Construction analysis: With the Chancellor's speech still ringing in our ears, we bring together the most important features of the Autumn Statement 2015 for construction lawyers alongside expert analysis and industry comment.
What was relevant in the Autumn Statement for construction lawyers?
Autumn Statement 2015: Property issues, LNB News 25/11/2015 132
From 1 April 2016 higher rates of Stamp Duty Land Tax (SDLT) will be charged on purchases of additional residential properties (above £40,000), such as buy to let properties and second homes, the government has announced. The higher rates will be 3 percentage points above the current SDLT rates. The higher rates will not apply to purchases of caravans, mobile homes or houseboats, or to corporates or funds making significant investments in residential property given the
role of this investment in supporting the government's housing agenda.
Autumn Statement 2015: Environment issues, LNB News 25/11/2015 157
A replacement for the Energy Companies Obligation (ECO), set to run for five years from April 2017, will save around 24 million households an average of £30 a year on their energy bills, the Chancellor announced in the 2015 Autumn Statement. In addition to this, the Warm Home Discount scheme has been extended to 2020/21, and spending on energy innovation research has been doubled.
What does this mean for construction lawyers?
What are the headlines for this year's Autumn Statement for construction lawyers and why?
Rachel Armstrong, lawyer, CMS: There was a clear focus on boosting infrastructure, transport and construction spending in the Autumn Statement. For example, George Osborne promised to invest over £100bn in infrastructure, increasing transport investment by 50% to £61bn, starting construction on High Speed 2 and spending over £5bn on road maintenance.
There was good news in other sectors, for example a promise to double investment in housing to support home ownership, and the construction of nine new prisons. If these promises are followed through by the Chancellor, the Budget should spark growth in the construction industry over the coming years, bringing a renewed confidence to the construction sector. It was not all good news. A major theme was a decrease in public spending, which may lead to a rise in disputes as councils seek to close gaps in their funding through increasing the efficiency of their contractors. We are already witnessing an increase in PFI disputes this year, as councils see their resources squeezed.
Julie Morrissy, partner, Irwin Mitchell LLP: Many of the headlines will focus on the significant cuts the Chancellor will be making over the next five years to help tackle the current deficit, but it was certainly encouraging to see house-building taking a prominent position in this year's Autumn Statement. Described as the biggest affordable house-building programme since the 1970s, the package of announcements included 400,000 affordable new homes by 2020 with half of these being starter homes, while 135,000 will be shared ownership.
For construction lawyers this means that there is work to be done on house-building projects and consideration should be given as to suitable forms of procurement for these schemes. Typically house-builders have employed in-house teams to undertake construction work, or used short-form contracts, but a renewed focus across the sector on house-building is likely to give greater focus to ensuring more robust contractual arrangements are in place, particularly where external funding is being provided. It may well be that construction lawyers will see an increase in partnering arrangements, especially in relation to affordable housing. If that is the case, then it would be advisable to keep up to date with case law on principles such as 'good faith'.
The government also announced that it plans to continue with major electrification projects on the Midland Mainline and TransPennine routes. These two schemes were manifesto pledges earlier in 2015 and they will certainly be welcomed by businesses who, according to our recent UK Powerhouse survey with Cebr, said local transportation investment would be one of the main drivers for boosting economic growth.
The last couple of years have seen changes in how large-scale infrastructure projects are procured, with Network Rail being keen to drive forward the use of alliancing agreements. These are relatively new to the UK and rely upon the parties to a project working closely together in a non-adversarial way. A key feature of such contracts, and one which is challenging to construction lawyers and professional indemnity insurers alike, is the concept of 'no blame' arrangements that are designed to avoid disputes about liability if there are found to be subsequent defects in the works. We should see a renewed interest in these contracts alongside increased investment in rail sector.
