UK construction sector – Q3 review
As we head into Q4, the construction sector remains subdued. The war in the Middle East and domestic economic uncertainty has not been curtailed and the figures are uninspiring. Subduedness aside, a lot of change is on the horizon, and we have aimed to bring you a snapshot of some of those changes in this issue.
Fresh ONS figures released in September show that total construction output fell by 0.5% in the three months to July but was preceded by growth of 1.3% and 1.5% in April and May respectively. On an annualised basis, total output was down 2.5% in July, new work declined by 5.1%, but repairs and maintenance were up by 1%. Infrastructure is the only outlier, with a 0.4% increase.
While this may sound a bit bleak, there are reasons to be positive. Early expectations indicate that construction activity will return to growth from 2027 and remain in growth mode until 2030. There are also several changes affecting the industry on the horizon.
In this September issue, we cover a range of topics we hope you will find interesting and current. If you have any questions, feel free to reach out to the Stephenson Harwood team.
RETENTIONS – WHAT ARE MY ALTERNATIVES?
The dust has firmly settled on the Government’s announcement in March that it will ban retentions. The logic for banning retentions is clear: currently around £230 million per year that is retained never goes back to where it belongs, principally due to insolvencies higher up the food chain. And over the course of a year: a few billion pounds is held in retention monies alone, while those waiting for their money hope nothing goes wrong.
By now, most of us know the clock is already ticking, even if implementation is likely to be a few years away. Rather than focussing on the proposed penalties for non-compliance, in this issue we ask: what are my alternatives if I can’t have a retention?
The short answer is there is no single clear alternative that is currently seen as likely to be as effective as withholding money. Of the actual options, none are novel, and cost and access will be an issue with most. Broadly, the following are likely to be options:
Shift from interim to stage/milestone payments (one of the only options that does not come with added upfront cost to the employer, parties may look to tweak their payment arrangements towards milestone or stage payments instead, with certain payments only falling due when specific milestones have been met (for example, issue of a taking over certificate in an EPC contract, or the completion of specific commissioning). The most obvious approach would be to tie specific payments to the achievement of practical completion and conclusion of the rectification period, subject to the forthcoming legislation allowing for this).
PCGs (parties may start to include specific provisions concerning defects, but the reality remains that the guarantee is only as good as the value of the guarantor itself. May be a blunt instrument).
Retention bonds (not in vogue now. Function is to provide cover for defects instead of retaining money. The downside? Like with any bonding, your past claims record and your covenant strength, not to mention cost).
Performance bonds (these will just be adapted and extended to provide an alternative to retentions. Most bonds for real estate construction projects require proof of default, and possibly an adjudicator’s decision. To be a true alternative, bonds will need to be on demand in nature and therefore expensive and in limited supply).
Escrow accounts (not in vogue now, mainly due to set up and ongoing administration costs (as well as money being ring-fenced without being able to be used), this is a possible alternative. The current downsides will remain).
Insurance (will LDI / decennial policies be used more? We think there will be a small increase, but effectiveness will clearly depend heavily on the policy terms. Costs will remain high).
Project bank accounts (while not necessarily an alternative, PBAs are a separate bank account holding monies for the project that can be used by the client to pay its entire supply chain. The main benefit in terms of payment reassurance is for those further down the chain, who often lose out the most when there is a main contractor insolvency. PBAs ease financial stress and can encourage greater collaboration. Downsides: high cost of set up and ongoing management. Not currently widely used).
BUILDING SAFETY – HRB CHANGES AND ANOTHER CONSULTATION
In July, the Government published its response to a consultation considering how the higher-risk building (HRB) regime could operate in a more proportionate and practical way. From 1 September 2026, certain telecommunications works are no longer subject to some of the Gateway 2 requirements. This includes the installation of fibre-optic cabling (for three years) and certain works involving mobile communications equipment on HRB rooftops. The inclusion of telecoms works within the HRB scope had clear unintended consequences. For those undertaking work to HRBs, this should make certain telecommunications projects more straightforward without removing the underlying safety and competency requirements.
