Revealed: The issues that could make or break UK construction businesses in 2025

Sadia McEvoy:

Hello everyone. My name is Sadia McEvoy. I'm Counsel and Head of Client Solutions in the construction team at Ashurst. And I'm joined today by my colleagues, Partner Chris Whitehouse and Counsel Matt Pearson. This podcast follows our recent article, which you can find on our website in which we reflected on 2024 and highlighted some of the developments in the construction sector that we're expecting this year. We'll take a deeper dive here into some of the issues flagged in that article. And suffice it to say, 2024 was a difficult year for the sector and there are certainly more challenges ahead. We continue to deal with geopolitical issues, insolvency risk, labour shortages and other factors, but we're also in the throes of a rapidly changing landscape with new approaches to procurement, technological developments, ambitious net-zero commitments, and as always in our sector, excitement around new asset classes.

With these factors in mind, let's discuss what 2025 might have in store and let's start unsurprisingly with the perennial topic of building safety. Chris, we went up a steep learning curve in 2024 as we and our clients got the grips with the new legislation. How would you reflect on last year and how do you expect the landscape to develop in 2025?

Chris Whitehouse:

Thanks very much, Sadia. And I think that while it's now widely accepted that the new building safety regime was needed, getting up to speed has certainly not been easy for many. Residential developers have had to navigate that new high risk building safety regime, which is overseen by the building safety regulator. At the same time, the building safety regulator itself has struggled to meet the statutory timeframes that it has to review gateway applications and also to register high risk buildings. We've heard recently that some developers are now factoring in, are whopping another six months on their project timelines just to take account of the new approvals that are required under the Building Safety Act.

Sadia McEvoy:

Yeah, and what we're asking, what our clients are asking, are these resourcing issues within the building safety regulator likely to resolve soon? And I think not. Meaning further pain for the sector as we progress through the year. The government has said it will respond to the Grenfell Phase 2 report in the spring, but there's some trepidation around that because there's the potential that we might see that what constitutes a higher risk building being extended. And of course with the current challenges facing the regulator in terms of resources, any extension is only likely to further challenge those resourcing issues.

Matt Pearson:

Yeah. We should also mention the anticipated introduction of the Building Safety Levy, which would apply generally to all new residential buildings requiring building control approval, so not just higher risk buildings. And there are actually only some limited exceptions to that. The levy is due to be introduced in the autumn, so not very imminently, but pretty soon, following which applications for building control after that date will have to pay the levy. The levy will be collected at the local authority level and then returned to central governments. Purpose of the levy is to raise funds to pay for the remediation of building safety defects. And overall the government is expecting that to raise around 3.4 billion over at least a decade, so it's pretty significant. The big question though remains, what will the levy rate actually be? And this is down to the Secretary of State to decide, which just adds yet further financial unknowns to a sector that's already struggling with high costs.

Sadia McEvoy:

Yeah. So still a number of challenges in relation to building safety. But I think also probably worth us mentioning that we are seeing greater confidence and respect to understanding the new duty holder regime. This time last year there was a lot of nervousness around what the roles entail and what competency looks like in relation to them. And I think it's safe to say that there is a greater understanding now and acceptance that this new regime is a good development. Although I think there's much greater uncertainty still around the higher risk buildings and what's expected in terms of gateway two and three applications.

Chris Whitehouse:

I agree with that, Sadia, but amongst that uncertainty, one of the positive targets I would pick out is the government's new remediation acceleration plan that was announced in December 2024. And the real purpose of that remediation acceleration plan was to speed up the identification and remediation of all unsafe cladding on residential buildings. And one of the key targets of that plan is that by the end of 2029, every building over 11 metres with unsafe cladding would either have been remediated, have a date for completion of the remediation works, or the landlords will be liable for severe penalties. So I think we can all here welcome the desire to ensure that buildings are made safe quicker.

Sadia McEvoy:

Thanks, Chris. Can I turn to another subject, Matt? Insolvency. I know a lot of your time's been taken up in 2024 advising clients in relation to ongoing projects where main contractor insolvency has become an issue. Do you think this is likely to continue as we move into 2025?

Matt Pearson:

Yes, I do. I think that continued problems are very likely. As you say, I spent a considerable chunk of the last year advising clients who have their main contractor go into administration during a live project, so I do know firsthand the chaos that's often involved. Just in terms then of the current risk in the sector, the figures say it all, so depressingly, the sector topped the charts in terms of most insolvencies with over 4,000 companies becoming insolvent in total last year, which averages at around 300 per month. Obviously that covers the entire supply chain, not just main contractors, but it did account for 17% of all company insolvencies in England and Wales. That's a huge statistic and it's 500 more than the next biggest sector, which is retail, which is always high profile and much reported on.

People might wonder what's caused this. I mean, I think that there are a number of contributing issues that have collided to create an almost perfect storm. These are high interest rates, inflation generally in our economy and also globally, high and unpredictable cost of labour and goods, low profit margins, the perennial cash flow issues, subcontractor tiers, and sometimes M&A processes that just haven't worked out.

