Need to ‘balance books’ will mould 2025 construction procurement trends

With the £22 billion “black hole” referred in the UK autumn budget, it is crucial for such balance to allow the UK construction industry to get back on track.

As 2025 unfolds, we expect to see the private sector being encouraged to take a stake in infrastructure projects. The private finance initiative (PFI) was a mainstay of infrastructure projects during the 1990s and 2000s but ceased to be used because of perceptions of lack of value for money. However, the lack of public sector funds means that we are now likely to see new models emerge to fund significant infrastructure projects.

Collaborative models continue to be used with increasing sophistication. An emerging theme within frameworks is that public sector organisations are becoming both more collaborative and ensuring projects are designed to budget.

For too long, there has often been a disconnect between the design brief and project budgets. Generally, a priced design is in excess of the budget and value engineering occurs to ensure the project proceeds, with compromises being made both in terms of sacrifices of quality or functionality.

We are now seeing more contractors and employers working closely to bundle up projects within an overall budget. This involves an active dialogue about what can be built for the budget. The contracts are let on a two-stage basis and savings achieved on the project are shared between the parties. If the intended design cannot be implemented within the budget, the contractor is encouraged to provide alternative design which can be implemented within the budget.

Pre-construction design is carried out fully so that risk is assessed and dealt with before commencement on site. There is a greater degree of confidence that variations will be minimal, and costs will not increase significantly. Cost overrun is absorbed by both the project risk pot and any underspend in the pre-construction phase before overspend or underspend is allocated.

This model allows the employer to retain a degree of control on deciding how to allocate funds against its projects and for the contractor to be encouraged to be open and realistic about what can be built for the budget. This eliminates waste through cost overrun and enables allocated funds to achieve the client’s objectives and creates value for money for the employer.

Designing to price can be compelling as it means that the contractor is happy its solution can be built within the price. This pragmatic view can allow a programme of works to run smoothly, allocating budget and resources accordingly. 

We are continuing to see mainly two-stage contracting with significant early contractor involvement (ECI). When the contract gets awarded, most of the big design and construction risks have been mitigated or understood. The market remains resistant to single stage tendering where there is difficulty in pricing risks accurately.

There is also a trend emerging across a range of infrastructure sectors regarding the adaptation of the Institution of Civil Engineers’ (ICE) ‘Project 13’ enterprise model. The model shifts the focus from traditional transactional models to a more collaborative, enterprise-based approach. The goal is to improve productivity, certainty in delivery, and outcomes for society.

Key principles include value being defined at the outcome level, with enterprises rewarded for performance, as well as all parts of the enterprise being aligned with the outcomes to be delivered.

What we have seen is that the Project 13 model is being adapted so that clients retain more control, and the projects are not fully integrated but can be categorised as ‘hub and spoke’. Savings generated can be reinvested by the client in additional projects. This is great if you are the contractor appointed to these projects who will have increased turnover and fees,but may not be as positive if you have contributed but do not get a “piece of the pie”.

One inadvertent consequence of the contractor’s incentives being deferred to the end of project is that it favours contractors who can take a long-term view of profit rather than having to satisfy shareholders annually.

Trends towards reducing or net zero projects continue to develop. There is increasing emphasis on circular economy projects. These entail the reuse of materials from buildings which are taken down and then re-built. Contractors need to take the risk of the extent of materials they can reuse in projects following their examination.

Significant building owners are commencing longer term projects relating to decarbonising estates. There is not yet significant use of NEC4’s Secondary Option X29 which focuses on integrating climate change requirements into construction contracts to improve carbon performance, outlining what a contractor must achieve to reduce carbon emissions and rewards good performance through incentives. On estate wide projects, much of the improvement in carbon performance can be tweaked through soft landings processes following completion.

Looking ahead to 2025, it is likely we will see the publication of ACA’s new Project Alliance Contract (PPC) to replace PPC 2000. The contract has always contained integrated pre-site start and building phases. This is an opportunity to address the issue of passing the Building Safety Regulator’s Gateway 2 in one agreement, rather than other models which need to include Gateway 2 provisions in a pre-construction services agreement. 

Also anticipated is the publication of the JCT’s Target Cost contract. With the exception of the JCT Constructing Excellence form, JCT contracts have had traditional risk allocation. It will be interesting to see how the JCT deals with reimbursable costs issues such as disallowed costs and how closely it follows other models.