Construction - market insights April 2025

Insolvencies

The 2025 outlook for the construction industry is optimistic with predicted growth and transformation. However, insolvencies will continue to rise due to a number of factors. Top of the list is continuing supply chain issues resulting in increasingly high and unpredictable costs of materials, coupled with increased skilled labour costs. The budget announcement in November 2024 to increase National Insurance contributions from employers will also have the potential to drive up prices and consequently building costs. The recipients of these supply chain insolvencies have been contractors and sub-contractors. This has brought the risk profile of main contracting back into sharp focus including criticism of design and build contracting and value engineering. Expect to see a move towards alternative methods of contracting as contractors protect against risks and clients are keen to mitigate against supply chain insolvency. 

We may also see contractors increasing efforts to access the CAR policy for damage arising after handover by negotiating the JCT standard terms so that they align with coverage terms. To do so, we may see companies liaising with the JCT on amendment of standard terms to make them more consistent and in line with the intention of a CAR policy.

Separately, a further consequence of this rise in insolvencies is an increased number of claimants looking to pursue claims directly against the insolvent companies’ insurers via the Third Parties (Rights Against Insurers) Act 2010.

We have also identified insolvencies as a key topic in the Professional liability section.

Procurement Act 2023

The Procurement Act 2023 came into force in February 2025. The Act aims to overhaul public procurement law by simplifying processes and increasing opportunities for small businesses. Public procurement agencies are now expected to:

• Adopt a centralised digital platform for publishing contract opportunities, ensuring greater transparency and accessibility for bidders
• Prioritise social value outcomes, including sustainability and community benefits when awarding contracts
• Breaking larger projects into smaller, where possible, to encourage SME participation
• Enforce prompt payment terms to support smaller subcontractors.

It remains to be seen whether these measures will stem the tide of insolvencies, especially for small businesses.

JCT 2024

It has been just under a year since the introduction of the JCT 2024 suite of contracts. As the JCT 2024 does not take into account the Higher risk building (HRB) regime, companies have been negotiating amendment of the standard terms to, amongst others, manage the risks of supply chain insolvencies, payment security, coverage gaps and management post-handover. We predict we will see more contract revision and may see companies liaise with the JCT on amendment of provisions to take into account the HRB regime and market forces.

Case Developments

Fix the roof while the sun is shining – Round 2

(1) Sky UK Limited (Sky) (2) Mace Limited (Mace) v Riverstone Managing Agency Limited & Ors

The Court of Appeal has now handed down its judgment, finding in favour of Sky and Mace on all aspects of their appeals.

The claim concerned extensive water damage to the roof of Sky’s global headquarters in West London. The building was constructed by Mace, the main contractor, between 2014 and 2016 and was insured under a construction all risks policy. Mace was a named insured under the Policy. Mace in turn subcontracted the roof design package.

Substantial water ingress entered the unventilated timber roof during construction as a result of a failure to incorporate temporary waterproofing into the design, resulting in significant roof damage. The water ingress occurred prior to practical completion and during the period of insurance. However, the resulting damage worsened after practical completion and after expiry of the insurance period. Insurers denied coverage. 

The Court of Appeal held that:

• Meaning of Damage within the CAR policy: as a restatement of the legal position, the court said that ‘damage’ meant an adverse change in the physical condition of the property which impaired its use or value.
• Developing and Deteriorating Damage: insurers were found liable to indemnify Sky and Mace for the damage that occurred during the period of insurance, but also damage which deteriorated or developed thereafter, overturning the first instance judge’s decision. 
• Aggregation/Retained Liability: the court found that the first instance judge had been right to find that ‘event’ refers to the ‘cause of the damage’ and not the damage itself. The court rejected insurers’ contention that the decision to carry out the works without a protective temporary roof could not amount to an event.
• Investigatory Costs: where damage has occurred, costs incurred in investigating the damage were recoverable, provided they are “reasonably incurred in order to determine how to remediate it”. The court rejected insurers’ submission that the Basis of Settlement clause did not cover investigation costs.

It remains to be seen whether insurers will appeal to the Supreme Court. In the meantime, insurers and their insureds in existing disputes may need to reassess their positions concerning any damage manifesting after the coverage period which can be shown to have deteriorated or developed from damage first occurring within the insurance period. 

CAR policies may now seek to expressly and clearly exclude deterioration and development damage going forward. We may also see insurers more readily relying on limitation defences in relation to claims against the contracts of insurance.

An update on the definition of contractors in Construction all risks (CAR) policies

Honeywell International Inc v XL Insurance Company Ltd [12.11.24] (Canada Court of Appeal)

The British Columbia Court of Appeal ruled that unless otherwise specified in a construction policy, the definition of an insured “subcontractor” includes offsite manufacturers of components to be used in the project, even if that supplier does not attend or perform on-site services.

Honeywell represents a departure from the recognised position in English law for over 25 years. Whilst not binding in UK law, this decision should serve as a warning when drafting CAR policies so as to prevent the UK courts being persuaded to extend cover beyond that which was originally intended.