Construction 2015: Trends

After the global construction industry experienced a moderate upward trend in 2014, contributors in several jurisdictions have indicated a continued improvement in the construction market in recent months as improved economic conditions have led to increased investor confidence and bank lending, with reports of greater funding availability for new construction projects, in terms of both traditional and creative financing. The US acts as a particular example of this trend, with many optimistic about the sector’s continued expansion over the course of 2015. As one respondent noted, “We hope to see a broader range of industry participants in the market in the next couple of years and have seen more work in terms of commercial building, particularly for clients in the technology sector.”

Our research indicates that the Middle East and the Far East will continue to be active hubs for construction, with lawyers seeing continuing transactional and disputes work relating to major infrastructure and energy projects; practitioners in Saudi Arabia, the UAE and Qatar with experience in the contractual and contentious aspects of power plant projects have “seen a continued appetite for new projects from international bidders”. Government-backed infrastructure initiatives in Singapore and Hong Kong continue to drive work for well-positioned firms in the Far East, while international firms are closely monitoring opportunities in emerging markets such as Indonesia and Vietnam.

After some years of consolidation and, in some cases, contraction in the construction legal marketplace as a result of the global financial crisis, increased economic stability and a reliable flow of project work have led to increased competition among firms. Respondents in the Far East, US and Middle East have all described “a highly competitive market, with many new entrants still undeterred by the difficulty of breaking into some jurisdictions” such as Singapore and Hong Kong. Several contributors discussed the possibility of “heightened movement among the leading professionals”, particularly those with contentious experience, international arbitration and litigation arising out of contractual disputes and project delays having continued into 2015.

Active Sectors and Trends

As one of the contributors to this year’s research observed, “construction levels will always act as a reliable reflector of a country’s economy”, and this is particularly pertinent when it comes to infrastructure work, which has continued to drive activity in a number of key jurisdictions and emerging markets. The Asia-Pacific infrastructure boom has continued in 2015, and lawyers have reported healthy competition among contractors with large portfolios in Hong Kong and Singapore. The market for infrastructure projects in Hong Kong continues to thrive, and while initiatives such as the Guangzhou-Shenzhen-Hong Kong express railway links act as an example of the cross-border work available for leading firms in the region, several contributors have remarked that “the boom in Hong Kong continues to find momentum in domestic rather than multi-jurisdictional work”. The Hong Kong government in recent years has thrown its weight behind mega infrastructure projects as it looks to maintain a strong economy and establish itself as a “main hub” for contractors and construction companies in Greater China, who have already seen considerable opportunities for work relating to rail projects such as the Hong Kong-Zhuhai-Macao bridge and the MTR South Island Line (East), which is due to be completed by the end of 2016. The result for law firms is a highly competitive market which is close to saturation, with many commenting on the “increased difficulty for international firms, particularly from the US, to break into the region”.

Similarly, infrastructure projects for healthcare and transport remain a significant driver of activity in Singapore, the government having committed SGD$26 billion to projects in public transport over the next five years. The government also set up the Changi Airport Development Fund which will facilitate major construction work for terminals four and five at the airport, and international firms have seen continued EPC contract work for clients in the region. Competition among firms is also heightened by the jurisdiction’s growing influence in terms of outbound work for construction companies throughout South East Asia in key emerging markets such as Indonesia, Vietnam and Myanmar; a Singapore-led consortium recently won a $1.4 billion contract for the construction of a second international airport in Yangon, Myanmar, epitomising the opportunities available for lawyers in Singapore with a focus on cross-border projects. Although there are some concerns about the construction market slowing down over the next two years to reflect the economy, “there will still be fierce competition among firms with a presence in South East Asia due to new project work coming through”.

Law firms with offices or networks in Latin America, and Brazil in particular, will continue to see transactional work arising out of badly-needed infrastructure projects throughout the region; in late 2014 the Brazilian government announced a bill to invest $29 billion in infrastructure works throughout 2015 via its PAC growth acceleration programme. While activity in the jurisdiction looks set to continue through to the Rio Olympics in 2016, lawyers have also been fielding enquiries as to how the $3 billion Petrobas corruption scandal in Brazil will “threaten confidence in agreed infrastructure and energy projects and deter foreign investors”; the scandal could have a negative impact on firms which have upped their cross-border work in the region over recent years. However, the divestment of resources for major projects into surrounding markets could also act as a positive for domestic firms in countries such as Argentina, Chile and Peru.

