Construction

The Building Act 1984 establishes a series of regulations, including the Building Regulations 2010, which apply to all ‘building work’ (as defined). Approval under the regulations is required for most building work in England; and other consents and licences may be required depending on the project.

The Housing Grants, Construction and Regeneration Act 1996 (as amended) applies to all contracts for ‘construction operations’ (as defined) and prescribes statutory provisions to be included in most construction contracts and consultants’ appointments. The Scheme for Construction Contracts (England and Wales) Regulations 1998 imply the required provisions into the contract if they are absent. The Town and Country Planning (Environmental Impact Assessment) (England and Wales) Regulations 2017 and other planning regulations may also apply.

The Health and Safety at Work, etc Act 1974 and the Construction (Design and Management) Regulations 2015 are key from a health and safety perspective, together with other regulations, including the Control of Substances Hazardous to Health Regulations 2002.

The Building and Fire Safety Bill 2021 is proceeding through Parliament and is likely to come into force in 2023. It establishes:

• a new Building Safety Regulator;
• a more stringent regulatory regime for high-risk residential buildings; and
• three new project ‘gateways’, the first of which is already in effect at the planning stage.

The Defective Premises Act 1972 imposes liability on landlords and builders for poorly constructed and maintained buildings. The Corporate Manslaughter and Corporate Homicide Act 2007 establishes corporate criminal liability for poor health and safety management. The Modern Slavery Act 2015 requires large businesses to produce and register an annual statement on avoidance of modern slavery risks.

Tax-related legislation includes:

• the Construction Industry Scheme (CIS), which applies to self-employed individuals; and
• the value-added tax ‘reverse charge’ rules, which apply to certain supplies of construction services.

The Finance Bill 2021-22 anticipates a new residential property developers’ tax of 4%, which will come into effect to help fund the removal of unsafe cladding.

Numerous government departments and local authorities are responsible for different aspects of the construction sector, including the Department for Levelling Up, Housing and Communities. Approved Inspectors can also determine compliance with building regulations. Her Majesty’s Revenue and Customs is responsible for administering the CIS and tax issues. The powers of government bodies vary, but they generally include the right to withhold or withdraw approvals, prosecute and impose penalties.

The Health and Safety Executive manages health and safety and has powers to:

• inspect sites;
• withdraw approvals;
• impose monetary sanctions; and
• bring criminal prosecutions.

The construction sector is well regulated and regulations are enforced, with inspections undertaken and sanctions for breaches imposed under both sector-wide and project-specific legislative requirements.

Commercial projects are generally procured through a one or two-stage competitive tendering process. A lump-sum contract is commonly used, with contract mechanisms to adjust the contract sum. The following are also used:

• guaranteed maximum price (GMP) contracts, where the contract sum will not exceed a specified maximum; and
• target cost contracts, where cost savings and overruns are allocated between the parties using a ‘pain/gain share’ mechanism.

Until October 2018, the Private Finance Initiative was the United Kingdom’s predominant public-private partnership model for major public infrastructure projects, using variations of design-build-finance-operate type contracts. However, the Crown Commercial Service now manages public sector procurement based on a legal framework of free and open competition and value for money, in line with internationally and nationally agreed obligations and regulations.

Framework agreements are often used by government bodies, allowing contracts to be carried out over a period of time on a call-off basis, as and when required. Prime contracting or strategic infrastructure partnerships allow public sector bodies to bundle together smaller projects with a single point of contact. Partnering arrangements are sometimes employed and are generally linked by bi-party contracts which can include the wider supply chain.

Generally, the involvement of an international party does not affect the procurement method, subject to tax considerations and the provision of suitable guarantees.

These vary as the appropriate procurement method should be selected depending on the nature of the project and the client. Lump-sum contracts suit a project that is well defined at tender stage, giving greater certainty over costs; although there is little incentive to reduce time or costs. Under a GMP or target cost contract, the contractor should be in a good position to control its costs. Framework agreements and prime contracting can save time and reduce ‘learning curves’ and other risks. Partnering can be time and cost effective if the project parties are incentivised, but requires commitment and management from the outset.

These include:

• the nature of the project and the client;
• the time for completion;
• design and planning risk;
• specific site issues and location;
• the method of financing;
• the need for operation and maintenance;
• entitlement to the facility’s product or revenues; and
• tax considerations.

