Construction - market insights Q3/Q4 2024

The King’s Speech - “Get Britain building again” 

The new government has made “building Britain” a key priority by reinstating the Net Zero 2030 target – to reduce emissions by 68% compared to 1990 levels. In support of these ambitions, four Bills were introduced at the Kings Speech: 

• The Planning and Infrastructure Bill
• The Crown Estate Bill 
• The Skills England Bill
• The National Wealth Fund Bill

Wind

One method by which the new government has sought to achieve the Net Zero target is its reversal of the ban on onshore wind projects, having pledged to double onshore wind and quadruple offshore wind by 2030. To put this in context, in 2023, 33.7% of the total electricity produced was generated from wind, compared with 27% in 2022 and 22% in 2021.

There are several cost and operational factors for the construction and insurance industries to consider as the number of new onshore and offshore wind projects is set to increase.

Housing

The new government has also reinstated mandatory housing targets for local authorities. It is anticipated that the industry will respond to the government’s pledge to be “builders, not blockers” and to build 1.5 million new homes within the next five years. 

One such type of affordable housing that will be key to this dramatic increase in housing stock is modular homes. Whilst sustainable, the use of modular homes in the UK is in its infancy, and construction professionals are alive to potential issues with the production and assembly process that can delay the completion of projects. If there is a rapid increase in the rate at which modular homes are produced, the number of defects and workmanship issues has the capacity to increase. 

As with wind projects, there are some hurdles that will need to be overcome, including the deficit in the UK’s labour force and a materials shortage, which could impact attempts to get “Britain building again”.

Labour shortages

Patience may be required for the Skills England Bill while the industry tries to recover from its labour shortage within the UK.

The UK’s workforce remains around or below its pre-pandemic level. This could be attributed to, among other things, high levels of inflation leading to increased unemployment, a large number of people retiring, high COVID-19 infection rates which increased the mortality rate and those suffering long COVID (which forced them to stop work), and Brexit.

According to the CITB Workforce Skills and Mobility in the Construction Sector 2022 report, the UK construction workforce is made up of those aged 25 to 44 (50%) and those aged 45 to 59 (25%), while there is just 19% aged under 25. This ageing population and lack of younger construction workers is a big cause of the skills shortage. There was a net loss of 10,000 construction workers in 2023, yet it has been widely reported that the industry needs 225,000 new workers by 2027.

The Skills England Bill will seek to achieve this by a variety of methods, such as the reform of the apprenticeship levy and the allocation of £7m of investment in the development of the skills required to achieve the aims of this Government. 

Materials shortages

The position regarding building materials shortages is likely to remain complicated into 2025. For instance, there is a combination of shortages of in-demand materials, which will likely continue, whilst other prices may fall due to a slowdown in new projects and labour shortages. It is clear from statistics that the same materials have seen great increases and decreases in the same year:

• The greatest price increases in 2023-2024 have been reported for: pipes and fittings (+17%); metal doors and windows (16%); gravel, sand clays etc (7.4%)
• The greatest price decreases in 2023-2024 are for fabricated structural steel (-16%); gravel, sand clays etc (-13%); and concrete steel reinforcing bars (-11).

On the whole however, material prices are 39.2% higher than pre-pandemic levels.  This, coupled with easing of deflation pressures and higher demand expected in the market, may result in an increase in supply issues which could lead to price increases. This in turn may result in delays and non-completion of projects, increasing the risk for claims.

Notwithstanding the labour shortages and the price fluctuation for materials, it is hoped that the Bank of England’s reduction in interest rates from 5.25% to 5% will result in a more competitive mortgage market, which will in turn result in more home purchases.

Nature Restoration – the Planning and Infrastructure Bill 

Whilst the Bill did not touch on the Biodiversity Net Gain (BNG) regulations which came into force in February 2023, it promises to use development to fund nature recovery.  The government further state that they will work in tandem with nature delivery organisations, stakeholders and the sector to determine the way forward. We will continue to monitor the Bill for more details on how the government intends to deliver on its pledges for nature restoration and whether that means via the BNG regulations or secondary legislation. 

We have also identified insolvencies as a key update in the Financial lines section.

Building smarter: CIOB playbook 

In June 2024, the Chartered institute of Building’s Digital and Innovation Advisory Panel (CIOB) published a playbook on Artificial Intelligence (AI) technology to help businesses with their AI strategy and governance. Factors to consider that are set out in the playbook include ethics, cyber security and data protection to assist businesses minimise the risks of AI. 

Market intelligence has found that there are high levels of early AI implementation by construction companies. To mitigate risks, proposal and renewal form questions are increasingly seeking evidence that:  

• Relevant and strict AI controls are in place within the organisation
• Individuals using the programme or system are adequately trained
• The inputting of data is accurate to reduce the risk of an incorrect outcome being produced
• Quality assurance processes or auditing of the AI results are in place to ensure there are no systematic issues.

