Construction has continued apace in both established and developing jurisdictions, despite uncertainty in traditional markets like the US and the UK. Lawyers in big firms acting on big projects have found no shortage of work, but in the US an industry that used to be booming has seen a squeeze owing to a labour shortage, commodity prices remaining below average and government intervention, either as increased regulation or as a corollary of geopolitical issues. Disputes remain strong however, with arbitration in particular increasing its footprint, from the UK and Canada to China and Malaysia.
The inflation on global construction costs was 3.7 per cent in 2016, while 24 out of 43 markets were reported as suffering skills shortages. Despite this, construction was aided by a commodities market that bottomed out in 2016 and is now rising, with steady growth in general.
Lawyers we spoke to in the USA broadly stated that the market is doing exceptionally well, but that it is struggling from a skills shortage. Sometimes these two trends coincided – particularly on the East Coast in metropolitan areas like Washington, DC, Philadelphia and New York where so much new construction work is happening and there is a significant shortfall in available and qualified practitioners who can carry it out. One California-based lawyer also told us that “in the US, industry-wide, construction work is exploding”. A huge boom in infrastructure development has happened nationwide while residential construction in suburban areas is up, owing in part to demand from the influx of young professionals into commuter-friendly locations just outside of major cities.
However, this boom is tempered by the uncertainty caused by the Trump administration, where budget cuts have meant construction projects worth billions have been put on hold. The building of a new headquarters to house the FBI, at a cost of around US$646 million, has now been dropped owing to budgetary constraints and the General Services Administration missed its deadline to submit a new plan of action to the Senate’s Committee on Environment and Public Works. This deadline was 30 November 2017, and the project has been in limbo since then.
Moreover, a labour shortage in the USA raises serious questions for the future of construction in the country. “It is currently very difficult to find skilled trade,” one long-standing construction lawyer told us. “A lot of companies are going non-Union, but will trade associations go into high schools and attempt to recruit?” Meanwhile, the Environmental Protection Agency is deregulating several areas in order to help facilitate development. Some rules done away with under the Trump administration include flood building standards – a decision that was roundly condemned following the flooding in Texas last year – and planning rules for public land. However, it is not yet known what long-term effects these will have on the legal market.
A once burgeoning market in the Middle East and Africa has been hampered both by recession in Dubai and the Gulf blockade, which was described by one lawyer we spoke to as “a game changer”. Day-to-day projects rumble on but bigger ones have halted, and while the blockade is not prima facie a huge deterrent to construction projects, it has increased costs for procurement companies that now must reroute materials.
In Africa, particularly Francophone Africa, the market is growing. According to Deloitte, across the continent the number of construction projects has increased from 286 in 2016 to 303 in 2017, although the value has fallen from US$324 billion to US$307 billion. South Africa has seen the largest number of projects at 93, but West Africa leads in value terms, with nearly US$100 billion worth of projects under way.
China’s PPP projects are “booming”, while sources noted a rise in disputes from industrial buildings. More and more Chinese companies are looking to go international, with cross-border construction projects giving rise to more complex legal issues and a greater number of disputes.
Elsewhere in Asia, projects have been varied according to the lawyers we spoke to. Many new rail and power projects have arisen, though fewer of these are traditional oil and gas projects. Renewables are now big business in Asia and power producers from across the world are looking to the region to roll out low-carbon-based power plants, as countries look to move on from coal power for good.
The news from Europe was optimistic, despite reports from the IMF that growth in the eurozone will remain below 2 per cent over the next year. Land reclamation and wind power projects in the Netherlands, large infrastructure projects across the continent and a substantial number of mergers have been keeping the lawyers we spoke to busy. Market consolidation at home has been considerable, with fewer players now occupying the market following significant M&A deals. Otherwise European lawyers are looking to the Middle East and Asia, particularly practitioners with a link to the UK. “We continue to act on a number of multibillion-dollar cases for Middle Eastern clients based in London,” one UK-based lawyer said.
In the UK, optimism in the construction industry is at its lowest for five years, according to a poll by IHS Markit and the Chartered Institute of Procurement & Supply. Commercial work is down although residential building is up. Alongside this, a labour shortage means that the UK is reflecting some of the issues being seen in the US market. How much Brexit is a factor in this is uncertain, but lawyers we spoke to said that the City of London will remain largely unaffected. Indeed, “many contractors are coming home” to the UK after protracted periods abroad. While lawyers are looking global, contractors who spent the majority of the previous decade in the Middle East are now exiting the depressed market.
The future of private finance initiatives, the darling of consecutive UK governments for over 20 years, have now been cast into serious doubt by the collapse of Carillion, suggesting that a once-integral part of the UK construction market – and a model that has been copied with great success around the world – may now be subject to serious review.
Construction litigation has decreased recently, according to sources, and arbitration now increasingly looks to be the premier method of solving disputes in the construction industry. One lawyer in the Netherlands told us that “there is more willingness to settle out of court as opposed to continuous litigation” while one of the ways in which litigation has been avoided is through “lengthy contract negotiations” and a strong desire to get an agreement on exactly what each party wants at the very beginning.
Arbitrations and expert witnesses are now being used not only in established jurisdictions like London and Paris, but also in places with less of a track record, such as Lima and Kuala Lumpur. As markets develop, so does the nature of their disputes. In the Middle East in particular, arbitration infrastructure failing to keep pace with the growing scale of disputes in the construction arena has generated a niche for US- and UK-based firms with serious experience to come in and handle the “super-large” disputes for which regional firms may not be fully equipped. This has generated another issue where solicitors enter the fray with the knowledge that they can handle the entire project, which means they are also looking to do their own advocacy. This can be tricky for those at the Bar. “The challenge we face is still on these large arbitrations, doing the advocacy rather than big solicitors turning up and doing it all,” said one London-based barrister. Nevertheless, barristers are still in high demand for a broad swathe of construction work worldwide.
A recent development in disputes is the introduction of special construction courts in certain jurisdictions, which are designed to hear disputes specifically about buildings, engineering and surveying, including construction arbitration. These exist in London, Ontario and the USA, and are increasingly being used by companies engaged in construction disputes of all kinds.
As in all areas, digitalisation of the workplace is continuing apace and was mentioned by many of the lawyers we spoke with. Electronic tendering and digital procurement are two ways in which the construction process has already changed fundamentally. A key issue is the additional documentation being generated by drones and webcams that now forms part of the construction process, which therefore constitutes a significantly increased data pool. What is more, such new methods can improve transparency, a crucial aspect of the move to digital.
The rise of analytics, cloud computing and big data in industry and infrastructure, alongside the digitalisation of the process, means that both data-savvy lawyers and consultants are increasingly stepping into an industry that, until recently, was the preserve of hardened construction and engineering experts.
Despite tougher times for the industry thanks to the protracted economic squeeze in developed jurisdictions, lawyers we spoke to still had plenty of work on their books. Moreover, it is a time of significant change in the market – technology, government regulation and the realignment of the labour force being three major trends that have come together to make the future look less certain. But these issues are also likely to generate new problems for clients, who will inevitably look to their lawyers for solutions. One thing is certain: people still need places to live and to work. They still need energy, which means building large-scale power plants, or facilities for deep oil or gas extraction. Furthermore, where construction projects exist there will always be construction disputes and lawyers on both sides of that divide can count on filling their time with relative ease.