The traditional project structure has the design team appointed directly by the client. The contractor is typically appointed after a competitive tender process and coordinates the construction team, including all subcontractors. Often the design team is novated to the contractor at a milestone stage – for example, after planning approval. However, many projects adopt design and build procurement, where the contractor engages the design team and all subcontractors from the outset. Collateral warranties or third-party rights, given under the Contracts (Rights of Third Parties) Act 1999, are typically given by contractors and certain consultants and subcontractors to the client and/or other interested parties, such as funders, purchasers and tenants.

Construction management suits experienced developers whose in-house team engages and manages individual trade packages appointed directly by the client. Management contracting is similar, but the client employs a management contractor which engages the works contractors for a fee, plus overheads.

In turnkey and engineering, procurement and construction (EPC) contracting, the contractor develops the detailed design and is often responsible for facility commissioning, start-up and handover.

Generally, the involvement of an international party does not affect the structure of the project, subject to tax considerations and the provision of suitable guarantees.

The separation between the design and construction teams is the main disadvantage of traditional procurement, although it is a well-established structure. Under design and build, the contractor takes on all risks and is the single point of contract, simplifying communication and processes; although this may not be as cost effective.

The construction management is time and cost effective, but involves more risk and management for the client, even it receives collateral warranties from key works contractors. EPC and turnkey require a suitably experienced and technologically competent contractor; although this comes at a cost and limits client involvement and flexibility of design.

These include:

• the nature of the project and the client;
• the time for completion;
• design and planning risk;
• specific site issues and location;
• the method of financing;
• the need for operation and maintenance;
• entitlement to the facility’s product or revenues; and
• tax considerations.

Commercial projects are typically financed externally by the client through loans, funds from shareholders and venture capital. Funds are often released in stages based on milestones in the project. Other funding options include mezzanine, bridging and project finance, with the special purpose vehicle providing equity.

Project finance is typically used for long-term infrastructure projects and was historically used for Private Finance Initiative (PFI) projects by the public sector, with service payments principally met from public funds rather than end-user charges. However, with PFI discontinued in the United Kingdom, new revenue support models alongside existing models are being developed to support private investment in infrastructure – for example, contracts for difference and the regulatory asset base model. Generally, the involvement of an international party does not affect the financing of the project, subject to tax considerations and the provision of suitable guarantees.

Short-term loans rely on the ability of the project to quickly generate income – for example, through sales or leasing – so the loan can be repaid or a mortgage or long-term option adopted. Commercial bank loans offer security of funding and flexibility, although interest rates may be higher for small or high-risk projects. Project financing creates a long-term commitment to the project, but its use is generally limited to specific public infrastructure projects.

These include:

• the nature of the project and the client;
• the time for completion;
• design and planning risk;
• specific site issues and location;
• business environment risks;
• the need for operation and maintenance;
• entitlement to the facility’s product or revenues; and
• tax considerations.

Various protections are available, including:

• taking security by way of an assignment or charge over the construction documents; and
• providing collateral warranties.

The lender will typically take security over the borrower’s rights under the development contracts, including the benefit of performance bonds, parent company guarantees and collateral warranties. The lender will also directly receive collateral warranties in its favour.

No specific laws govern project finance transactions, although general common law principles, other UK legislation and guidance apply.

Measures include:

• the Bribery Act 2010;
• money-laundering offences in the Proceeds of Crime Act 2002; and
• the Competition Act 1998, which prohibits anti-competitive agreements and abuse of a dominant position by a business (eg, cartels, collusive tendering and bid rigging).

The Joint Contracts Tribunal (JCT) 2016 standard forms of contract are the main contract forms used for commercial construction projects. The New Engineering Contracts (NEC) (current edition NEC4, published June 2017) are used for almost all government-procured projects, are being used increasingly internationally and are likely to be used in favour of the Infrastructure Conditions of Contract (ICC) for large-scale projects. The ICC suite is published by the Association of Consultancy and Engineering and the Civil Engineering Contractors Association, and replaced the ICE conditions of contract published by the Institution of Civil Engineers. The IChemE contracts, published by the Institution of Chemical Engineers, are for use in the chemical and process industries, and comprise both UK and international editions. Project partnering is often procured under PPC 2000 and other partnering forms published by the Association of Consulting Architects. The FIDIC forms, published by the International Federation of Consulting Engineers, have limited use in the United Kingdom and are generally used for international construction projects. The Royal Institute of British Architects publishes standard commercial and domestic forms of building contract and a consultant appointment.

The JCT forms are well known, particularly for commercial property development, and are adaptable with a standard payment structure. The NEC contracts offer a more collaborative approach with flexible payment options – for example, Option C target cost; although their intensive project management provisions may be costly to administer.

