Prepare for a year of legal ups and downs

A new BIM protocol, payment rules and modular construction are among the changes afoot this year. Assad Maqbool and Jennifer Dalby ask what it all means for the legal landscape.

A new BIM Protocol

2017 will be a critical year for BIM. The economic uncertainty and downturn in construction industry output means that the investment in BIM technology and skills will need to be justified by offering better value for money.

In the spring there should be a reissue of the Construction Industry Council BIM Protocol. The first edition has been critical to the successful contractual implementation of BIM in the UK by focusing minds on the legal implications of using BIM; a revision is due to rebalance the risk on extensions of time and data corruption, among other issues, to assist in promoting employers’ procurement of BIM-enabled projects. 

Modular construction

Another theme of 2017 will be the impact of the Farmer Review of the UK construction labour model, which brought to the fore the case for pre-manufactured solutions.

From a construction lawyer’s perspective, the point at which ownership of the components in a manufacturing process passes to the employer should always be considered in construction contracts.

An increase in modular construction is likely to mean a rise in the use of “vesting certificates” which ensure that ownership passes from subcontractors and contractors to employers when payment has been made, reducing the employer’s risk should there be insolvency at any point in the supply chain.

Another point that will need to be considered is health and safety and the CDM Regulations. “Construction work” under the Regulations includes “the assembly on site of prefabricated elements to form a structure”. If more of a project is being carried out through the manufacture and assembly offsite, this could have an impact on the application of the CDM Regulations to those manufacturing sites.

Adjudication costs

A judgment published in late 2016 is likely to increase the numbers of adjudications next year.

Lulu Construction Ltd v Mullaley & Co Ltd concerned a dispute referred to adjudication by a Notice of Adjudication brought by the paying party, Mulalley, to resolve the value of Lulu’s claim under the subcontract.

The interesting feature of this case is that it opens the way for a disgruntled payee to recover costs either when initiating an adjudication or when faced by a claim from the payer. The payer by contrast will not be in a position to introduce such a claim as the right under Section 5A(2A) of the Late Payment Act applies only to the supplier.

FAC-1 and JCT

This year we are expecting to see the publication of some positive case studies from the first projects to use the new published standard form framework agreement, FAC-1, which is likely to become the model for long-term alliancing in UK construction projects.

As the JCT completes the 2016 update of its suite, much of the industry will start contracting using the new 2016 contracts and many companies will start receiving their first tenders on the basis of the new suite. While most of the updates have been small tweaks to wording, those tweaks will need to flow through to normal subcontracting positions and there are a few substantive changes which will need to be considered, such as the payment cycle and the process to claim loss and expense.

Paying on time

We are also likely to see a trend in the construction industry that may be helpful and worrying in equal proportions.

Much of the intent behind the Construction Act has always been to ensure that money flows during projects and to ensure the solvency of companies that might otherwise suffer from late payment.

However, there has always been a difference between policy and practice: suppliers have been discouraged from pursuing their employers because they do not want to “bite the hand that feeds them” and because of the cost (including cost of management time) in pursuing small debts.

The Small Business, Enterprise and Employment Act 2015 introduced an express power for the secretary of state to make regulations intended to tackle barriers to the ability of businesses (not specifically limited to SMEs) to access invoice finance and other forms of receivables financing. In particular, the legislation addresses restrictions that may be included in business contracts preventing the assignment of debts.

We are likely to see regulations that would mean some restrictions in construction contracts on assignment become invalid. This means that suppliers would be able to assign their rights to payment to debt factoring companies, which can pursue the right to payment direct to employers.

Although it would take time for this to infiltrate the market, the introduction of debt factoring companies as a common feature in the industry may improve solvency and payment periods, but will necessarily change traditional relationships in the industry and perhaps lead to more disputes. 

Skills shortage and existing developments

The endemic shortage that has been brewing due to the UK’s own failures in training sufficient people to meet the demand for skilled workers in the construction industry will continue to bite in 2017. The EU referendum (including its effect on the pound) has already had an impact on the willingness of European workers to move to the UK to fill that skills gap.

Since most employers want cost certainty and are reluctant to share risk, the majority of existing developments are being undertaken on a fixed price under a traditional building contract. This means that most contractors are currently taking the risk of increased labour costs, as well as the risk of delivery on time.

As with other periods of rising subcontract prices, we are likely to see a rise this year of contractors and subcontractors seeking to leave long-term fixed-price arrangements and seek open-book contracts which pass rising costs through to employers.

Assad Maqbool is a partner and Jennifer Dalby is an associate at Trowers & Hamlins