06 December 2018 #Construction
2018 has been a rollercoaster year for construction. The collapse of Carillion casting light on unfair payment practices, abuse of retentions and the woeful profit margins. The Hackitt Report in May 2018 identifying the need for an industry-wide cultural shift away from cost focussed agendas and towards prioritising good quality service and products, facilitated by a full-life “golden thread” of digital information. The decision of the Court of Appeal in Grove Developments that underlined the pay first, argue later philosophy of the Construction Act. The injection of significant investment by Government in the Construction Sector Deal and pressure on the sector to increase productivity and adopt new technologies including a presumption to offsite manufacture on public sector projects. And all of this against the omnipresent Brexit, all the consequences of which, at the time of writing, remain uncertain.
Pulling these threads together we have identified five key issues which are likely to be themes for 2019.
1. Payment and retentions
The Construction sector was thrust into the spotlight when Carillion went into liquidation in January. The demise of Carillion had huge ramifications for contractors and subcontractors, with many falling into financial difficulties as a direct result.
This highlighted the real impact of late payments and widespread use of retentions within the industry as well as the low profit margins and attracted the attention of both parliament and the public.
Reforming the law on retentions has been on the agenda for some time: the government ran a consultation on retentions in the construction industry which closed in January 2018, and a response (delayed by the failure of Carillion) is due soon.
The Construction (Retention Deposits Scheme) Bill (Aldous Bill) gained significant traction this year. The Aldous Bill proposes that cash retentions should be placed in a secure trust fund, similar to a tenancy deposit scheme. The second reading of the Aldous Bill has now been pushed back until January 2019. This is the fourth delay from the original intended date of 27 April 2018. Will it ever become law?
In July 2018, the Construction Leadership Council published its report on Procuring for Value which included recommendations on how the sector could improve productivity by a change in its approach to procurement and recommends the development of an industry-wide definition of value that goes beyond capital cost, allowing procurement on the basis of whole-life value and performance.
Richard Harrington (Construction Minister) recently told the Construction News Summit that the government would announce changes to the law “very soon”. Clearly, retentions and payment will continue to be a focus for the industry in 2019.
2. Changes to building regulations
The Grenfell Tower fire in 2017 shocked the public and put the industry under increasing public and governmental scrutiny. The independent Hackitt report, Building a Safer Future, was published in May 2018 and the government is determined to address the issues raised in that report.
While the report failed to recommend an outright ban of combustible cladding, it did recommend a new regulatory framework aimed at simplifying and streamlining building control and fires safety regulation. This included the creation of a single regulator, the Joint Competent Authority (JCA), which would amalgamate the functions and expertise of building control, the fire and rescue service and the Health and Safety Executive.
Crucially, the report also identified the need for an industry-wide cultural shift away from cost focussed agendas and towards prioritising good quality service and products. It also affirmed the role of digital technology in construction by recommending a full digital record of all design, changes and maintenance to a building – a “golden thread” of information, for use throughout the building’s lifespan.
From December 2018, the use of combustible materials in the construction of external walls of high-rise residential buildings (and certain other buildings) in England will be banned following amendments to the Building Regulations 2010, SI 2010/2214 made pursuant to the Building (Amendment) Regulations 2019, SI 2018/1230.
This year our sources report a dip in the number of adjudications in the sector, with more parties seeking a negotiated resolution to disputes. There are many reasons for this although concerns have been raised about the disproportionate cost of adjudication and there has been criticism for its use for more technical disputes rather than straightforward payment disputes. A long-awaited government consultation on the operation of the 2011 amendments is due soon.
Arguably, the biggest case on adjudication this year was Grove Developments Ltd v S&T (UK) Limited. In this case, the Court of Appeal upheld the first instance decision and ruled that a responding party may issue counter-adjudication proceedings to ascertain the value of the sums claimed. However, it emphasised that payment must first be made to the claiming party. The court held that payment provisions of the Construction Act trumped the adjudication provisions hence “pay now, argue later”. We wait to see how this will be applied in practice; whether parties will argue that an adjudicator does not have jurisdiction to hear parallel proceedings and if the Construction Act will need amending.
The push to offsite manufacture is increasing to deal with the housing crisis and productivity in the sector. Earlier this year, the Government announced its Construction Sector Deal which pledged £170 million to improve productivity through increased investment in innovation and skills. The deal focussed on “bytes and mortar smart construction” and specifically referred to offsite manufacturing technology.
This was reinforced by the House of Lords report which highlighted the productivity and health and safety benefits of using offsite manufacture (see previous article here). The report reiterated the Government’s previous commitment to adopting a “presumption in favour” of offsite manufacture.
Last month, the Government announced a consultation on the construction industry’s preparation for offsite manufacture and how to best implement the use of this technology in government projects. The consultation will close on 17 February 2019.
Parties should consider their contracts carefully to consider whether they properly address the risks and challenges of off-site manufacture including retention of title, the need for advance payments/security and the need for BIM.
5. Technology (not just BIM)
The adoption of technology (BIM, Blockchain, Drones and AI to name just a few) is gathering apace and the challenge is whether the industry can adapt quickly enough. The government recently announced a new £72 million Core Innovation Hub to support essential research and development in digital and offsite manufacturing technologies.
There are various legal implications of using technology in construction contracts which include data protection, insurance, intellectual property and ownership.
For BIM alone in 2018, there has been a new CIC BIM Protocol and the publication of the Winfield Rock Report (see article here). The JCT is preparing new guidance for those preparing BIM based amendments of contracts.
Will 2019 be the year of collaboration?
Pulling together the threads above (with the exception of adjudication, although including the move towards more consensual dispute resolution processes), I wonder whether the industry will see a real move in 2019 to embrace collaborative ways of working (including perhaps use of the NEC4 Alliance contract), focus on the whole life cost of the buildings and fair payment. All of which are needed to address the concerns flagged in the Hackitt Report and Procuring for Value and facilitate the increased use of technology and off-site manufacture. That is certainly the direction that government wants the industry to go in. However, is this even possible in a difficult market with the uncertainty of Brexit looming?