What lies ahead for the construction industry in 2019?
At the beginning of a new year it is customary to consider what the year ahead may bring. 2019 promises to be eventful not least with the UK's (planned) exit from the EU on 29 March 2019. Here's what to look out for in the next 12 months…
The impact of Brexit on currency markets and affects on the cost of imported materials and the UK labour market was felt almost immediately after the referendum in June 2016. Between now and 29 March there is the possibility for further referendums which will bring more uncertainty and affect the appetite for fixed-price contracts in the construction industry. There is likely to be continued focus on the change control provisions in contracts to try to mitigate some of the negative affects on labour and currency fluctuations.
Before Christmas the Government proposed draft changes to the procurement Regulations to address the scenario of a no-deal Brexit. Public procurement rules are already enshrined in UK law therefore the effect of the changes are limited to more of a 'spring clean' to reflect the exit from the EU. However, the Government is planning to set up a UK e-notification service if access to OJEU is closed off on 29 March.
There is no doubt that following Brexit projects requiring public or private finance will be more dependent on the health of the UK economy if any EU funding routes are withdrawn.
The Grenfell Enquiry
Whilst the majority of social residential developments have either begun or completed works to remove combustible cladding, at the end of 2018 it was reported that only 14 out of 176 private residential apartment blocks had begun or completed the removal works. According to the Ministry of Housing, Communities and Local Government, there were no plans to carry out the removal of combustible cladding on 76 private residential blocks.
We are likely to hear more on the issue of 'value engineering'. Dame Judith Hackitt highlighted the risks associated with value engineering during her speech at the annual conference of the Chartered Association of Building Engineers in October 2018. In the current climate, employers are likely to place greater emphasis in the bid process on technical specifications, materials testing and health and safety assessments rather than focusing on who can do the job cheapest.
We expect the impact of the Grenfell tragedy, on cladding, fire doors and the wider construction industry, the be felt acutely over the next 12 months and beyond.
Read more on the Government's plans to take forward the recommendations from Dame Hackitt's review of the Building Regulations here.
Impact of S&T (UK) Limited v Grove Developments Limited
In November 2018 the Court of Appeal concluded that that an employer who has failed to serve both a payment notice and a pay less notice can nevertheless commence an adjudication to have the true value of an application assessed and to reclaim any sum which has been overpaid. This was a significant departure from previous 'smash and grab' cases. This confirmed the availability to employers of true value adjudications even if they have failed to issue a timely payment or a valid pay less notice
The impact of this decision will play out in 2019. However, it may be something that is addressed by the Department for Business, Energy & Industrial Strategy's review of the 2011 amendments to the Construction Act when finally published. The logical step would appear to be an amendment to the Construction Act so that the issues that arose from S&T v Grove are resolved in legislation although this may be unlikely.
The new VAT "reverse charge" regime will come into effect for certain building and construction services on 1 October 2019. This will require the recipient of services, rather than the supplier, to account for VAT due. Subcontractor invoices will therefore no longer include VAT but will require the main contractor to account for the VAT. However, to determine whether the reverse charge applies, it will be necessary for contractors to disclose to their subcontractors whether or not they are at the end of the supply chain – information which could, in some cases, be commercially sensitive. Some businesses may also suffer a loss of cash flow where VAT is no longer charged as they will no longer be able to use the VAT they collect from customers as working capital before it is paid over to HMRC.
Aftermath of Carillion's Insolvency
The aftermath of Carillion's collapse will no doubt continue to be felt as lenders continue to reduce their exposure to the construction market. Many tier one contractors are seeking to secure new financing terms with lenders and it is possible we may see some more company failures.
Following the Chancellor's announcement in October that PFI and PF2 funding models are to be scrapped, projects like the Stonehenge Tunnel and the Lower Thames Crossing have had their funding plans pulled from underneath them. However, the Government has confirmed that both projects will be publicly funded.
The Government has suggested that the funding model known as regulated asset base (RAB) could be deployed to replace PFI/PF2 models. The RAB model, similar to the model used for the Thames Tideway Tunnel, sees private investors buy stakes in long term infrastructure projects and provides protection to financiers by regularly reviewing pricing. In the case of Thames Tideway consumers fund the construction of the project through their water bills. If events cause planned costs to be exceeded the regulator Ofwat steps in to ensure investors are protected. Like PFI and PF2, RAB is not included on the Government's balance sheet making it attractive to the Treasury.