Energy projects have been a “considerable driver of activity” in the construction sector in the past couple of years and this remains the case on a global basis. As one UK-based practitioner observed, “the opportunities for international advisory work relating to major liquefied natural gas (LNG), petrochemical and process plants has been a reliable source of work” for firms with an international presence. The Middle East and North Africa (MENA) are prime locations for energy construction, with developers and investors continuing to explore opportunities for oil and gas and renewable projects in the UAE, Qatar, Iraq and Saudi Arabia in particular. One respondent compared Dubai in the Middle East to Singapore for South East Asia, saying “it really has become an international hub for construction work, in terms of attracting foreign investors and construction companies to power generation and renewable energy projects”. While local firms can point to local expertise and an understanding of the cultural aspects of contract negotiation in Middle Eastern jurisdictions, international firms are thriving on construction activity in the region as well, due to services they can offer across several jurisdictions. This is prevalent given the amount of foreign investment in the MENA region, particularly form the Far East. As one Dubai-based contributor points out, “the Middle East energy and infrastructure market has been a specific target for Korean investors, with varying results. Given the amount of Chinese outbound investment at the moment, we expect to see more advisory work for such clients over the next year, which will certainly benefit firms with close ties in between MENA and China”.

As for firms considering further expansion in the Middle East and further afield, the slump in oil prices (in some cases by 45 per cent since 2012) is a major question mark hovering over key economies in the region. Qatar Petroleum and Royal Dutch Shell Plc ended plans in January to build a $6.5 billion petrochemical plant in Saudi Arabia due to commercial uncertainty caused by the price collapse, with lawyers “seeing more and more client enquiries about the oil price’s effect on planned energy initiatives, particularly in relation to chemical projects”. On the other hand, lawyers have been quick to point out that lower oil prices and associated costs for building materials and transportation give contractors the opportunity to negotiate supply contracts with their subcontractors, and if prices remain low contributors expect to see more advisory work in this regard. The prevalence of energy-related construction work in the Middle East has inevitably prompted international firms to explore their options in the region. As one Dubai-based lawyer noted, “we have definitely seen more foreign firms trying to break into the market here; while firms have previously outsourced construction work in the Middle East, the energy work available means that many have sought to establish a direct presence in key locations”.

Overall growth in the US economy has been reflected by a busy year for construction specialists, with several commenting that the confidence of domestic and foreign construction companies “has reached its highest levels since the global financial crisis”. Massive projects in the energy sector, particularly in terms of chemical and LNG plants, have continued to provide work for the leading construction practices, and the low cost of shale gas has resulted in an increased appetite among international and domestic contractors and investors for energy export. New initiatives are planned on the basis of an effective domestic pricing system that fixes a set fee to liquefy and ship the gas, Freeport LNG Development’s planned £14 billion terminal in Quintana Island, Texas being a key  example. Lawyers have highlighted increased private investment from abroad for such projects, and the scaling back of coal power in favour of gas and renewable energy projects means that “the market for cross-border transactional work is thriving”.

After increased activity in 2014, lawyers are confident of further growth in the UK construction sector throughout 2015, with a number of major schemes in progress such as the £600 million Battersea Power Station commercial development and £420 million retail and office project at 10 Fenchurch Street. While residential construction will continue to dominate the market, commercial building in London has grown considerably; more contracts have been awarded over the past year and “competition among the leading practices is fiercer than ever”, our research indicating that international firms with strong cross-departmental expertise in insurance and construction are well-positioned to take advantage of inbound investment into London in 2015.

