UK: The Long Shadow Of The Recession

Last Updated: 24 October 2014
Article by Suzanne Reeves

For those of us working in construction, the recession appears to be over and in London the skyline is once again dominated by cranes. The upturn started with, and is still dominated by, residential developments in London and the southeast but now seems to have spread to other sectors and other parts of the country. Long may it continue!

So does that mean that it is business as (pre-recession) usual? The answer to that is no. The length and depth of the recession, not surprisingly led to significant cut backs in labour and the production of materials. By comparison the relatively quick upswing from the end of 2013 into this year has given rise to corresponding shortages as supply has not been able to keep pace as the level of construction activity increases.

The most notable material shortage is bricks, as has been well publicised. Whilst UK manufacturers cannot keep up with demand, there is also apparently now a problem with obtaining alternative supplies outside the UK. On the labour front it is taking longer to replace experienced people at all levels of construction — some of whom have been lost to the industry by finding employment elsewhere.

There were, of course, casualties in the recession among main contractors, specialist contractors, suppliers and consultants. There has also been a lot of merger activity particularly among consultants, which arguably is reducing competition at the top end. Whilst the fittest may have weathered the recession and come out of it leaner and fitter, those organisations are now very busy with a full order book and many can now be more choosy about whom they are prepared to work with and are now reaping what they have sown. Perhaps a solitary lesson for those who have not treated their supply chain well in the past?

For projects I have been acting on, lists of contractors asked to pre-qualify have grown considerably, but the responses expressing interest have reduced. On one significant project being undertaken by a client in London to start on site early next year there were only two positive responses received from contractors out of an initial list of 20. So, what changes in procurement are we construction lawyers seeing to take account of these factors?

  • A considerable increase in two stage tendering as a way of seeking to secure a main contractor and some price certainty as soon as possible. This is not limited to design and build procurement as used to be the case.
  • A revival of traditional procurement where the whole design team remains with the developer and is not novated, with the contractor taking no or only limited design responsibility for discrete design packages, as a way of progressing with the design elements to a more advanced stage before the main contractor is selected.
  • Engagement of design specialists directly by the developer before the main contractor is engaged on the basis that the specialists will subsequently be novated to the main contractor when it is engaged.
  • Main contractors requiring payments for materials in advance before delivery to site, so as to place early orders and, in turn, developers requiring advance payment bonds and guarantees, as well as deeds vesting in them the legal ownership for such materials as security for payment. Vesting deeds can give rise to problems when materials are being sourced from outside the UK and the suppliers are subject to different legal requirements.
  • Inflation in construction costs is leaving gaps between budgets approved by funders and estimated contract sums, giving rise to considerable value engineering and negotiation post tender in an attempt to firm up a price which comes within the borrowing facility. If the gap cannot be bridged re-design, retendering may be needed with attendant delay.
  • A return to the use of fluctuation provisions which had all but disappeared before the recession — just as well contract bodies, such as the Joint Contracts Tribunal, have retained such provisions.
  • A hardening of the attitude of contractors, subcontractors, consultants and their insurers to risk with the pendulum swinging away from developers. The large scale amendments to standard form contracts seeking to shift risk away from the developers and funders onto main contractors and the design team are meeting more resistance, particularly on design and build projects. This may lead to more balanced risk sharing in the future.

It seems therefore that in a relatively short time the construction marketplace has turned around and is becoming a seller's market. This is giving rise to many challenges across the industry as it tries to keep pace with demand and tight development timetables. The current climate may give rise to an opportunity for those able to meet such challenges and turn them to their advantage, possibly to improve the historically low margins that the industry has had to endure. But will the market change again, particularly as the general election approaches? We live in interesting times!

Originally published by Civil Engineering Surveyor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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