These include:

• the nature of the project and the relationship between the parties;
• the level of project risk;
• the contract value; and
• the need for operation and maintenance.

The standard form provisions are almost always amended.

A choice of foreign law or jurisdiction clause is generally valid and enforceable. However, the common law and instruments that determine governing law and jurisdiction (eg, Rome I and II and the Hague Convention) will apply. Mandatory rules of law and certain statutory provisions (eg, the Unfair Contract Terms Act 1977, the Financial Services and Markets Act 2000 and those protecting consumers and employees) will apply irrespective of a contract’s chosen governing law. The governing law will not apply to the extent it overrides mandatory provisions.

The Housing Grants, Construction and Regeneration Act 1996 (as amended) applies to all contracts for ‘construction operations’ (as defined) and prescribes statutory payment, dispute resolution (by adjudication) and other provisions for most construction contracts and consultants’ appointments. If these provisions are absent, the Scheme for Construction Contracts (England and Wales) Regulations 1998 imply the required provisions into the contract. Other typical terms address:

• changes in the work;
• extensions of time;
• liquidated damages for contractor delay; and
• termination.

Under the common law, penalty clauses are generally unenforceable, so care should be taken to ensure that liquidated damages fall within the test. There are also statutory and common law public policy controls on limitation and exclusion clauses in certain commercial contracts (eg, injury or death, fraud).

Initially, the client determines the intended risk allocation as it prepares the contract and bid material. The procurement method also plays a role – for example, in a design and build or EPC contract, the contractor will assume greater or full design responsibility. Generally, the party best able to control a risk will bear it; although many ‘neutral’ risks are often allocated to the contractor and can be mitigated through insurance, by being passed down the supply chain or through an entitlement to additional time and/or recovery of costs.

Limitation and exclusion clauses, subject to common law and statutory controls, are often used – for example, to cap liquidated damages or overall liability.

Most construction contracts include provisions entitling the contractor to additional time for completion where certain specified events cause delay. Contractors should be entitled to an extension of time for client-caused delays, failing which the prevention principle applies and time for completion may be set ‘at large’. The contractor is required to mitigate delay and, in some instances, may need to accelerate the works.

Most construction contracts include provisions addressing the consequences of force majeure. Depending on the event, the contract may entitle the contractor to costs and/or an extension of time.

Most construction contracts include provisions entitling the client to make variations to the works, subject to common law restrictions on the extent of such changes.

These requirements are generally addressed in the contract.

Subject to common law requirements in relation to termination, these provisions are generally addressed in the contract.

Subject to common law requirements in relation to delay and damages, the contract will generally entitle the client to liquidated damages where completion has been delayed.

No.

Yes, particularly for specialist works.

The Housing Grants, Construction and Regeneration Act 1996 (as amended) (HGCRA) and the Scheme for Construction Contracts (England and Wales) Regulations 1998 prescribe statutory payment provisions for most construction contracts.

No, they are prohibited by the HGCRA.

Retention is typically 5% of the contract sum, retained from progress payments, with 50% released to the contractor upon practical completion and the remainder at the expiry of the defects’ liability period.

The Health and Safety at Work, etc Act 1974 and the Construction (Design and Management) Regulations 2015 are key, together with other regulations, including the Control of Substances Hazardous to Health Regulations 2002.

The Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013 require reporting and recording of certain work-related accidents, occupational diseases and specified dangerous incidents.

Breaches of the relevant statutory provisions are criminal offences. Penalties for employers include payment of compensation, unlimited fines and/or imprisonment. Directors can be personally liable and board members can have both collective and individual responsibility.

Irrespective of size, all contractors must engage ‘competent’ people with responsibility for health and safety. Larger contractors may engage a specialist or consultancy.

Primarily the Health and Safety Executive and local authorities.

It is well regulated and obligations are enforced.

A wide range of environmental authorisations are required, depending on the location and type of project (eg, flood risk, waste or mining operations, water discharge). Many activities require an environmental permit. Projects likely to have a significant effect on the environment require an Environmental Impact Assessment. Certain projects also require a Construction Environmental Management Plan.

Generally, this occurs at the early design or planning stage by application to relevant authorities and the Environment Agency.

The contractor must comply with all requirements relevant to the project, including waste management, recycling and noise control.

The sanction for breach of most environmental laws is prosecution; the penalties include fines and imprisonment and civil sanctions (eg, stop notices). Company directors and officers can be prosecuted if the offence was committed with their consent or was attributable to their neglect.

New buildings must achieve specified energy-efficiency standards and lower carbon emissions.

The Environment Agency is the main body responsible for enforcement.