James Parker, associate director in the planning and environment team, Berwin Leighton Paisner LLP:It is fair to say that the government's focus on planning for and commitment to long-term investment in infrastructure and housing remained clear--and the Chancellor stated in particular that delivering economic infrastructure remains a goal of the current government.
The Autumn Statement will be pleasing for all those involved in UK infrastructure, as the focus on UK infrastructure over recent years clearly remains an important part of the Chancellor's message and seemed to form a major plank of Mr Osborne's overriding message of long-term delivery for the UK. While the benefits of infrastructure are sometimes hard to quantify, it would seem like a real boon for the UK as a whole that this commitment to long-term investment remains a central plank of the UK's future.
Equally, support for infrastructure across the country was apparent--the Chancellor talked of:
o the spread of power and wealth, including the delivery of long-term infrastructure nationwide
o the recent devolution deals delivering transport and skills, and
o elected mayors using funds raised to deliver local infrastructure projects where they are supported by the local business community
The Chancellor labelled it the 'big package' of new powers and responsibilities for local authorities, and perhaps while there wasn't anything massively new, the continued narrative in respect of infrastructure and housing offers greater certainty for all those engaged in it.
Given the savings made elsewhere, the Chancellor was able to confirm one of its goals of investing in economic infrastructure--indeed, Mr Osborne was clear that the UK hasn't invested enough 'for a generation'--including in terms of new roads, railways, and energy. Skills also got airtime--which is of course a major issue faced by the UK construction industry.
The Chancellor also noted that Britain topped the league table of the best places in the world to invest in infrastructure.
The message to the world's investment community seemed clear--investment in UK infrastructure remains a commitment of the UK administration. In terms of details, Mr Osborne noted the government's ongoing commitment--he reiterated the slogan 'We are the builders', and expressly mentioned transport, energy and housing.
Andy Mather, partner, construction and engineering group, Macfarlanes LLP: Unsurprisingly, a number of construction-related announcements in the Autumn Statement involved housing--with support promised for both first-time buyers and builders. For the former, the Help to Buy scheme is being extended to 2021, a new London Help to Buy scheme is being set up and the Right to Buy scheme is being extended to housing association tenants. For the latter, the Builders Finance Fund is being extended from its previously scheduled end in 2017 to 2020/21--this provides support for SME builders involved in stalled or slowed down developments of five to 250 units, indicating that government recognises that the housing shortage cannot be overcome by the large house builders alone.
The government has also pledged to release more public sector land than previously announced, increasing capacity by an additional 10,000 homes from its previous commitment, and to raise the housing budget to £2bn a year. The previously trailed figure of 400,000 affordable housing starts during this Parliament was confirmed, together with the sale of old and inadequate prisons on 'prime real estate' to free up land for more homes. There are also further, as yet unspecified, reforms to the planning system promised.
There were more details released about the proposed apprenticeship levy. It will be introduced from April 2017 at a rate of 0.5% of an employer's paybill. Employers will receive an allowance of £15,000 to offset against their levy payment and so it is anticipated that only employers with a wage bill of over £3m will pay more than that allowance. How this will fit with the existing Construction Industry Training Board (CITB) levy is being considered by the government and the CITB. With the recognised skills shortage within the construction industry, this additional support is likely to be very welcome.
Good news for the green construction sector--with funding for a reformed Renewable Heat Incentive increasing to £1.15bn by 2020/21 and plans to replace the Energy Companies Obligation with a new scheme when it ends in March 2017. The school building programme also received a boost with the announcement that £23bn will be available during the course of this Parliament.
Infrastructure announcements include confirmation that £61bn will be invested in transport over the duration of this Parliament (with a number of projects linked to the government's devolution plans to encourage growth outside of London and in the North in particular) and £2.3bn for flood defences, although full details of how the government will deliver key projects and programmes will not be available until Spring next year.
