure & Environment UK Ltd [2022] - and further such claims are likely to follow in 2023.
It was also widely expected that the BSA would bring section 38 of the Building Act 1984 into force, which provides that a "breach of a duty imposed by building regulations so far as it causes damage" is actionable - and extend the limitation period for claims thereunder to 15 years, prospectively. However, s. 38 is not yet in force and it is not known when it will be brought into force. If / when s. 38 comes into force, it will provide a statutory right to claim compensation for physical damage (e.g. injury or damage to property) from those responsible, where such damage is caused by a breach of the Building Regulations.
Economic pressures and risk of supply chain insolvency
The well-documented 'perfect storm' of recent economic pressures - including inflation, energy prices, investor uncertainty and shortages of goods, materials and labour – is presenting issues for parties entering into construction and engineering contracts. Understanding and providing for these pressures has become a key contractual consideration.
We are seeing a number of measures being adopted to tackle the issue of rising and unpredictable construction costs, including:
- advance payments for the purchase of materials up-front - with vesting provisions to ensure title to those materials passes to the employer;
- increased use of Guaranteed Maximum Price (GMP), or "not-to-exceed price" contracts, under which contractors are reimbursed for materials, labour and a fee to cover their profit - but subject to a maximum price, which is the most that the contractor is entitled to bill for the project; and
- provisional sums which are included within the contract price for items of work that cannot be sufficiently defined or detailed to allow for an accurate determination of cost at the date of entry into the contract.
Fluctuation provisions - which for many years were typically deleted from construction contracts - are also making a comeback. These are a contractual mechanism that allows contractors to pass on increased costs to employers, by adjusting the contract price in line with the fluctuating cost of certain specified materials. Fluctuation provisions can be of mutual benefit to both employers and contractors since they provide for a "rise and fall" mechanism to account for both increases and decreases. They may also result in lower bids being tendered at the outset of a project since they mitigate some of the fluctuation risk contractors may otherwise have to absorb. Further, they may also mitigate the risk of disputes later down the line and thus help to preserve amicable commercial relationships.
Supply chain insolvency risk is also exacerbated by the above pressures. This is particularly acute in the construction industry which, as the Insolvency Service reported, experienced the highest number of insolvencies of any sector in England and Wales in the 12 months ending Q3 2022 (with 3,949 company insolvencies reported). Whilst the Insolvency Service observes that it is not unusual for the construction industry to have the "highest quarterly number of insolvencies of any industrial grouping", this figure was significantly higher than the number of insolvencies recorded in the sector in 2021 when 2579 insolvencies were reported.
Insolvency and pressures on cash flow in the supply chain are a perennial problem in the UK construction industry and were a key driver for the implementation of the Housing Grants, Construction and Regeneration Act 1996. They also sit behind the continued debate about the practice of cash retentions. A Private Members' Bill - the Construction (Retentions Abolition) Bill - had its first reading in the House of Lords in November 2021 but we understand will make no further progress. However, many in the industry including Build UK and the Construction Leadership Council (CLC) continue to push for zero retentions by 2025.
In November 2022, the CLC in collaboration with NEC published joint guidance to industry on the use of retention clauses, which endorses this long-term aim of eliminating the need for retentions. We continue as always to wait and see if anything will move on this legislatively or whether in fact it will be market driven, with employers choosing to drop retentions - which may have the wider commercial benefit of the works being provided at a lower cost - in favour of more prescriptive drafting of the requirements for achieving completion and ensuring effective quality management, or the provision of further security in the form of performance bonds or parent company guarantees.
Net zero, sustainability and environmental, social and governance (ESG)
The construction and engineering industries continue to seek to reduce the climate change impact of the UK built environment. This, according to the UK Green Building Council's "Net Zero Whole Life Carbon Roadmap", published in November 2021, is responsible for around 25% of total UK greenhouse gas emissions.
The CLC has its own performance framework, CO2nstruct Zero, which sets out nine priorities (including greater use of Modern Methods of Construction (MMC), enhancing energy performance of new and existing buildings, and implementing carbon measurement) which underpin the construction industry's targets for carbon reduction. It also includes a series of measures and metrics to show how progress is being made. Sustainability, and achieving net zero greenhouse gas emissions by or ahead of 2050, also form part of the "cross-cutting priorities" / "non-negotiable priorities" listed in the public and private sector 'Construction Playbooks' which we describe below.
Within the construction and engineering industries, there continues to be a growing desire to go further and embed a wider range of net zero objectives in construction and supply chain management, design principles and an acknowledgment of medium to long term strategy by putting in place the framework and processes now, despite current cost pressures. Developers, operators, investors, funders and building contractors with the most ambitious net zero agendas are seeking to include net zero objectives in contractual documents. For example, use of sustainable materials, supply chain restrictions and accredited schemes in development agreements and property management agreements.
The Chancery Lane Project, a collaborative initiative of international legal and industry professionals whose vision is a world where every contract enables solutions to climate change, has published a number of climate aligned clauses for use in contracts.
In July 2022, NEC published new Secondary Option clause (Option X29) for inclusion in the NEC4 suite of contracts. It is also borne out of the growing view, as mentioned above, that standard contract conditions can be used to support the reduction in the climate change impact of built assets. Option X29, the NEC states, is intended to "support, incentivise and tangibly demonstrate carbon reduction initiatives on future builds across the sector". Option X29 enables clients to set specific climate-change targets in a new "Performance Table" and to include both positive and negative incentives for the contractor to reduce whole-life cost.
In 2023, we expect to see an increased use of measured obligations focused on achieving Net Zero 2050 in construction and engineering contracts at all levels and across a wide-range of sectors.
Finally, Part Z, which is an industry-proposed amendment to the Building Regulations 2010, may also gather force in the not too distant future: the Government has stated it "intends to consult in 2023 on [its] approach and interventions to mainstream the measurement and reduction of embodied carbon in the built environment".
Public and private sector Construction Playbooks - greater uptake in 2023?
As we reported in this insight, in December 2020 the Government published the Construction Playbook, which was then updated in September 2022. Fairly soon thereafter, in November 2022, the Construction Productivity Taskforce (a collaboration between some of the UK's biggest developers, contractors, architects and engineers) published a private sector equivalent entitled Trust and productivity: The private sector construction playbook.
The priorities and principles set out in both playbooks (which are broadly aligned with each other, whilst recognising that there is more flexibility within the private sector as to how projects are procured) endorse both the building safety and net zero objectives described above (which the private sector playbook refers to as "non-negotiable priorities"). They also call for early supply chain involvement and prompt and fair payment regimes, which may help to mitigate some of the risk of supply chain insolvency which is exacerbated in the current economic climate.
Notably, both playbooks advocate for greater use of MMC, which will be critical to the delivery of sustainable net zero carbon construction (as mentioned above), as well as speeding up construction times and thus increasing productivity. We expect and look forward to seeing further examples of both playbooks' application in practice in 2023.
Joint Contracts Tribunal (JCT) 2023
We also look forward to the publication of the new JCT suite of contracts, which were originally expected to be issued in 2022 but have been pushed back to 2023. We understand that the reason for the postponement is the JCT's desire to cater for recent market developments, including the passing of the BSA as well as the greater focus on sustainability, net zero and MMC. It will be interesting to see how the JCT tackles some of the issues referenced above.
If you have any questions about this article, please get in touch with Philip Baker, Sue Ryan, Ruth Griffin or Emma Knight.