Contracting and Disputes

Energy projects have driven contentious work in the sector, with lawyers reporting a particularly high number of disputes at contractor and subcontractor level; the trend towards large-scale government-backed infrastructure initiatives and power plant projects has meant that delay is a prominent issue encountered by leading lawyers. In this sense, a key area of consideration for clients involved in major projects is the method of contracting used, and whether the clauses in the New Engineering Contract (NEC3) or International Federation of Consulting Engineers contract (FIDIC) are more effective for cost-efficient dispute resolution. Given clients’ increased cost consciousness, many lawyers have spoken of the increased preference shown towards NEC3, which “prioritises early dispute resolution and prevents contracting parties dragging out an issue through to project completion, which is a major problem with other methods”. Bolstered by a resurgent economy and with many more projects coming online in key jurisdictions such as the US throughout 2015, greater insurance coverage is available for both commercial and residential projects. Contributors therefore expect insurance-related disputes to continue over the course of the next year, with contractors in particular making enquiries with regard to obtaining the right project-specific insurance and minimising their exposure as a result of limited indemnities. The current market “certainly plays into the hands of firms with expertise that cuts across insurance and construction”, and those that are in the position of acting for both insurers and contractors will continue to see a steady work flow over the coming year.

The past year has seen high levels of international construction arbitration, and firms with a presence in Singapore or Hong Kong have benefitted from the competition between Hong Kong International Arbitration Centre (HKIAC) and Singapore International Arbitration Centre (SIAC) for the handling of high-stakes construction disputes in the Asia-Pacific region. The rivalry has been welcomed by many in the region, some of whom compare it to competition for major arbitrations between the LCIA and ICC in Europe. HKIAC appears to be more popular as a seat for disputes involving parties from Greater China and domestic projects, while Singapore has established itself as a hub for arbitration involving other South East Asian countries and EPC contracts; as one contributor noted, “nearly 10 per cent of disputes at the SIAC are construction based, and as firms compete for the large-scale cases we expect to see more practice growth and hiring of arbitration experts in the region in the next two years”.

Firms with international arbitration expertise have also noted further opportunities in the Middle East as a result of the DIFC-LCIA Arbitration Centre’s growing reputation with regard to award enforceability. Changes to DIFC arbitration law in late 2013 brought Dubai’s financial free zone into line with the New York Convention, and as a result there has been greater confidence in the seat as an alternative to the established Dubai International Arbitration Centre; recent changes allowing for the enforcement of foreign arbitral awards in the DIFC are also likely to increase the seat’s appeal for international clients. Respondents from leading UK firms were positive about the development, given that DIFC laws default to English common law in the event of an ambiguity and that the arbitration centre uses rules modelled on the LCIA.  As one UK-based contributor observed, “there has been a concerted effort from many UK firms to take advantage of this trend, and the increased demand for leading UK barristers in Dubai has also been palpable”.

As is the case across a wide range of industry sectors, clients from construction companies to contractors and insurers are looking to minimise costs and focus on dispute avoidance; as such lawyers have seen increased advisory work relating to internal risk management processes and alternative methods of dispute resolution. As noted by one respondent to the research, “the big contractors and companies are being more selective in the cases they litigate and considering the escalating costs of international arbitration, panel reviews are increasingly focused on firms’ records for alternative dispute resolution”. This trend is epitomised by the increasing use of dispute adjudications boards (DABs) for a dispute resolution process that encapsulates elements of both mediation and arbitration, and is reinforced by the Swiss Federal Court’s decision in late 2014 to make DAB adjudication a mandatory step in disputes involving parties bound by FIDIC contracts. DAB adjudication is “certainly a growth area and one that firms with major construction practices should be exploring in the future as clients pursue alternative and cost effective means of resolving large-scale disputes”.

The Legal Marketplace

After 2014 represented a period of cautious optimism for construction lawyers, 2015 has been a strong year so far, particularly for international firms with established reputations in the sector. The number of construction lawyers listed in our research has risen considerably from 523 in last year’s edition to 552 in 2015, reflecting the sector’s competitive nature and the ever-increasing demand for leading lawyers, who are subsequently recognised in our research for their sector-leading work over the past year. Practitioners have seized upon the increased opportunities to advise major clients on major energy and infrastructure projects and disputes, with more lawyers achieving recognition for their work to the extent that they can be considered experts in the field. The trend for long-term infrastructure projects and energy initiatives with cross-border private funding has allowed familiar names in the international construction market to consolidate their position among the elite; Pinsent Masons once again leads our research with 21 nominations, while other international firms such as Clyde & Co and Herbert Smith Freehills also feature prominently.