Sarah Schütte, managing director, Schutte Consulting Ltd:
I would pick out these five key points:
o over £2bn is to be made available to private developers to build 400,000 new homes, supporting pledges on housing ownership
o state-sponsored projects to modernise public infrastructure are announced, such as nine new prisons
o the construction budget for HS2 is announced, underlying the government's commitment to this mega-project (although it is still at Bill stage)
o the government's drive to modernise public sector services continues across all departments, so there should be scope for firms to participate in and contribute to initiatives on the reforming and streamlining of systems and processes to deliver services.
o local government is to retain all money raised from business rates by the end of Parliament--this supports the idea of micro-economies, enabling communities to grow independently
However, it is not all good news. Public sector spending has been slashed across the board. For the construction and engineering industry, sectors such as transport, energy business and the environment are all taking big cuts.
Were there any surprises?
Rachel Armstrong: The scale of the investment in infrastructure was significantly higher than anticipated. Across the board, however, the general theme of cut backs and savings was to be expected.
Julie Morrissy: The Chancellor usually likes to pull a rabbit out of the hat and during this Autumn Statement it was perhaps the announcement of a new London Help to Buy scheme. This was mentioned as part of the Chancellor's package of measures to get people on to the housing ladder, but although the Chancellor thanked Zac Goldsmith for campaigning on this issue, credit must go to businesses that have long been highlighting that the shortage of housing and the high cost of living have the potential to harm the future growth of our capital city.
James Parker: Not really--there was much recycling of substance. However, what is worth noting is that the government could have been slightly 'quieter' on infrastructure, and focussed even more on things like security, policing and housing.
However, they chose to maintain the narrative about infrastructure in its widest sense, and that ought to be good news for all those engaged in delivering and investing in UK infrastructure. Additionally, for the past five years the UK National Infrastructure Plan (NIP) has been updated and issued alongside the Autumn Statement, but this year, perhaps unsurprisingly following the changes over recent months (including the establishment of the National Infrastructure Commission, and the 'merger' of Infrastructure UK and the Major Projects Authority), it hasn't been, and the detailed Autumn Statement itself explains that a 'National Infrastructure Delivery Plan' will be published in Spring 2016, 'setting out in detail how it will deliver key projects and programmes over the next 5 years'. The previous criticism of the old NIP was that it was just a list of projects, so one might hope that the clue is in the title of the new document, and that the National Infrastructure Delivery Plan will indeed be about 'delivery'.
On another note, what remains unclear, and perhaps wasn't a question for today, is how English devolution glues itself together, so that structures and infrastructure are delivered holistically based on spatial planning evidence that is 'knitted together'. So while the announcements of the continued take-up of devolution deals are to be welcomed, and indeed the ability of elected city mayors to deliver local infrastructure projects where local businesses support them, there remains a bridge to be crossed as to how English devolution functions alongside central government.
Andy Mather, partner, construction and engineering group, Macfarlanes LLP: There were no real surprises from the construction perspective--the Statement generally builds on announcements made in the July Budget and those following the launch of the National Infrastructure Commission earlier in the autumn.
From the wider property perspective, the stamp duty rise on buy to let property and second homes from 1 April 2016 (a 3% additional charge in addition to the usual stamp duty rate) was definitely a surprise.
Sarah Schütte: Happily for the construction and engineering industry, the infrastructure budget is larger than expected, although the transport element is cut by 37%. However, there is a strong underlying theme of 'value for money' in Mr Osborne's statement, so the years ahead are not likely to be easy.
What actions should construction lawyers be taking as the dust settles?
Rachel Armstrong: Other than preparing for an increase in transactional work, construction lawyers should be ready to advise any of their clients with public sector contracts on the implications of the cut backs and how to avoid disputes. In such a climate it is imperative that contractors follow their contractual obligations by the book and protect themselves from opportunistic claims.