It is well regulated and obligations are enforced.

In line with the Climate Change Act 2008, the United Kingdom’s Net Zero Strategy (October 2021) sets out decarbonisation pathways for a net zero economy in 2050.

Insurance for construction projects typically comprises:

• contractors’ all risk insurance;
• public liability and professional indemnity insurance; and
• potentially, depending on the project, product liability and/or latent defects insurance.

Collateral warranties and third party rights which extend the duty of care by a contracting party to a third party are also common.

There is a compulsory statutory process under the Financial Services and Markets Act 2000 for the transfer of all or part of an insurance business, including the transfer of reinsurance contracts. An application must be made to the UK courts for the approval of the transfer scheme, but the consent of the individual policyholders is not required. This can be a lengthy and complicated process.

Generally, professional indemnity insurance policies will not cover this risk or may expressly exclude it; and it may invalidate the policy altogether if an insured agrees to fitness for purpose obligations.

These include:

• provision of performance bonds;
• directors’ and officers’ insurance;
• flood insurance;
• terrorism insurance;
• legal costs insurance;
• legal indemnity insurance;
• residual value insurance; and
• integrated project insurance.

A wide range of employment laws apply, including;

• the Employment Act 2002;

• the Employment Rights Act 1996;
• post-Brexit immigration rules;
• the Data Protection Act 2018;
• the Equality Act 2010 and anti-discrimination laws;
• the Construction Industry Scheme;
• off-payroll working rules, known as IR35; and
• other taxation laws.

A range of tax laws apply, including:

• the Construction Industry Scheme;
• off-payroll working rules, known as IR35;
• the value added tax (VAT) ‘reverse charge’ rules; and
• anti-fraud and corruption legislation.

VAT refunds are available for building new homes, certain conversions and some energy-saving products. The new ‘Help to Build’ scheme encourages self-built homes. The Enterprise Investment Scheme, a venture capital scheme, may assist certain businesses. Tax relief is available for some energy-efficient building improvements and offsetting environmental impact. The Construction Industry Training Board grants scheme assists with training and improving skills.

Strategies include certain company structures, taking advantage of government schemes and managing capital gains tax.

The United Kingdom is widely considered to be a global leader in the adoption and use of BIM. Since 2016, all centrally procured construction projects are required to utilise BIM Level 2 in their processes, with BIM Level 3 the aim by 2025.

The government’s Digital Build Britain strategy recommends smart contracts for construction procurement in Level 3 BIM. Although the use of standard forms is well entrenched, some digitalisation is being used to achieve cost reductions in certain infrastructure sectors. In principle, smart contracts are enforceable.

Digitalisation could lead to:

• gains in productivity and time efficiency;
• cost reductions;
• increased safety; and
• improved productivity.

Most construction contracts provide for statutory adjudication pursuant to the Housing Grants, Construction and Regeneration Act 1996 (as amended) (HGCRA). The Technology and Construction Court (TCC) is a specialist court which deals with construction disputes, including the enforcement of adjudicators’ decisions.

Issues typically involve:

• payment;
• delay and incomplete works;
• defects and quality of workmanship;
• design failures;
• variations; and
• site conditions.

Generally, through statutory adjudication.

Mediation is commonly used and the TCC Guide encourages the parties to use alternative dispute resolution, including mediation. Arbitration is governed by the Arbitration Act 1996 and is generally used for international disputes.

No, as statutory adjudication generally prevails.

Toppan v Simply Construct [2021] EWHC 2110 (TCC) highlighted whether disputes under collateral warranties must be adjudicated as they are ‘construction contracts’ for the purpose of the HGCRA. The Court of Appeal has granted leave to appeal the decision. In Triple Point v PTT [2021] UKSC 29, the Supreme Court provided crucial guidance on the correct interpretation of liquidated damages clauses.

Projects face:

• supply chain issues and material shortages;
• reduction in turnover;
• delay and postponement of projects;
• tightening of procurement and risk management strategies;
• new measures to ensure the health and safety of the workforce; and
• increased use of alternative dispute resolution.

Construction output is forecast to grow and prevailing trends include:

• the use of offsite and prefabrication methods;
• interactive design;
• artificial intelligence and machine learning;
• augmented and virtual reality technologies;
• the use of robotics and drones; and
• an increased focus on fire safety.

The entry into effect of the Building and Fire Safety Bill 2021 (anticipated to be 2023) will see major legislative reforms.

Focus on risk management and good project management, and invest in technology. Potential sticking points include:

• skills, labour and materials shortages;
• increased competition; and
• shrinking profit margins.