CONSTRUCTION: NON-CONTENTIOUS: An Introduction to London (Firms)

Sharpe Pritchard – Construction 

Construction is a bellwether sector, where broader economic trends often crystallise before they become apparent in other parts of the economy.

The sector depends on economic confidence.

There is typically a gap of several years between the initial investment in a construction project and the realisation of any returns, with breaking even often coming many years later.

Investors need assurance that, when the project is complete, people will want to live in the development or businesses will have the trade they need to employ people to work in those developments, and that those properties will command sufficient asking prices or rental income.

The commercial success of a construction project therefore depends on the overall health of the economy.

The construction sector is exposed to other factors that contribute to its bellwether status.

It is heavily reliant on lending and the availability of affordable finance – both to fund projects in the first place and for end customers to be able to afford homes, for instance. A reduction in the availability of lending will quickly show in investments in construction projects.

Construction is also labour-intensive and demands a significant supply of workers across a wide range of skill levels, again meaning any labour shortages will quickly become apparent.

Furthermore, a substantial proportion of raw materials are imported and so vulnerable to volatility in the exchange rates and global economic trends.

And, of course, energy represents a significant proportion of the cost of any construction project.

At the time of writing in autumn 2022, the future health of the economy appears highly uncertain, with a wide range of medium to long-term outcomes seeming at least plausible.

Things are slightly different when it comes to the public sector construction projects that represent our bread-and-butter work as a team. But, nevertheless, they ultimately depend on the Government’s willingness and ability to spend, which is tied to politics and the public finances, which, of course, are heavily influenced by the wider economy.

At Sharpe Pritchard, we focus on mitigating the risks our clients face in the sector by ensuring their interests are protected and commercial dangers are shared fairly across between employer and contractor.

An important element of our approach is trying to make things as predictable as possible for all parties, improving investor confidence in the chances of the project achieving commercial success in the long run.

Of course, pragmatic and commercially informed legal advice is always important in the construction sector. However, in times of economic uncertainty, it is indispensable: reducing risk in such a way that projects that might not otherwise be viable can get off the ground.

Currently, our employer clients are certainly seeing contractual relationships being challenged as a result of the current economic pressures.

Clients are seeing the effects of higher inflation, the current political uncertainty, the knock-on effects from Brexit, particularly around the lack of skills and difficulties and delays in sourcing materials, as well as the broader geopolitical situation and the war in Ukraine.

Although activity levels remain high, employers are feeling the knock-on effects of these factors in increased tender prices, shorter tender periods, higher risk premiums being priced into tenders and fewer tender responses.

Industry indices have only shown a slight contraction in the sector over the last two months, while housebuilding has increased.

Whilst public sector employers must and are continuing to spend on construction, there has been a slight slowdown, at least at local government level, as a result of the current economic climate.

Overall, the public sector continues to be the biggest procurer of construction works and, as such, public sector spending will be essential to the industry in the immediate term.

Nevertheless, inflation is a very real issue for the industry and for our employer clients. Some clients have chosen to pause procurements as they are, at present, no longer commercially viable. However, on the whole we are seeing employers seeking to try and agree sensible and pragmatic partnering arrangements to address issues such as inflation.

Despite these ongoing challenges, the sector continues to innovate to tackle the climate crisis and achieve net zero targets. Whilst MMC is seen as a critical piece of the puzzle, its uptake has not been as swift and extensive as had been hoped.

Meanwhile, there has been important new legislation this year that will have a significant effect on clients.

The Building Safety Act came into force this year and is the single most significant piece of legislation affecting the industry for decades. Contractors and Employers alike are grappling with the implications of the Act and seeking to second guess the detail of the secondary legislation which will be implemented under it in the next 12 to 18 months.

Moreover, the new procurement regulations will be crucial for our clients.

Everything outlined above will have significant and wide-ranging implications for our clients. Innovative and collaborative arrangements are likely to be needed to ensure that parties can navigate these challenges.

We are hosting and participating in seminars with our clients and with cost consultants to discuss the best way of structuring contracts in the current climate, to achieve a fair allocation of risks in a challenging economic climate and so that our clients can have certainty on pricing.

To find out more about our services for the construction sector, please contact us today.