Julie Morrissy: Construction lawyers should be thinking about the best procurement routes for the new construction activity we will hopefully see in the next few years. In relation to rail infrastructure projects, in particular, it is important to be aware of the new models and the drivers for change and a new approach to contracting. In relation to house-building, a key focus will be ensuring that proper protection is in place at all levels, without over-complicating arrangements which have stood the test of time. We are likely to see a renewed interest by the banks in these areas and so it will be important to have an eye on what is institutionally acceptable.
Experience of late has shown that there has been an increase in contractor insolvencies and so it is essential to make sure that adequate security arrangements are in place for larger schemes. This could be by way of performance bond or parent company guarantee or insurance protection and ensuring that proper contractual notices are observed. 2015 has also seen a number of adjudications relating to payment notices and applications for payment where complacency has led to a lack of rigour in applying the contractual and statutory payment procedures. These should be a timely reminder to ensure that contract drafting is clear and simple, and easily understood, and to remind clients that contract provisions are there for a reason.
Andy Mather, partner, construction and engineering group, Macfarlanes LLP: Most of the changes are long term so there is unlikely to be much immediate action needed from construction lawyers at this stage.
Sarah Schütte: 'Value for money' is going to present challenges to those working with the public sector. I expect it is likely to become even tougher at tender stage, and contractors and consultants at all tiers are likely to feel their profit margins squeezed further. Care will be required to ensure realistic pricing from the start. Contract negotiation is likely to become tougher--the terms on which contracts are let, and the level of output demanded by clients is likely to be challenging.
Contractors and consultants who are already in contract may find their applications for payment and variations coming under more detailed scrutiny as councils try to soften the blow of cuts. It will become even more important for industry firms to understand the terms of their contract in order to manoeuvre through the likely difficulties.
Firms who want to tighten up their corporate risk management strategies and protect against project risk will take practical steps such as ensuring full record keeping and training staff in contract and commercial skills. In time, we may see an overall rise in claims, although given the background against which this occurs, I expect the vast majority to be capable of settlement between the parties. Skilled negotiators are likely to be in demand.
Although the Autumn Statement is good news for the industry overall, the path ahead is not likely to be easy.
What has been the reaction from industry?
Jeremy Blackburn, RICS head of UK policy
'Today the Chancellor argued that "we are the builders". However, the construction skills shortage is now at the highest levels seen in the past 20 years. During the recession an estimated 400,000 people left construction--one of the highest rates of redundancy across any sector--but worse is yet to come as we are expecting a 'knowledge cliff' when those left in the workforce eventually retire. There are serious questions around how we continue to build to meet the 400,000 new houses announced today with the infrastructure that will get Britain moving."
On infrastructure: 'But there is a much bigger problem that will have major repercussions for the UK's current and future infrastructure plans. Our data shows that tender prices for infrastructure projects are expected to rise by around 30% over the next five years. In addition, we don't have the investment needed to cover the existing £400bn infrastructure funding gap. British infrastructure is undoubtedly facing a funding crisis. While money announced today will help, we need to go much further.'
Michael Conroy Harris, construction expert at law firm Eversheds
'Any focus on housebuilding is naturally welcome news for both the construction industry and wider economy but let's hope the Chancellor grasps the thorny issue that, as things stand, this is a market where businesses look to maximise returns for shareholders above all. Ultimately, what we really need to see are innovative arrangements where the rewards for speed of construction outweigh the returns from limiting supply to increase demand and returns.'
Kersten Muller, real estate tax partner, and Jenny Brown, head of housing at Grant Thornton UK LLP
'The new house-building programme will benefit the UK economy although there will be challenges along the way, in particular the skills shortage in the construction industry. New construction methods such as modular homes therefore need to be embraced to meet these ambitious targets. It is also a great opportunity to improve employment opportunities and skills development for the younger generation.'
Want to know more?
A full overview of the Autumn Statement 2015 can be found here: Autumn Statement 2015: Overview of tax announcements, LNB News 25/11/2015 137
This article was first published on Lexis®PSL Construction on 25 November 2015.