Considering the proliferation of large-scale and long-term projects across a range of jurisdictions, as well as an increased focus on foreign markets from contractors and investors, contributors predict that “the gap between the global powerhouse firms and mid-sized practices will only continue to widen” as clients seek globalised advice. Although mergers are an attractive option for those struggling to compete without the international reach of other firms, sources have reported that some firms have scaled back their construction work or absorbed their practices into other departments such as real estate. One way for firms to distinguish themselves in a highly competitive market is to compete in terms of cost and alternative pricing structures, given their importance to clients in recent years and especially in terms of their panel reviews. As one UK-based contributor observed, “clients want price certainty from their providers and know that they can insist upon cost identification, taking advantage of strong competition in the field”. Litigation and arbitration costs continue to rise, and “clients have been very specific in their enquiries about fee arrangements; even the biggest firms have to make sure they put in the right bid” when competing for disputes work.

The US is once again the most highly represented jurisdiction in our research with 211 lawyers nominated, as confidence remains high among major domestic and international firms in the country, due to a raft of energy infrastructure and power plant projects over the past year. The number of nominees in active markets such as Hong Kong and Qatar has risen again in this year’s edition, reflecting the work available in the region and the need for recognised experts in those jurisdictions from major contractor and construction company clients. Similarly, the number of UK-based lawyers in our research has increased for the fifth year in succession after a considerable drop between 2010 and 2011. The London construction market is expected to thrive in the next two years in terms of large-scale infrastructure and commercial building, and the number of leading UK individuals in our research reflects the competitiveness among major firms in the city. The need for construction legal expertise in emerging markets is also borne out by the results of our research with lawyers from 59 jurisdictions included in this edition, an increase of 11 on last year. The number of lawyers in emerging markets such as Indonesia, Oman and Ghana is expected to increase further over the coming years, both in terms of practitioners from international firms moving in to undertake infrastructure work and lawyers at local niche firms developing their industry experience and reputation to the extent that they are considered experts.

Returning confidence in the sector has led to increased movement in the legal marketplace, with contributors in key jurisdictions predicting that the year ahead “will be a lively one for hires, both in terms of younger lawyers coming through and lateral movement”. As one UK-based lawyer commented, “we have been receiving more enquiries from head hunters” and for firms looking to establish a presence in key markets such as the Middle East and South East Asia it will be necessary to bring in well-reputed lawyers and experience in those regions so as to attract key clients and remain competitive. A US-based respondent observed that “senior partners are on the radar of US firms looking abroad, as they will not be able to take advantage of the current infrastructure boom by simply promoting from within and expecting younger lawyers to build a practice without the regional experience and reputation”. It is possible that the desire of firms to establish a direct presence in growing markets for construction, such as Saudi Arabia, the UAE, Indonesia and Vietnam, could affect local firms who have benefited from high levels of outsourced work in recent years, and many expect some local firms in emerging markets to avoid being squeezed out by merging with international firms. This has been an issue facing domestic firms which have previously undertaken large-scale infrastructure work; local firms with a focus on mid-sized projects and advisory work for local contractors and investors “are unlikely to be as challenged by the internationalisation of global firms”.

While the ongoing dominance of international firms with leading construction practices presents a challenge for mid-sized firms in the field, our research indicates that established niche construction firms have continued to thrive in a competitive market, due to strong relationships with long-term clients and unparalleled industry knowledge. US construction specialists Peckar & Abramson and Smith Currie & Hancock epitomise this trend; as two of the leading firms in our research, with 11 listings and six listings respectively, their strong representation in our research reflects the value that clients attach to a firm’s industry reputation. The construction market will see continued levels of activity in the next two years with new infrastructure, residential and energy projects going online throughout 2015, as the leading firms in our research look to compete for transactional and disputes work in both established markets and emerging jurisdictions. Another consideration for construction practices will be identifying which sectors are likely to see growth in the future as confidence grows in other commercial areas outside of infrastructure and energy, which have driven construction legal work from 2012 onwards.

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Nominees have been selected based upon comprehensive, independent survey work with both general counsel and private practice lawyers worldwide. Only specialists who have met independent international research criteria are listed.

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