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You don’t need to be wearing a hard hat to know that the construction sector is dealing with more curveballs than ever. Between legal and regulatory changes, new governmental policies and the unstable global economic climate, it has been a bit of a rollercoaster. Recent headlines suggested that the UK was the fastest growing G7 economy in Q1 of 2025, but when you delve into the detail you will see that construction output hasn’t grown at all. In this article, we explore some of the trends that we have seen more recently affecting our clients, the challenges arising from those trends and what we can do to help.
Uncertainty around Building Safety Levy
Expected to be introduced from Autumn 2026, the Building Safety Levy confers the government the ability to impose a levy on all new residential developments, with some exceptions for internal refurbishments, smaller developments and community facilities.
The levy will be calculated using the internal area of floorspace within developments, with the rates per square metre to be determined by each local authority, accounting for the geographical variation in house prices. Over the next 10 years, the government has set a revenue target for the levy of £3.4 billion in order to fund the remediation of safety defects, a key tenet of the government’s housing commitments.
Importantly, the levy will apply to all developers, regardless of whether the developer had responsibility for historic building safety failures; additionally, the levy will be chargeable on top of the residential property developer tax. With the government acknowledging in its recent Consultation Response that ‘the levy may have a small impact on housing supply’, it is clear that the levy will impose a financial burden on developers and potentially limit development opportunities, particularly in geographical areas where the levy is considered too costly.
Further, the introduction of the levy coincides with the government’s ambitious targets to deliver 1.5 million more homes by 2029. It is therefore unclear how the tension between the government’s housebuilding targets and the introduction of the building safety levy will pan out; developers will have more answers when the levy regulations reach Parliament later this year. Michelmores will observe any new developments and issue guidance where necessary when further changes are published.
Handback issues on PFI schemes
As of March 2025, there were 540 legacy Private Finance Initiative (PFI) infrastructure projects in England with original asset values of £42bn (estimated to be £105bn in current terms). It is anticipated that there will be a total of around £123 billion unitary charge payments to be made before all projects reach expiry, with a peak number of 61 projects expiring in 2036.
On 1 April 2025, a new National Infrastructure and Service Transformation Authority (NISTA) was formed by the government when it brought together the functions of the National Infrastructure Commission and the Infrastructure and Projects Authority (IPA). NISTA will oversee the underlying strategy of public-private infrastructure development – central to the government’s 10-year infrastructure plan.
A vast number of project companies are still holding an asset which they must ‘hand back’ to the public authority; in many cases, sooner rather than later, with the majority of contracts expected to expire in the next 15 years. It may be the case that the relevant Project Agreement is left in a drawer and not picked up again until handback is imminent, thus leaving insufficient time to consider the condition of the assets and carry out any necessary work to bring them up to the required contractual standard prior to commencement of the formal handback mechanics at the end of the concession period, and potentially resulting in a right for the public authority to make significant retentions from the project company’s income stream.
The IPA issued its Asset Condition Playbook in March 2025, just weeks before its merger with the National Infrastructure Commission to form NISTA. The Asset Condition Playbook is intended to provide a practical guide for carrying out asset condition surveys in preparation for contract expiry, against the backdrop of the handback obligations in the underlying project agreement. We have seen a significant increase in the use of consultants acting for public authorities in relation to asset condition surveys, both throughout the term of the project agreement and in preparation for handback.
It will be important for project companies and facilities management contractors to work with the relevant public authority to ensure that appropriate asset condition surveys are carried out in good time to establish the extent of any defects or maintenance issues, allowing sufficient time to rectify them in advance of handback. The Asset Condition Playbook recommends that asset condition surveys are carried out as early as possible but in any event not later than five years prior to expiry of the project agreement, with preparation for the survey commencing two years before that. This is significantly in advance of the timescales contained in most project agreements, many of which require a final asset survey to be carried out just one or two years prior to expiry but the intention is that early involvement of all parties should make the handback process less risky and facilitate a smoother handover of the assets and associated services.
Project companies should also undertake an early audit of project documentation to establish the extent to which there may be gaps in any documentation and information that the public sector will expect to receive to enable it to operate the assets following expiry of the project agreement might be, allowing adequate time to remedy any documents that are missing or incomplete.
If any dispute arises from the project or if there are question marks surrounding termination, Michelmores can provide advice from an early stage up until handback. We are able to work closely with our nationally recognised Projects & Infrastructure team to consider the state of the asset prior to handback, including reviewing the contractual documents and, as far as possible, determining the objective criteria to be applied. We can also assist with the appointment of surveyors and other construction consultants, both in circumstances where there is a mutually agreed joint appointment between the public authority and project company (as envisaged by the Asset Condition Playbook and the handover provisions in many project agreements), or where it may be beneficial for appointments to be made through solicitors, which in turn may allow the resulting reports to be protected by privilege and as a result not be disclosable in future litigation.
Insolvency and the Procurement Act 2023
It is no secret that the rate of insolvency in the construction industry is especially high. Delays in supply chains, a shortage in labour and increasing material costs are only propounded by the general instability of the political-economic climate, resulting in many contractors facing cash flow issues in an already highly competitive sector.
One of the reasons for the introduction of the Procurement Act 2023 is to alleviate some of these problems. Commencing towards the end of February 2025, the Act simplifies the tendering procedures by streamlining the mechanisms involved and confers flexibility on contracting authorities to design their own procedures for the contract being procured. It also widens the transparency obligations of contracting authorities; in turn, this aims to widen the scope of procurement, allowing smaller contractors to tender for more contracts.
It doesn’t stop there; the Act implies into all public contracts (with some exclusions) a term providing that a sum due by the authority must be paid within 30 days from the day the authority is invoiced. It all rather sounds promising, and we hope that these legislative changes help address cash flow and supply chain issues in the Construction industry.
Whilst we hope that the Act is successful in relieving cash flow concerns and lowering insolvency rates, there are other protections that can be sought by parties to help mitigate insolvency risk. Whether you need a hand with drafting collateral warranties, retention bonds, procurement of vesting certificates or general advice in taking protective measures, Michelmores can help.
Modern Methods of Construction
Despite being the poster boys for the government’s housebuilding targets, MMC contractors are facing insolvency at an alarming rate. Findings from a House of Lords Built Environment Committee report suggests that MMC contractors are struggling to actually demonstrate cost savings, one of the cornerstones of the MMC deliverables. In fact, one housing association reported that MMC estimates could be 30-50 percent higher than traditional construction methods.
This has led to a struggle for some MMC contractors generating and securing work streams, with some developers and Registered Providers hesitant to engage with them until they have a visible pipeline of work and have begun to turn a profit. Naturally, the concern is insolvency before any contract between consumer and MMC builder is fulfilled.
Off-site IP issues do not help MMC contractors, nor does the risk averse nature of insurers and lenders – we are seeing insurers restricting the uptake of residential properties for MMC’s due to issues in quality from modular homes being noticed several years later. Whilst the quality problems may relate to older designs and MMC contractor may have made improvements since, until insurers’ concerns are allayed, this will be a live issue in this sector.
If you are an MMC contractor, navigating these issues is no mean feat. Lining up the legals early is key; Michelmores acts for several MMCs across different sectors and we are able to provide creative and customised solutions to the challenges you are facing, depending on your objectives.
Conclusion
The Construction industry is undoubtedly navigating something of a rough patch, but we hope that some of the regulatory and legal changes can help ease some of the symptoms that many are currently facing. The future? Still very much under construction – time will tell how well the sector will stand up against the government’s targets and policies. In the meantime, please do not hesitate to get in touch with a member of our team if you need any Construction related advice.
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