We consider the current climate of the construction industry in the UK – and whether a downturn in new construction projects will cause an upsurge in disputes.
The construction industry has had a turbulent 18 months. The difficulties that the sector has suffered, with the straightened economic climate being compounded by the uncertainty following a change in government, has renewed fears that the construction industry in the UK could be heading for a "double dip" recession. How likely is that to happen, and will it result in employers, contractors and construction professionals retreating to their bunkers and letting battle commence?
There is little doubt that, at present, the sector is in ruder health than it was in 2009, which witnessed the worst recession to hit the construction industry since the early 1990s. From its peak towards the end of 2006, the construction industry as a whole has fallen 20 per cent, and the more "bell-weather" private house-building sub-sector has fallen by a third.
However, the data is conflicting. For instance, between April and June 2010 (Q2) construction output grew at an estimated 8.5 per cent, its fastest pace of growth since 1963. Whilst the industry's output appears to be rosy, however, the future order book looks empty. Figures released by the Office for National Statistics on 3 September 2010 paint a bleak picture: orders for the building trade dropped by 14 per cent in Q2 2010 – and particular sub-sectors were extremely hard hit, with private house-building orders down 24 per cent and infrastructure orders down 22 per cent.
Those figures reflect only the first wave of public sector cuts announced by George Osborne on 24 May 2010. That announcement included the shelving of the Building Schools for the Future (BSF) programme, which will have a major impact on future construction works.
In the immediate aftermath of the Comprehensive Spending Review (CSR), which took place on 20 October 2010, the construction industry may be breathing a sigh of relief that Mr. Osborne's axe did not fall on too many construction-related sectors. Crossrail funding appears to have been ring-fenced, and the budget reduction for the Department for Transport has been less severe than elsewhere in Whitehall, with the coalition seemingly committed to ensuring that public infrastructure projects remain funded. However, the CSR will hit social housing projects extremely hard with a 60 per cent reduction in the funding available from central government over the next three years in this sector. Moreover, now that local authorities have more latitude to decide how to spend their own budgets, public funding for house-builders involved in social housing projects is likely to remain low for some time.
Fight or flight ...?
Given that the volume of new construction work peaked in Q4 2006 and has been in decline since then, a concern for clients is whether there has been a corresponding rise in disputes and insolvencies.
The picture as to the latter appears to be improving; the period between Q3 2008 and Q2 2009 saw the greatest rates of attrition during the current economic downturn with, successively, 292, 296, 343 and 381 insolvencies in those four quarters. Since then, the numbers of construction companies being compulsorily liquidated has tailed off, with that fate befalling only 276 companies in Q1 2010. It would, however, be rash to read too much into that downward trend; the recent demise of Connaught and Rok, for instance, suggests that even the highest profile contractors remain vulnerable. Moreover, the CSR is likely to result in extremely tough trading conditions persisting into 2011 and 2012.
Does the reduction in investment capital for new (and current) projects automatically mean that construction businesses and professionals will be seeing more disputes in the coming months? The short answer is: probably. Recent figures from the Royal Institute of Chartered Surveyors (RICS) on the numbers of adjudication appointments they have made are interesting. As one of the leading Adjudicator Nominating Bodies (ANBs), the numbers of adjudicators appointed by RICS gives a clear picture on trends in disputes across the construction industry. RICS had a peak in adjudication appointments during the early 2000s, not long after the Construction Act came into force and also during what was a lean spell for the construction industry, with the number of appointments exceeding 1,000 in each of the years from 2000-2003. That number dipped as low as 779 in 2007; but rose to 990 in 2008 and broke back through the 1,000 barrier (1,018) last year. However, statistics show that other ANBs are seeing fewer appointments and only a fraction of the RICS's volume.
The upward trend in numbers of adjudications also appears to be mirrored in the High Court. The last two years have seen a significant increase in the numbers of actions commenced in the Technology and Construction Court (TCC): in 2008, 366 actions were issued in or transferred to the TCC; but by the end of 2009, that number had jumped by more than 44 per cent to 528 new TCC cases that year. Provisional figures for 2010 suggest that a similar number of new disputes have commenced in the TCC this year as last, with 372 actions having been issued by September 2010, already exceeding the figure for the whole of 2008. Figures for professional negligence actions issued in the Chancery and the Queen's Bench Divisions show a similarly upward trend between 2008 and 2009.
Disputes are, of course, not inevitable so long as parties keep communicating with each other – although whether an appetite for discourse will persist once the impact of the CSR has filtered through, and once VAT has risen in the New Year, remains to be seen.
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.
