Market trends in the construction industry in 2023 and how to tackle them in 2024

January 2024

Andrew Croft and Ellie Eastwood

As the first month of 2024 draws to a close, we feel it is an opportune time to reflect on some of the trends we saw in the construction industry in 2023 and hopefully look with some positivity at what is to come in 2024.

2023 was, in lots of ways, a difficult year for the construction industry. It was plagued by inflation, increased cost of materials, skilled labour shortages, a cost-of-living crisis and the ongoing effects of the Russo-Ukrainian war. It was not all doom and gloom though. We saw a real increase in the focus on climate change and decarbonisation in construction projects globally and in the use of digital technologies to improve efficiencies. We also saw the introduction of secondary legislation under the Building Safety Act which reflected a hugely important step towards a safer built environment.

This article will reflect on these important trends and, for those who are interested in reading more on each of these topics, it will also direct you to some of the articles that we have written throughout 2023.

A difficult year for the construction industry

Inflationary pressures

Inflation soared following the COVID-19 pandemic and the subsequent Russo-Ukraine war. This was compounded by rising energy and food prices, a shortage of skilled workers and a rise in the cost of materials and goods. In an attempt to keep inflation at an acceptable level (although still double the Bank’s target of 2%), the Bank of England increased the interest rate five times in 2023 – a trend which has seen the base rate increased fourteen times between December 2021 and August 2023. This ultimately led to a 15-year peak in the Bank of England base rate in 2023.

When interest rates rise, borrowing becomes more expensive and this is one of the key issues that the industry faced in 2023. The increase in mortgage rates, together with the general cost of living crisis, also led to a fall in the demand for housing. While the total construction output decreased by 4.4% in 2023 (a fall which took it below the pre-pandemic level), as expected, the residential construction sector was worst affected.

At the end of 2023, the construction industry was clearly still battling against an inflationary market. This remains the case going into 2024. Energy costs remain at an all-time high; there are ongoing difficulties with availability of materials (particularly bricks and blocks); and the Bank of England base rate remains high at 5.25%. It is predicted that the base rate will stay high for a while to maintain the downward pressure on inflation which means that the industry will likely still face issues associated with high borrowing costs through 2024.

That being said, there is no doubt that inflationary pressure did subside somewhat in 2023 compared to 2021 & 2022. The end of 2023 saw the cost of construction materials coming down, a reduction in shipping costs and we also saw a large number of new opportunities and tenders so it is clear that the construction and infrastructure markets continue to be very active. Inflationary pressures throughout 2023 and the consequential decrease in demand has also allowed the supply chain a chance to catch up, meaning there is reason to hope that supply chain issues could ease in 2024. The resilience of the construction sector was shown by the fact that by the third quarter of 2023, construction was the only economic sector still experiencing growth. It is hoped that 2024 will see a further decrease in inflationary pressures to allow the sector to recover and grow, with the help of some of the major projects in the pipeline.

It is still of the utmost importance for businesses to protect themselves against the risks discussed above through careful and continued due diligence of clients and by structuring payments to ensure cashflow. This should also be reflected in contract terms, such as by seeking regular (monthly) payment provisions and the use of price fluctuation, force majeure and termination provisions.

Insolvencies

The issues discussed above led to a real increase in the number of construction insolvencies, with the second quarter of 2023 seeing the highest level ever recorded, including some large contractors like Buckingham Group and Tolent. This is expected to continue into 2024. For further discussion on this point, we will shortly be releasing an article that addresses insolvency risks in the current market and provides some practical points to consider.

Contract Management

In 2023, we saw proposed contract terms continue to be detailed and onerous. As a result, the provisions relating to entitlement to payment and variations are becoming more complex and harder to manage. For example, we are increasingly seeing overly prescriptive requirements for invoicing as well as conditions precedent to payment and time bars to entitlement to payment. This creates barriers to recovering payment as a result of the technical requirements not having been complied with – particularly in the case of general prolongation. It is therefore vitally important for construction professionals to manage their invoicing and change control processes and ensure they have clear rights regarding entitlement to additional fee in the event of delay.

Some positivity for the construction industry in 2023

Lendlease v AECOM and duties of care

The judgment in this case, which was published in November 2023, clarified two important points in relation to contractual liability. Crucially, it upheld the effect and importance of an overriding care clause. It confirmed that if an overriding reasonable skill and care clause is used correctly, it has the power to override and successfully limit otherwise onerous strict obligations within a contract. This provides useful support for consultants to request an overriding duty of care in their contracts, the inclusion of which is becoming more commonly agreed within the industry and can also be important from a PI perspective.