The Government also launched a separate consultation on emergency repairs under the HRB regime, which concluded on 3 September. This consultation acknowledges that the existing emergency repairs exemption is relatively restrictive. The first proposed reform is an expanded emergency works exemption that allows a wider range of urgent repairs and replacements to proceed without prior approval from the Building Safety Regulator (BSR) where there is an immediate risk to health, safety, or welfare, and obtaining approval beforehand is not practical. The second proposed reform introduces a new critical works route for certain urgent works that fall outside the existing exemption. Under the proposed critical works route, works could proceed promptly but would remain subject to retrospective oversight by the BSR through the regularisation process.
SINGLE CONSTRUCTION REGULATOR – ADDRESSING INSTITUTIONAL FRAGMENTATION
The Government published its responses to the consultation on the Single Construction Regulator (SCR) Prospectus on 9 July, confirming its commitment to introducing legislation to establish the SCR. The proposed regulator would operate as a body independent of government, responsible for both operational oversight and enforcement, and bringing building, construction products, and professional regulation within a more coherent system to address current regulatory fragmentation. The Government is also considering a requirement for all new-build homes to be sold with a new-build warranty meeting minimum standards, including insurer backing, enforceable redress timeframes, and transferability to future buyers. While implementation of the SCR regime is not expected before 2028, reforms relating to construction products and potential mandatory warranty requirements are progressing more quickly.
BURNHAM LAYS THE FOUNDATIONS FOR SOCIAL HOUSING
Andy Burnham’s proposal for the “biggest council-house building programme since the post-war era" could provide a significant boost to the construction industry, although it remains unclear when or how the pledge will be delivered. His plans to use vacant public land, promote higher-density residential development and oversee delivery through “Number 10 North” suggest a potentially stronger public-sector pipeline for contractors, consultants and housing providers active in affordable housing and regeneration. However, the delivery challenge is substantial: councils built almost 200,000 homes a year in the 1950s, but only 1,970 in 2025, meaning any large-scale return to direct council delivery would require significant funding, procurement capacity and skills to convert political ambition into buildable schemes. While it remains to be seen whether Burnham’s ambitions can be delivered in practice, Angela Rayner’s return and Burnham’s commitment to social and council housing suggest that affordable housing models will receive renewed political focus in the months ahead.
GATEWAYS 2/3: THE GAP BETWEEN DESIGN AND DELIVERY
BSR chair Lord Andy Roe has warned that main contractors on higher-risk building projects will be expected to demonstrate stronger oversight of subcontractors as schemes progress from Gateway 2 approval to Gateway 3 completion, noting that approved designs can still be undermined by poor installation, weak supervision or inadequate checks across trades. The BSR has said it will use regular inspections to assess whether completed works comply with the approved Gateway 2 design, with contractors expected to have suitably experienced personnel capable of assessing workmanship and challenging subcontractors where standards fall short. While the BSR has not yet identified widespread failures in current Gateway 2 projects, its message is clear that improved design approvals must translate into compliant completed buildings.
BEYOND THE CORPORATE FAÇADE – THE SCOPE OF BUILDING LIABILITY ORDERS
In a landmark Building Safety Act decision, the Technology and Construction Court confirmed in Crest Nicholson Regeneration Limited & Ors v Ardmore Construction Limited & Ors [2026] EWHC 789 (TCC) that Building Liability Orders (BLOs) can be used to extend liability for building safety defects beyond the original contracting party to associated companies within the same corporate group. Following Ardmore Construction Limited's entry into administration, the court granted both an “anticipatory” BLO (before liability had been finally determined) and a further BLO in respect of an unpaid £14.9 million adjudication award against other associated Ardmore group companies. The judgment makes clear that the courts are willing to look beyond corporate structures where it is just and equitable to do so, reinforcing that historic building safety liabilities may not be contained within an insolvent entity or a subsidiary with limited assets. This decision strengthens recovery options for remediation costs; for contractors and their parent groups, it serves as a warning that restructuring and insolvency processes may not shield associated entities from building safety claims.
Watch this space for updates, as the Ardmore defendants have been granted permission to appeal and hearing is set for 15 December. Note, however, that the appeal may not be heard given that five of seven Ardmore entities relevant to the case have entered into company voluntary arrangements, with the other two being in administration.
