Construction Sector: What to expect in 2025

2024 has been a challenging year for the construction sector. What trends can we expect in 2025?

Building Safety

While it's now widely accepted that the new regime was needed, getting up-to-speed has not been easy for many.

Residential developers have had to navigate the new higher-risk building regime overseen by the Building Safety Regulator, while dealing with delays as the Regulator itself has struggled to meet the statutory timeframes to review Gateway applications and to register higher-risk buildings.

In 2025, the resourcing issues facing the BSR are unlikely to be resolved quickly which means further pain for the sector. The Government has said it will respond to the Grenfell Phase 2 Report in the Spring and we can expect to see further changes in relation to building safety.

One of the recommendations in the Report was to extend the scope of what constitutes a higher-risk building, which would be challenging for an already under-resourced Regulator. In the meantime, the industry must familiarise itself with updated fire safety guidance for residential buildings, BS9991:2024, which sets a new and expanded standard for fire safety.

Another important development will be the introduction of the Building Safety Levy on all new residential buildings in England (subject to limited exemptions) that require building control approval, which is now anticipated to be in place in Autumn 2025.

Insolvency

The construction industry has seen a significant increase in contractor and supply chain insolvencies, this year. The sector has topped the charts in terms of most insolvencies, with over 4000 companies becoming insolvent, accounting for 17% of all company insolvencies in England and Wales. This trend is expected to continue, driven by issues such as high interest rates, inflation, high and unpredictable costs of goods and labour, low profit margins, cashflow issues and failed M&A processes.

Over the course of 2024 we published a podcast series and articles looking at the risks and steps that can be taken to mitigate them. You can find these on our website here.

Sustainability

The construction industry has long recognised the importance of its role in achieving net zero by 2050, and a positive step forward has been achieved with the publication of the pilot version of the UK Net Zero Carbon Buildings Standard.

The new standard is widely hailed as offering the sector a consistent set of rules defining what constitutes a 'Net Zero Carbon Aligned Building'. However, there are critics who feel that the standard is too ambitious and lacking nuance.

With the pilot scheme running in 2025, we expect to see growing focus and discussion around establishing standards and embedding them in the front-end of construction contracts.

Housebuilding

With the Government's focus on housebuilding, improved interest rates and a de-escalation in inflation rates, the housebuilding sector is predicted to see modest growth in 2025. What remains to be seen is whether the sector has the resources to meet the ambitious targets.

A fifth of construction workers are now over the age of 50, with 500,000 set to retire over the coming 10 years. Electricians and welders are in particularly short supply and insolvencies are further hollowing out the industry. Expectations around modular construction have so far proved very disappointing, with participants failing amid weak order books and huge overheads. Will 2025 be the year when we finally see other solutions coming to the fore? Don't hold your breath – although we do like the idea of portable robo-brickies, some of which can allegedly build the walls of a house in just a day.

Procurement Act

Public procurement law is due to undergo one of its biggest reforms in many years in February 2025, when the Procurement Act 2023 is brought into effect. The Act consolidates and replaces the current patchwork of EU-derived law. While contracting authorities can continue to model their procurement practices on existing procedures, we can expect to see some contracting authorities developing their own bespoke procedures which will offer opportunities as well as challenges. Read more here.

Data Centres

Data centres already represent a significant share of UK construction work and, with the Government's designation in September 2024 of data centres as critical national infrastructure, we can expect ongoing interest from investors and development activity in 2025, provided that the UK can meet the energy capacity required. We're excited to see how innovators in this space will manage the tension between meeting the huge power demands of data centres while achieving sustainability criteria.

Data

Perhaps driven by the requirements of the Building Safety Act in relation to the Golden Thread, which demand a coherent and integrated approach to data management, we might expect to see advancements in the digital storage of data regarding a building. This would be good news both from a building safety and a sustainability perspective.

Procurement Strategy

Design and build has been the procurement method of choice in the UK for many years. There is growing consensus that stepping down all the design and construction risk on a project to a single contractor who has priced that risk in a highly competitive environment may no longer be optimal. Indeed, it may in some cases be unworkable, for example, if the contractor is unwilling to assume full design risk under the dutyholder regime forming part of the Building Safety Act for design developed before it was appointed. Insolvency risk is, of course, also a factor when considering putting all your eggs in one basket.

In 2025, we may see growing interest in a return to a traditional procurement approach and in construction management and management contracting (and, of course, a move away from the JCT 2016 suite to the new 2024 editions).

Two-stage contracting

The Private Sector Construction Playbook emphasises the importance of involving the supply chain early. Again, this accords with the drive towards safer and more sustainable buildings and the importance of early collaboration to achieve improvements in productivity from a cost, quality, programme, sustainability and waste reduction perspective. We are seeing two-stage tendering becoming more widespread and expect this to continue in 2025. Senior Consultant at Ashurst, Michael Smith, has recently published a book which analyses this procurement approach for the UK infrastructure sector.¹

Closing Comment

2025 promises a few green shoots for the sector, but challenges remain. As construction lawyers, we will continue to collaborate with our clients to achieve solutions that mitigate these risks while looking to harness positive developments in relation to sustainability and technology.