The construction sector in 2025

There are numerous hot topics affecting the construction sector in 2025, among them the challenges facing developers of higher-risk buildings, the UK Net Zero Carbon Buildings Standard and the new JCT 2024 suite of contracts. Higher-risk buildings April 2024 marked the end of the transitional arrangements under the new building control regime introduced by the Building Safety Act 2022 for higher-risk buildings (that is to say, buildings with at least two residential units which are at least 18m in height or have at least seven storeys). Since then, anyone wishing to construct or do work to HRBs has faced the unenviable task of dealing with the newly constituted Building Safety Regulator and attempting to navigate the affectionately titled “Gateway Regime”. The industry’s collective anxiety around Gateway 2 (before building work starts) and Gateway 3 (when building work is “completed” and before occupation) and the BSR’s ability to cope with the volume of submissions is proving to be well-founded. Reports from the front line are that the BSR is processing very few applications within the statutory determination periods (most are taking way longer), and the statutory non-determination process offers little in the way of comfort or recourse for those stuck at Gateways. As we head into 2025, we see the collective lack of confidence in the BSR translating into a general unwillingness on the part of main contractors to assume any programme risks associated with the Gateway Regime. Consequently, clients are having to build substantial float into their programmes to hedge against the risk of BSR delays, and this is having particularly adverse consequences for projects targeting narrow delivery windows (such as PBSA projects targeting term start dates). It is hoped that there will be meaningful government intervention during 2025 to “fix” the BSR, reduce the backlog of applications, and build confidence in the Gateway Regime. This in turn should enable clients to target more ambitious programmes for their higher-risk building projects than they are able to do currently. Sustainability Sustainability and social impact will remain at the top of the agenda for the industry throughout 2025. Deputy prime minister Angela Rayner’s decision to grant permission for Marks & Spencer to demolish and redevelop its flagship store on Oxford Street was welcome news for the “retrofit-first, not retrofit-only” campaign. The shift in focus to a whole-life carbon assessment, with equal importance attached to operational carbon as to embodied carbon, is consistent with the national planning policy framework and the work of the UK Net Zero Carbon Buildings Standard, among others. Heading into 2025, those with assets that do not lend themselves to deep retrofitting should feel more confident in seeking permission for redevelopment, provided they can demonstrate a net zero outcome through enhanced operational efficiency, material re-use, off-setting, and the like. September 2024 saw the publication of the pilot version of the much awaited UK Net Zero Carbon Buildings Standard, developed by a cross-industry group under the stewardship of David Partridge. The pilot version sets out the technical details on how a building should meet the standard, including what limits and targets it needs to meet, the technical evidence needed to demonstrate this and how it should be reported. The intention is that projects will be able to verify that they conform to the standard, which will help the industry to self-police more effectively and weed out instances of greenwashing. 2025 will see the continued rollout of the standard’s pilot programme with the pilot version being adopted on buildings and assets and further work being done by the standard’s Technical Steering Committee and Legal Working Group to facilitate this. It has been suggested by some commentators that the redevelopment of M&S’s Oxford Street store could be the perfect test case for the standard’s pilot programme, not least because of the multiple references to the standard contained within the deputy prime minister’s decision letter. ISG and beyond The insolvency of ISG in September, following other recent major insolvencies, shocked the construction market. It now appears likely that most creditors, including scores of subcontractors, will be unable to recover any sums owed to them. It is estimated that subcontractor losses, including lost retentions and lost payments for completed work, will exceed £1bn, all at a time when the balance sheets of many contractors and subcontractors are already under severe pressure. Impacted employers have struggled to keep partially complete projects on track in the face of reluctance by other contractors to take on risk when the full impact of ISG’s failure on subcontractor solvency has yet to be ascertained. For future projects, employers are likely to take a more conservative approach to performance security, whether that is regarding taking retention or requiring parent company guarantees and performance bonds. At the same time, main contractors and subcontractors find themselves in a market where cash flow is of vital importance and performance bonds are hard to obtain. Employers (and their funders) can expect to find themselves under pressure to accept shorter payment terms, reduced or no retention, more widespread use of advanced payments and a marked reluctance to provide performance bonds. In addition, main contractors will likely stress that contracts need to reflect the provisions of the Public and Private Sector Playbooks, including in relation to doing away with uncapped liability. Tier 1 main contractors in particular are increasingly unlikely to accept uncapped liability and are being far more selective about which projects they pursue. ISG’s failure has also had an impact on the new Labour government’s thinking in relation to retention. It is likely we will at the least see legislation to ensure that retention money is preserved in escrow accounts to prevent it being lost on main contractor insolvency. It is, however, possible the government will go further and outlaw retention altogether. Marc Hanson is a partner in the construction group and co-head of non-contentious construction, and Adriano Amorese is a partner in the construction group, at Mishcon de Reya LLP Image from Westminster City Council