2022 construction forecast: trends and future risks

The Department for Levelling Up, Housing and Communities (DLUHC) started the new year by announcing plans to force developers to “fix the cladding crisis”. This was followed by the publication of a new plan to protect leaseholders with the aim of making the construction and insurance industries fund the crisis.

The DLUHC then set a deadline of March 2022 for developers to agree a fully funded plan of action for the cladding crisis, currently estimated to be in the region of £4 billion.

The plan is still awaited, due to, in all likelihood, remaining concerns within the construction sector (including insurers) as to how developers will fund contributions.

It is likely that developers will look to the original project teams, supply chains (including product manufacturers) and the insurers of those entities via claims. Consequently, there remains uncertainty - both in general terms and on a project specific basis - as to responsibility for the costs involved. Ultimately, it may take new regulation/legislation to clarify these issues.

Insurers and brokers across the UK have also been recipients of ‘Dear CEO’ letters issued by the FCA. These letters have started an in-depth review by the FCA and the Competition and Markets Authority (CMA) of the availability and cost of buildings insurance, specifically for multi-occupied residential buildings.

The FCA’s letter to insurance firms drew attention to the issue of ‘fair value’. In particular, it reminds firms of their obligations to consider the costs borne by leaseholders when determining whether a product is ‘fair value’. The investigation reflects the DLUHC’s policy, expecting the insurance market to play a part in alleviating the cladding and building safety crisis.

The FCA/CMA investigation is due to report back before September 2022 and this may result in further regulation.

The Building Safety Bill will impact all buildings and not just high-rise multi-occupied residential buildings and we anticipate that it will achieve royal assent in September or October 2022.

The Bill changes applicable standards for design and construction. It also provides for a new ‘gateway’ regime to ensure building safety risks are considered at each stage of the design and construction. Compliance with the Bill will be a heavy obligation for firms that requires a lot of work, time and resources and we recommend that planning should start now.

Of great concern to practitioners are the proposed amendments to the Defective Premises Act (DPA) and the Limitation Act.

The proposed amendments to the Limitation Act would more than double the time for a claimant to bring an action in respect of damage or defects from six to 15 years.

With retroactive application, claims which had previously been out of time may now have an additional nine years in which to be brought.

The potential extension of limitation under the DPA to 30 years is also a cause for concern, particularly where insurance cover for fire safety related claims is not now commonly available. In the event these amendments come into force, we expect a rise in both notifications and claims.

There also remains the very real prospect that faced with an ever growing number of claims, those involved in the external façade of buildings, and with the expertise to put right defective works, will be forced to cease trading and/or be uninsured (due to prohibitive premiums) in respect of any works undertaken to remedy fire safety issues. This will inevitably add to the skills shortage crisis.

These concerns will have to be addressed by developers and the wider construction industry and its insurers if a successful framework for remedying fire safety issues is to be successfully established.

The long-awaited Levelling Up White Paper (the White Paper) was released by the DLUHC on 2 February 2022. The White Paper outlined the government’s 12 key ‘missions’ to rebalance opportunities across the UK and reverse the decline observed in certain areas.

Disappointingly, the White Paper did not include a plan for the retrofitting of homes although it announced a £2.2 billion funding scheme to address the worst (energy) performing homes and those least able to pay.

The White Paper also announced a ‘local skills improvement plan’ (the Plan) to be rolled out with funding across England. This will give local employers and stakeholders a statutory role in planning skills training in their area.

The aim of the Plan is to make sure the skills gap is being addressed on a proportionate regional level and it is hoped that construction training will play a large part of the Plan. If the funding is allocated correctly, the Plan has the potential to go some way to plug the current skills crisis. 

Environmental factors currently focus on efficiencies and reductions of waste and emission (in line with the net zero agenda) as required by policy and supported by the industry.

The Climate Change Committee aims to decarbonize the UK power sector by 2035 with electrification, supported by low-carbon hydrogen. As we strive for a green economic recovery, renewable energy technologies remain a priority.

Particular to construction, this will involve the increased build of renewable energy plants such as windfarms, the increased use of solar panels and new greener materials such as low-carbon concrete, energy efficient UV filtered glass, cross laminated timber and climate neutral bricks.

In addition, the newly established Building Research Establishment Environmental Assessment Method analyses the sustainable value of a construction development against various metrics including land use, construction methodology and as-built energy efficiency.

This method is not yet a legal requirement but is specified as a planning condition by some Local Planning Authorities.

There will also be a push for responsible sourcing of building materials under British Standards BES 6001 and BES EN 8902 and BREEAM certification. Other sustainable certifications now available include Leed, GRIHA, CRRM, GSAS, EDGE and WELL but again, these are not yet mandatory.

All of these initiatives present significant economic opportunity for the sector but they do not come without their issues.

Given the timescales involved up to Net Zero by 2050 and the call for mandatory energy performance disclosures and whole life carbon measurements, we are likely to see an increase in construction claims involving renewable technology, green methodologies (such as MMC) and materials.

Key areas of liability for the following renewable energies include:

• Wind projects - the positioning of subsea cables for offshore windfarms, workmanship in the manufacturer of key parts and completed projects not meeting forecast output levels.
• Waste to energy products - the building and civil and structural engineering design are secondary to the process plan design. Hence, accurate data concerning the process plant is  necessary to both the designer and contractor at an early stage to avoid errors and delays.
• Solar projects - despite their increasing popularity, solar projects represent a major area of potential liability (predominantly fire damage). This is particularly so with residential construction projects where liability arises at the installation and ‘use’ phases of solar panels.

Consequently, careful consideration should be given to design and build contracts and insurance policies to ensure contractual obligations fall as intended when relying on all new technologies in general.

