Member Article

As the ‘permacrisis’ of the last few years follows us into 2023, the construction industry is likely to experience further instability and economic uncertainty – driven by labour shortages, material and price fluctuations and the geopolitical landscape. 

Economic conditions

It’s not all bad news, however. 

In December, the Office of National Statistics published its Construction output in Great Britain: October 2022. Monthly output is estimated to have increased 0.8% in volume terms, the fourth consecutive monthly growth. Construction output in October 2022 was £15.2 million, which represents the highest level of construction output since records began. It states that “despite the current high prices, the construction industry is maintaining growth, and new orders books remain strong”.  

While these statistics are positive the industry is likely to face challenging headwinds in 2023. 

The CLC Construction Product Availability statement published in December 2022 predicts that “rising energy and wage costs are expected to put significant upward pressure on prices in the New Year”. 

It states that manufacturers of energy intensive products warn that “energy prices in Q2 and Q3 are expected to be considerably above historical (pre-Ukraine war) levels without further Government support”. It also states that “Several plaster, plasterboard and insulation manufacturers have notified there will be double-digit inflationary increases in the New Year”. 

Price volatility will mean that fixed price contracts represent a much riskier option for contractors. Whether this results in a rise in the long forgotten use of fluctuation provisions remains to be seen, but the JCT has launched a new fluctuations hub to offer guidance on its Fluctuation Options. 

Managing the risk of insolvency

Supply chain insolvency risk is likely to be exacerbated by the challenges that persist for the industry in 2023. In statistics published by the Insolvency Service at the end of October 2022, construction recorded 3,949 company insolvencies in the 12 months ending Q3 2022. 

Supply chain insolvency is an inherent risk in construction projects with the insolvency service recognising that the industry “usually has the highest quarterly number of insolvencies of any industrial grouping”. Managing this risk is key, and firms must continue monitoring their supply chains carefully and maintaining clear protocols to mitigate the effect of any insolvencies that do occur.

It is also important to be aware of the practical differences between, and impact of, the various UK corporate insolvency procedures, including those new restructuring processes introduced by the Corporate Insolvency and Governance Act 2020. In particular, the use of restructuring plans in the SME market has the potential to become more prevalent, as costs are reduced, and precedents set at Court for the use of this recently introduced restructuring tool.

Uptake of MMC

Modern Methods of Construction (MMC) including off-site manufacturing are likely to continue to be on the industry’s agenda in 2023. The updated public sector Construction Playbook, published at the end of 2022, supports increased investment in MMC with the Construction Playbook setting out the government’s aim to move towards using MMC 'where appropriate'. 

However, increased investment is needed for wider uptake of MMC, and this may be challenging as highlighted in our recent article. The recently published Trust and productivity: The private sector construction playbook states that while MMC has many benefits for the industry “it must be planned at the outset of a project”. Wider adoption in 2023 will require investment and a culture shift in the way projects are procured, designed and constructed. This was also covered in our recent article – analysing how the increased adoption of MMC may help to cut carbon emissions in construction.

Cutting carbon emissions

The government remains committed to reducing emissions by 2030 and the construction industry has a key role to play in achieving this target by making buildings more energy efficient and reducing embodied carbon emissions during a building’s lifecycle.

In June 2022, a Private Members’ Bill was introduced into Parliament with the aim of monitoring and limiting embodied carbon emissions in construction projects. The Carbon Emissions (Buildings) Bill seeks to set limits on embodied carbon emissions in the construction of buildings and to require that the whole life carbon emissions of buildings be reported.

The Bill is due to progress to its next stage (second reading) on 24 February 2023.

While it is rare for a Private Members’ Bill to progress through Parliament and become law, the Bill’s introduction demonstrates the importance of regulating embodied carbon emissions in construction.

Whether limits on embodied carbon in construction projects becomes a legal requirement or the industry continues to strive to increase sustainability, drafting to achieve environmental objectives could increasingly become a common feature of construction contracts.

Focus on building safety

The Building Safety Act (BSA 2022) came into force last year, but 2023 is likely to see the implementation of many of the provisions including the new regime that will impact the design and construction of higher-risk buildings. This is largely expected to come into force from October 2023 but details of how this regime will operate in practice have yet to be finalised.

Further details will be evident from the government’s awaited response to the Consultation on implementing the new building control regime for higher-risk buildings and wider changes to the building regulations for all buildings.

The consultation contains valuable detail on how the government proposes to implement the provisions relating to the design and construction of higher-risk buildings, as well as measures that will impact all building work. Shoosmiths has provided an analysis of the key proposals and submitted a consultation response calling for the secondary legislation required to implement many of the provisions to contain the necessary detail, clarity and flexibility to operate successfully in the industry.

A response is expected from the government this month according to the consultation timetable.

In its recent consultation response, the government has confirmed its intention that a higher-risk building during design and construction, subject to certain exceptions, is one that is at least 18 metres in height or has at least seven storeys and is:

• a building which contains at least two residential units;
• a care home;
• a hospital.

This definition is contained in The Draft Higher-Risk Buildings (Descriptions and Supplementary Provisions) Regulations 2023. These have been laid before Parliament and, subject to parliamentary approval, will come into force on 6 April 2023.

In preparation for this new regime, the industry must focus on rapidly upskilling and identifying who has the right skills and competencies to deliver the new roles of Principal Designer and Principal Contractor for the purposes of building control, while also ensuring the necessary insurances are available and in place. Similar challenges were encountered when The Construction (Design and Management) Regulations 2015 were introduced, and the industry will require time to adapt.

Other aspects of building safety to monitor in 2023 include:

• The outcome of the government’s consultation on a new levy that will be implemented under s.58 of the BSA 2022 through secondary legislation. The Building Safety Levy will be paid by developers and will be chargeable on all new residential buildings in England requiring building control approval. The consultation does not give any indication of possible levy rates.
• The government is also seeking views on the proposed future updates to Approved Document B. The proposals contained in the consultation include sprinklers to be included in all new care homes irrespective of height and a requirement for residential buildings above 30 metres in height to be designed and built with two staircases

All these potential changes represent a significant cost for the industry in 2023 and beyond.

Joint Contracts Tribunal

Finally, new editions of the Joint Contracts Tribunal Suite (JCT) may be published in 2023.

However, if the JCT plans to take account of the changes made by the BSA 2022 and the secondary legislation necessary to implement many of its provisions, the industry may need to wait until these regulations are finalised – watch this space.

 

Link to article