Sadia McEvoy:

Thank you. And are there any particular insolvencies from last year that stand out?

Matt Pearson:

Yeah, so the biggest upset, it's fair to say, was the collapse of ISG in September. And no doubt the consequences of that will unfold for some time. I saw an article yesterday actually, about an insolvent main contractor I dealt with last year, which reported on the devastating impacts their collapse had had not only on their suppliers and subcontractors but also their employees. Let's just hope we don't get a crisis of confidence from the likes of investors and insurers, which could really stymie growth.

Chris Whitehouse:

Thanks, Matt. And just to add to that, I think that this year we can expect to see increased focus on how those insolvency risks can be mitigated from the very early outset of a project. And I know you've spent a lot of time advising clients last year on how best to do that. I would recommend that listeners take a look at our website where they'll find a podcast series as well as two excellent articles that Matt has written recently, looking at those risks and the proactive steps in mitigation that clients can take.

Sadia McEvoy:

Yeah. I think it's worth pointing out that good results are achievable, it just needs commercial and pragmatic approaches on all sides. Turning to another important issue for the sector: sustainability. We've obviously heard for some years now about the build environment's carbon footprint and the responsibility of the sector to reduce emissions and waste. Do you think, Chris, that 2025 will be the year when we start to see big improvements?

Chris Whitehouse:

Well, that's the million-dollar question somewhat, Sadia. I think as you say, that the construction industry has long recognised the importance of its role in achieving net-zero by 2050. And one very positive step forward last year was the publication of the pilot version of the UK net-zero carbon building standard. That new standard is widely hailed as offering a sector a consistent set of rules that now define exactly what constitutes a net-zero carbon aligned building. However, there are some critics that feel the standard is too ambitious and arguably lacks the nuance required to achieve its desired aims.

Sadia McEvoy:

We know that sustainability is not just about new building standards, but it also relates to the sector's contribution to recycling and promoting a circular economy. What's the construction sector doing in terms of matters such as waste?

Chris Whitehouse:

Yes, waste still remains a massive issue in the sector, Sadia. And it doesn't necessarily get the focus it deserves in terms of the wider sustainability arena. The UK construction industry still generates huge amounts of waste, enough per day to fill Tottenham Hotspur Stadium, for any keen football fans out there. So we do need to recycle and reuse much more. To achieve this, I think we need incentives both from government and also the sector itself. I also think there's a role here for us as construction lawyers to bring these issues to the front and centre of the whole procurement process. At the moment, Chancery Lane Project is one of the leading collaborators on model climate change clauses, and I would encourage all lawyers to take a look at the range of clauses. These clauses are particularly relevant in times when some of the most popular industry standard form contracts in our industry are seen by some as not doing anywhere near enough to promote sustainability.

Sadia McEvoy:

Arguably it's house building that the sector's relying on most heavily as the route to greater productivity and profitability for the sector. It's also an asset class that offers itself to sustainability and innovation. And Matt, do you think the government's commitments to housing will bear fruit this year?

Matt Pearson:

I think it's difficult to say. This government's made no secret of its focus on house building, improved interest rates and de-escalation and inflation rates. It really wants to make major inroads with house building and it's set a target of one and a half million new homes. That might not seem insurmountable, but it is actually a high figure. It's all very well having targets I think, but it remains to be seen whether the sector actually has the resources to meet those targets. Predictions for this year are actually for mortgage growth only. The resourcing challenges are drawn out by some shocking statistics. For example, a fifth of construction workers are now over the age of 50, with half a million set to retire over the coming decade. The particular problem with a lack of electricians and welders, insolvencies are further hollowing out the industry too.

The construction industry training board predicts that we'll need an additional 250,000 workers by 2028. We need to kickstart apprenticeships and training schemes and the government will need support from the private sector in order to do that.

Sadia McEvoy:

Yeah. And I was reading something interesting yesterday about the contrast between how we do things in the UK and how things are done in Europe. In the UK a lot of workers are self-employed, whereas in Europe they are employees. And this might actually be holding the industry back because we don't have employers being incentivized to invest in the workforce in the same way, and this then makes construction less attractive as a career option.

Chris Whitehouse:

Absolutely. And on those labour issues, I think a related area for improvement for the sector is modular construction. On the whole, I think we all know that modular construction has so far failed to live up to its high expectations amongst generally weak order books and huge overheads, but I think modular is here for the long term. The sector just needs to learn from the failures and find new ways to make it work, because it still does have the potential to solve some of those productivity and labour issues you mentioned, Sadia

Sadia McEvoy:

Yeah. And worth mentioning in this context on the subject of productivity, that there are some really disheartening statistics out there about our sector. Notably, global construction productivity increased only 10% over the 20-year period between 2000 and 2022, in contrast to productivity for the overall economy, which increased 50%. And that's a really unacceptable discrepancy that we need to address. I've always thought that industrialist modular construction did have the potential to have a bigger impact on productivity by reducing the time needed for planning, design and on-site installation phases of construction, but obviously that's easy for me to say as it's not my money. But I do think the sector needs to be persistent with modular this day, even though it will only work at scale. This means really penetrating where it's viable. For example, on projects, again, such as housing where there are repeatable units, limited customization and consistent demand. The industry needs to recommit to looking for ways to collaborate and plan ahead so that modular can regain some traction.