Thorough reviews of CAR, EAR and TPL policies need to be undertaken to ensure emerging, sustainable technologies are covered.

Where they are not, the industry is turning to new insurance solutions to supplement traditional coverage.

Parametric insurance, whilst not new, is on the rise. Similar to a financial option, it insures a loss that occurs when a measurable value is exceeded or not reached. Parametric insurance can smooth out volatility and establish more comprehensive protection in circumstances where there is lack of sun for renewable energy or too much/too little wind for electricity generation.

Alternatively, protection/coverage gaps can be plugged by drafting new sustainability clauses in traditional policies. The Chancery Lane Project has brought together insurance lawyers to draft clauses which insurers can look to incorporate in policies, to provide for the repair, rather than replacement, of damaged property and/or use of parametric insurance (where the policy is triggered if certain objective criteria, such as wind speeds, are met).

All the steps outlined above could see the construction insurance sector tackling new claims effectively, while also making positive movements towards a more renewable future.

Biodiversity net gain (BNG)

The Environment Act 2021 has introduced a new condition to every planning permission granted: a Biodiversity net gain (BNG) of 10%.

Whilst BNG will not come into force until late 2023 at the earliest, the public sector has been encouraged to include BNG in all public procurement as of now.

The aim of BNG is to ensure that when a new development is completed, there are more potential habitats for animals and plants to thrive than before the development began, hence a gain in biodiversity. Not all construction developments are required to comply and there are exceptions.

Whilst the policy is welcomed, there will be challenges the industry will need to overcome. These include:

• Longer planning permission processes for new developments with the new BNG regulations.
• Project costs could increase with the added cost on the preservation and advancement of habitats.
• Build times for developments could be increased due to more work to complete impacting developers and the people waiting for property.
• There may be a lack of knowledge among people within the construction industry over what biodiversity is and how they’re going to take actions to improve it.
• There needs to be awareness spread by the people enforcing Biodiversity net gain to ensure that the industry is aware.
• There is no indication, at present, of how the measures are going to be regulated and enforced.

Hence, if these considerations are not factored into the development and all project contracts, we may see claims for delay, design errors and potential penalties for breach of the BNG provisions.

Schedule 3 of the Flood and Water Management Act 2010

There is widespread support for the implementation of Schedule 3, which has not yet been passed as part of the Flood and Water Management Act 2010 in England, to tackle the growing incidence of surface-water flooding. It will give powers to local authorities to approve new sustainable drainage systems and the way they connect to public sewers.

It has been reported that Schedule 3 could be introduced in the coming months to align planning policy that is related to sustainable drainage systems as recommended by the Climate Change Committee.

If so, the design and build times will need to be factored in, failing which we may see claims for errors and delays. As with all new technology, there may also be a lack of consultants and contractors familiar with sustainable drainage systems.

The key enabler to the adoption and implementation of ESG commitments is digital transformation and technology.

Until now, the construction industry’s focus has been on reducing operational carbon as outlined above. The next great challenge for the industry is to reduce embodied carbon. The industry is therefore being encouraged to take a whole life carbon approach to construction and to balance the carbon cost of installing greener materials against their operational carbon footprint.

One new technology already available that can take a whole life carbon approach to construction is digital twin technology.

A digital twin is a virtual representation of an existing physical entity that relies on data to offer valuation information in the form of analytics. The technology can be used to improve the safety and efficiency of a building. It can also ensure that a building meets sustainability requirements. Another feature of digital twins is that they can predict a failure before it happens and can even offer solutions to prevent them from happening at all.

Other new technology which we predict will grow in use are:

• Smart contracts - built from blockchain technology, smart contracts offer all construction parties a shared system to do business, allowing them to buy, track and pay for services. Construction companies can use smart contracts as an all-in-one tracking system where rules and deadlines are set which the blockchain then enforces. Consequently, this system will enable faster completion, increased security, better project tracking and an automated supply chain.
• Augmented reality (AR) – AR is a technology that overlays digital information onto the real world. It can be used to overlay instructions onto objects, show 3D models of buildings and help with safety. It is expected that AR will this year become a staple in the construction industry as it helps workers overcome many common challenges such as working in difficult or dangerous positions, inspecting complex structures and using heavy machinery.

These new technologies will create new risks and liabilities but will also bring new opportunities. The industry has, so far, adapted well to the transition to net zero and we are confident it will continue to be resilient in the face of these new challenges.

Extreme weather events linked to climate change coupled with the pandemic and geo political impacts (such as the current Russia/Ukraine conflict and Brexit) will continue to disrupt global supply chains in 2022.

China currently has 37 million people now in lockdown, resulting in “yet more growth-sapping turmoil in global supply chains”.

The International Panel on Climate Change (IPCC) report, published in February 2022, confirmed global temperatures are currently 1.1 degrees Celsius above pre-industrial levels, with temperature rise currently projected to overshoot the recommended 1.5 degree Celsius target over the next 20 years. Consequently, we will see an increase in extreme weather events and a growth in severity.

80% of timber used in the UK is imported predominantly from Canada and Sweden which suffered wildfires and insect damage in 2021 as a consequence of extreme weather events. This, in turn, has had a detrimental impact on stock.

The shortage of materials has resulted in a significant rise in prices that cannot be underestimated. The Trade Federation (TTF) reported that timber prices had surged by 50% between January and May 2021. Data from BEIS indicates that structural steel costs were 72.6% higher in October 2021 than the previous year. In November 2021, we saw steel prices increase for the seventh time in 2021. With these and other shortages across the board, it’s a “perfect storm for disruption in an industry built on tight margins”.

To avoid the direct impact to operations and the associated reputational damage to a company’s brand, supply chain resilience is now a priority issue for the construction industry including insurers.