The three biggest things affecting the construction sector in 2018
Carillion, Brexit and payment issues have hit businesses hard in 2018, with some firms slipping into insolvency and employers left with unfinished buildings. We examine the impact on the construction industry.
Effect of Carillion collapse
The construction sector in 2018 has been dominated by the collapse of Carillion leaving behind an estimated £7 billion in liabilities. This has led to its unpaid sub-contractors and suppliers slipping into insolvency (or struggling to avoid it) and its employers being left with incomplete and delayed buildings.
The full extent of the adverse effects may not be known for years to come.
Many legal issues have arisen as a result. For example, the loss of retention monies withheld from those in the Carillion supply chain, estimated at hundreds of millions of pounds, gave rise to further calls for legal protection of such monies.
The Construction (Retention Deposit Schemes) Bill introduced by an MP at Westminster tries to deal with the problem by requiring that retention monies be put in the hands of an independent party, much like the system for the holding of tenants’ deposits under property leases. The problem is that even after the Carillion disaster, all interested parties can’t seem to agree that this is the right thing to do.
The second reading of the Bill has been delayed twice (so far), apparently to garner sufficient support for it. The UK Government will need to decide if it will support the Bill. Even if there is a will to act with new legislation, the UK Government is unlikely to have parliamentary time for anything other than Brexit-related legislation in the short term.
Brexit: A huge issue for construction
Brexit is – and will continue to be – a huge issue for the construction sector. A Brexit deal might create new opportunities, but for many in the sector that’s work in the distant future. They have to plan and tender for projects now which means they need to know how they are going to resource materials and labour and how much they are going to cost.
While lawyers can try to draft ‘Brexit clauses’ to try to cover the position, the past year has brought home even more sharply the uncertainty about the legal changes and the possible additional cost that will be associated with the loss of a tried and tested regime which permits the free movement of construction materials and, importantly, labour among EU member states.
That loss may hit construction particularly hard because it has benefited much from that regime. It may cause construction costs to rise.
Talk of construction costs highlights that a major problem continues in the sector. Even after the effects of the recession have abated, too many are still contracting to carry out of construction work at very low profit margins. Bad payment practices (underpayment and late payment) exacerbate this problem. The sector cannot go on in this way. If it does, we’ll have to deal with even more insolvencies of large and small contractors and suppliers as well as defects in workmanship and design when corners are inevitably cut.
The public sector suffers significantly here with additional costs in its projects having to be picked up by the taxpayer.
Those who procure new buildings also need to avoid what appears, for the most part, to be a relentless drive to push costs down beyond what is reasonable to deliver not only properly designed and constructed buildings but also investment for the future of a strong UK construction industry through proper research, development and training.
Problems with payment
On payment, much has been written in the past year about the demise (or not) of the ‘smash and grab adjudication’ (where payment has to be made of the full amount claimed by a contractor or sub-contractor because there is no valid payment or ‘pay less’ notice from the payer challenging the amount claimed). It is an indication of the sector’s continuing malaise about payment that, rather than tackling the root causes of bad payment practices, the sector has become even more obsessed with only treating the symptoms of it.
In 2019, the construction sector and those who advise it need to take stock and decide to change practices that cause continuing and acute difficulty in the industry. Things won’t change overnight but 2019 might see a start.