Matt Pearson:

Yeah, I agree with that. There are still plenty of advocates for modular construction. Some experts claim that growth could expand substantially over the next 10 to 15 years, so I think we just need to watch this space.

Sadia McEvoy:

Thank you. And turning to legislative developments, hopefully nothing as major as building safety on the horizon this year, but is there anything particular that you'd like to flag for construction in terms of legislation?

Chris Whitehouse:

One I would flag is the reform to public procurement law that has been brought into effect in February of this year with the enactment of the Procurement Act 2023. And when this comes into effect, it will be one of the biggest ever reforms to public procurement law. One of the key purposes of the act is to consolidate and replace the existing patchwork of EU derived law essentially. And the act gives greater flexibility to allow contracting authorities to develop their own bespoke procurement procedures. And we know that new procedures and opportunities both create opportunities as well as challenges for our clients. And our procurement colleagues have been kept very busy recently providing guidance on how our clients can best embrace this new act.

Sadia McEvoy:

So that is a big piece of legislation and it's coming very soon. But turning to a more commercial question, we know our sector's always looking for exciting new opportunities. Recently over the last few years, we've seen logistics and life sciences in the limelight. What asset classes are investors excited about in 2025?

Chris Whitehouse:

Well, I think no surprise to say that I think investors will be very excited about data centres. They already represent a significant share of the UK construction work. And another 14 billion of new data centre projects was recently announced as part of the government's new AI action plan. So I think we can certainly expect ongoing keen interest from investors in 2025. But all of that is of course provided that the UK can actually meet the energy capacity required. And I think in the Ashurst construction team, we're all certainly very intrigued to see how innovators in the data centre space can manage that tension between meeting the huge power demands of data centres while also trying to achieve the sustainability criteria that we've mentioned in this podcast.

Matt Pearson:

And I think it's worth adding that the government's commitment to infrastructure projects more generally is a positive. We're expecting its 10-year infrastructure plan in the spring, in which the government has promised that it'll set out its approach to transport energy and housing projects, but also social infrastructure including prisons and hospitals.

Sadia McEvoy:

Turning to another topic, something I've heard increasingly over the last year or so is that parties are rethinking procurement strategies because of factors like building safety and insolvency risk. I think we'd all agree that design and build has been the procurement method of choice in the UK for many years, but there is a growing consensus that stepping down all the design and construction risk on a project to one single contractor who has priced that risk in a highly competitive environment may no longer be optimal. It may even be unworkable in some cases. For example, if the contractor is unwilling to assume full design risk under the duty holder regime forming part of the Building Safety Act for design developed before it was appointed.

Matt Pearson:

Yeah. In the coming years we may see growing interest in a return to traditional procurement approach and greater interest in using construction management and management contracting. But I do think any steps in a different direction will be slow. Remember, this is an industry that is heavily focused on D&D and has been for years. I think that's very entrenched. But other approaches and options do present potential solutions. For example, if a developer opts for CM or management contracting, there are many different parties involved in both the design and the construction, allowing a project to proceed without forcing one single contractor to take all of the risk. These types of procurement also facilitate greater control over the project for the developer, but it isn't for everyone and it comes with its own risks. Historically, it's just worth mentioning that funders haven't favoured this approach either, but I do think that that is softening.

Sadia McEvoy:

Thanks. Yes, I agree. That's interesting. I think we'll also see clients starting to move away from the 2016 JCT suite and start using the 2024 suite, which was published over the course of last year.

Chris Whitehouse:

I agree, Sadia. I take it, that the 2024 suite has been quite slow over the course of last year. On the subject of procurement, I also think it's worth mentioning the growing importance that two stage tendering is now playing in our industry. We know that both the public and private sector construction playbooks emphasise the importance of involving your supply chain early, and that also occurs with the drive towards safer and more sustainable buildings. More generally, two stage contracting should also allow a contractor to price a project with greater certainty and that should then go on to reduce contingencies given the contractor's early involvement.

Sadia McEvoy:

On that note, probably worth us plugging here that our colleagues at Ashurst, Mike Smith and Catherine Maddox, have recently published a book which analyses two stage tendering as a procurement approach for the UK infrastructure sector. The book's called Early Contractor Involvement, and if you follow us on LinkedIn you'll be able to find all the details. We also plan to hold a Q&A probably in April with the authors, so we'll keep you posted on that. Well, I think we've identified a few green shoots for the sector in 2025, but challenges undoubtedly remain. Please feel free to contact us if you have any questions. You should be able to find all our details on Ashurst.com. It just remains for me to thank Chris and Matt, and if it's not too late yet, to wish our listeners all the best 2025. Thank you.