UK construction sector 2024 review

Growth continues to be challenging, with data from the third quarter of 2024 suggesting a 0.8% increase on the second quarter but with some analysis suggesting modest contraction of the sector for the full year. Interestingly, the driver behind Q2 growth appears to be new-build projects, up 2%, rather than the stalwart repairs and maintenance sector, down 0.6%, according to the Office for National Statistics (ONS). Yet this is still relatively poor. In this regard, the UK does not appear to be materially out of step with international trends.

The good news, however, is that inflation in the marketplace in respect of project costs has perhaps been less of a sheet anchor for the industry than feared 12 months ago. Levels are still high when compared with pre-pandemic norms but at least have stopped yo-yoing, particularly in respect of certain materials and energy. Some issue-specific drafting that was going into contracts – including stretching definitions of ‘force majeure’ and its consequences – have not had to be implemented. That said, it would be a bold contractor on any but the shortest duration contracts who was not looking for some form of indexation for the contract price.

For project procurers seeking price certainty, this represents another challenge for shaping procurement strategies. Early contract involvement (ECI) sometimes appears to be deployed as a response to this. It continues to find favour with some employers, but often seems poorly understood by those using it and, in worst-case scenarios, may be seen as a way of “kicking the can” on unpalatable spending outcomes.

Use of ECI illustrates that, at least in certain parts of the market, employers and contractors continue to seek to collaborate to deliver successful project outcomes. Particularly in the case of frameworks with a relatively certain pipeline of activity to be undertaken, the use of ‘alliances’ – especially in the regulated utilities sector – continues to bring advantages for participants.

However, the language of collaboration also continues to be abused. Some major programmes in the infrastructure space that seek to describe themselves as “enterprises” are nothing of the sort. On closer examination, so-called ‘enterprise’ contracts contain risk allocation that seems to belong to a different, pre-Latham Report era. Some usage of mechanisms we have seen this year often more closely resemble a lump-sum fixed price set-up, with upside for the parties should the supply chain come in under budget.

A breakthrough in terms of the use of artificial intelligence (AI) was anticipated for 2024 and this is expected to continue. Both employers and contractors are still coming to terms with what AI means for their projects and the industry. Contracts and specifications, and standard form contracts in particular, are still busily playing catch up when it comes to the use of AI. With benefits for project delivery come a range of new risks in relation to shared design environments, data management and governance that require careful consideration. And let’s not forget the additional risks imposed by regulatory change, supply chain disruption and technological uncertainty brought about by the energy transition and the drive to decarbonise construction processes and materials.

Another important area considered at the start of the year was in relation to corporate insolvency. Sadly, the forecast in this respect – that levels of business failures were likely to remain high – has proved to be correct. The pernicious impact of high interest rates, balance sheets weakened by the Covid-19 pandemic, material and energy supply shortages and price increases on lump sum contracts, and risky contracts have meant that the construction sector has the highest level of insolvencies in the economy, according to the ONS, and including some high profile failures whose effects will cascade through the wider supply chain.

Case law continues to gather pace on building safety, and the final report of the inquiry into the Grenfell tragedy was published in September.  That report will accelerate further change to the regulatory environment and its findings will reverberate more widely through the industry – particularly in following through the requirements of the “Golden Thread” in design.

It is worth noting that there are outstanding projects being delivered across the country and a real innovation in construction techniques, from mega projects like Sizewell C to the street work activities on roads and towns. The challenge is that there is opportunity to be doing so much more. While contractors are perhaps proving more cautious when it comes to selecting the projects which they intend to pursue, there remains significant appetite – something that is reinforced by the continuing availability of private finance that is looking at the UK.

One of the biggest milestones during 2024 was the election of the new government in July. Infrastructure was seen as a priority and the Chancellor has committed to invest - but with an overflowing in-tray of competing demands there is still much for the government to deliver.

From continuing the march of energy transition and increasing energy security and implementing planning changes in a bid to deliver 1.5 million homes by 2029, to delivering a programme for new schools and hospitals, there are headlines about increasing the nation’s overall productivity. However, this requires new infrastructure. All of this is against a background of fiscal constraint, uncertainty in pipelines and schemes left in limbo, particularly given the hiatus in implementation of the Procurement Act. There are also a range of unanswered questions for the direction of many of the regulated utilities, most notably in the water sector, which will require further consideration in the new year.

In September, the prime minister spoke of “fixing the foundations of this country”. As with any successful construction programme, is it obviously essential to get the groundworks right. Equally, however, it is important to be aware of the perils and adverse consequences of delay.