For further discussion regarding this key judgment, please see our articles linked here and here.

Building Safety Act 2022

2023 saw the introduction of new secondary legislation, with the aim of supporting the practical implementation of the Building Safety Act. These included the following regulations which were published in August 2023:

Building Regulations etc. (Amendment) (England) Regulations 2023
Building (Higher-Risk Buildings Procedures) (England) Regulations 2023
Building (Approved Inspectors etc. and Review of Decisions) (England) Regulations 2023
The Higher-Risk Buildings (Management of Safety Risks etc) (England) Regulations 2023
The Building Safety Act 2022 (Consequential Amendments etc.) Regulations 2023

The introduction of these regulations was a hugely significant development which provided much needed clarity and guidance on the realities of the new roles, responsibilities, timelines etc. introduced by the Act. They came into effect following consultations with a wide range of construction professionals and aim to reflect the recommendations from the Hackitt Report (linked here) and provide the necessary technical detail surrounding the new regime for the design and construction of higher-risk buildings and wider changes to the building regulations. It is hoped that these regulations (and other secondary legislation which has been, or will be, implemented) will reform the way in which buildings are designed, built and managed to make way for a safer built environment.

This is the most wide ranging and complex legislative change in the construction industry for a significant time and the industry was given very little notice of the detail it would involve. Similarly, there has been limited guidance on how to apply the new regime and no industry standard contract terms have been published yet. Given the importance of these changes and the consequences of failing to comply with the regime (both reputationally and legally), it is important that those across the industry are up to speed with the regime and that the approach is reflected in contractual terms, scopes and prices.

We have written a number of relevant articles discussing the secondary legislation and these are linked below:

Sustainability

In addition to the welcome changes in the sphere of building safety, there were also some positive changes in relation to sustainability. COP28, which took place in Dubai at the end of 2023, showed that sustainability remains a key issue for the construction industry, with renewed commitments and ambitions to address the climate crisis.

We saw a real uptick throughout the year in construction companies making a conscious effort to factor sustainability into their projects, construction processes, and designs. This included seeking advice from sustainability specialists / consultants and the increased use of contractual provisions such as the NEC’s secondary option X29 Climate Change, which was introduced in July 2022 (see our article linked here for further discussion on the climate change clauses).

In July 2023, the Institution of Structural Engineers published their new guidance on the circular economy which is based on the principles of reuse, refurbish and recycle. The guidance was written, in part, to help tackle climate change and to provide engineers, designers and construction professionals with guidance as to how best to incorporate circular economy principles into their work and to enable structural engineers to take a greater role in driving construction projects to net zero. Again, this showed a real commitment by the industry in combatting climate change and achieving net zero (see our article, linked here, which discusses the guidance in more detail).

In the UK, we also saw the Energy Act 2023 become law in October 2023. This Act aims to lay the foundations for a new and improved energy system fit for the future by strengthening energy security and supporting the delivery of net zero.

The contractual approach to sustainability needs to be considered very carefully, with a sensitive balance between encouraging the achievement of the important aims, without imposing an unreasonable level of risk.

Digitisation and AI

In 2023 there was also a distinct increase in the utilisation of digital technologies and AI on construction projects – for example, through the use of drones, 3D printing, robotics and BIM. This helped to accelerate projects and improve processes and efficiencies, with the aim of reducing errors, delays and costs. Of course, this can come with some risks, particularly around cyber risk and data security but we nevertheless see this as a positive step for the industry.

One key area which often gets overlooked is how the use of technology is reflected in contractual terms and conditions. Although we are seeing an increased use of Software as a Service type arrangements by consultants and clients, these are rare and often the use of technology occurs in a “contractual bubble”. This can lead to uncertainty in terms of liability, payment and intellectual property rights. It is therefore vitally important that the use of technology is understood at the outset and reflected contractually.

Looking forward to 2024

Overall, there are many reasons to be positive as we go into 2024. Major projects continue to be a driver of growth for the construction industry and we hope to see a decrease in the inflationary pressures over the course of the year, with a further push towards sustainability and green building. Given the developments in the UK and global markets in 2023, we would strongly suggest that our clients take the opportunity to review their standard terms and conditions. Please do get in touch if you would like any assistance with this. In addition, if you are experiencing any issues on current projects as a result of any of the pressures discussed in this article, or would like guidance on the Building Safety Act, then we are also available to assist.

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