Insuring mass timber 

Mass timber has become an increasingly popular choice of material within the construction industry and given the government’s key priority to “get Britain building again” to meet Net Zero 2030 targets, its use will probably escalate. 

Maintenance of old infrastructure 

There is a heightened risk Robust project management is central to mitigating these risks given that infrastructure projects often involve multiple parties. 

Building Safety Act Update

Section 144 of the BSA stipulates that developers must provide a new build warranty to anyone acquiring an interest in a dwelling, for a minimum term of 15 years (rather than the usual 10-year period). The Act also grants the Secretary of State powers to impose minimum requirements for these warranties, which may include the solvency of any insurer or underwriter, the assignability of the warranty, the specific defects, levels of cover and maximum amounts for any excess. Details have yet to be confirmed, although they are expected within the next year.  Failure to provide the 15-year build warranty may result in a financial penalty for developers of either £10,000 or 10% of the sale value, per home.

The Future of LEG (London Engineering Group) clauses: An update on

SCB v Lexington [29.09.23] and Archer v Ace [19.12.23]

Since the Archer and SCB cases, the market has been considering a new definition of damage to be inserted into all contract works  policies.  It seems likely that any new wording agreed will be utilised in the US but may not be used in the UK given the established damage law. 

Civil unrest – where do contractors stand?

In August, communities across the UK were hit by rioting and looting as a result of civil unrest with an excess of 500 people arrested for their part in the disorder. Construction sites have been secured against the effects of rioting and workers sent home.

In the wake of the disorder, some contractors now find themselves not only dealing with the damage but also looking into where they stand contractually. Physical loss or damage to construction works from rioting is likely to be recoverable under a Contractor’s All Risks policy and theft of tools and materials and loss of vehicles are also likely to be recoverable under other insurance policies. In some circumstances, the employer may also be able to recover the effects of physical loss or damage under the Riot Compensation Act 2016. More problematic however is the cost of extra security, disruption of working time on site and the effects of rescheduling deliveries, which are unlikely to be recoverable under such insurances.

Grenfell Tower Inquiry - Phase Two Report

The Grenfell Tower Inquiry published the final part of its report on 4 September 2024.

The 1,571-page document presents 59 recommendations for enhanced fire safety for high risk buildings. If implemented, these changes will significantly impact the construction environment, especially those involved in building and/or managing high rise structures. Focusing on policy change, the report recommended that fire safety policy is developed “in an holistic and coherent way”. Bearing this in mind, key recommendations include: 

• The creation of a single construction regulator to report to a single Secretary of State responsible for fire safety within construction
• The construction regulator to oversee a new, independent body whose remit will cover:
  • The regulation and testing of construction products
  • The licencing of contractors for work on high risk buildings
  • The mandatory accreditation of fire risk assessors/engineers
  • Building control oversight
• A review of the definition of high risk buildings in the Building Safety Act 2022.

For the construction industry on the whole, the report has recommended a significant “shift in culture and behaviour in the built environment sector”. The report envisages that the proposed new legislation and government policy will spur this transition.

We have also identified the Grenfell report as a key update in the Crime & regulatory and Professional indemnity sections.

Case developments  

Collateral Warranties – To be or not to be a construction contract? 

Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP)  

The Supreme Court has clarified that in most instances, collateral warranties are not construction contracts for the purposes of the Housing Grants Construction and Regeneration Act 1996. 

In practice, although it remains possible for a document referred to as a collateral warranty to be a construction contract under the Construction Act, those that are most typically in circulation are unlikely to be considered as construction contracts under the Construction Act.  

Consequently, in the absence of specific drafting, funders, purchasers and tenants will now be unlikely to have the right to issue statutory adjudication proceedings for breaches of obligations under collateral warranties. This will result in longer, more complex and expensive court claims. 

The Court of Appeal explores potential unauthorised settlements by a “prudent uninsured”

Technip Saudi Arabia Ltd (Technip) v Mediterranean and Gulf Cooperative Insurance and Reinsurance Company (Medgulf) (CoA) [09.05.24]

Technip and Kuwait Gulf Oil Company (KJO) were principal assureds under a WELCAR policy (Wellington Syndicate Contractors All Risks), an offshore construction insurance policy. Technip caused damage (valued at US$25 million) to a platform owned by KJO. Technip notified Medgulf, their insurers, who declined cover on the basis of an existing property endorsement, which provided that any damage caused to existing property (the platform) owned by a principal assured (KJO) be excluded. Technip issued proceedings alleging that Medgulf’s interpretation of the exclusion clause was wrong.

The High Court agreed that the exclusion clause was properly interpreted. Technip appealed to the Court of Appeal. This appeal was dismissed.

Both judgments confirm that where there are two possible constructions of a policy wording, the courts will favour the construction that is consistent with business common sense and follows the natural and ordinary meaning of the words. The judgment is also a useful reminder on the importance of consistent drafting and for underwriters to consider how a particular clause fits in with the policy overall.