Construction Law 2022

Overview

For almost all jurisdictions, COVID-19 has obviously been a defining event over the past two years. For the construction industry, however, in retrospect the effects seem to have been relatively mild. Unfortunately, this cannot be said of the war in Ukraine, which the world was confronted with at the end of February 2022. The effects of this war coincided with the end of quantitative easing and the aftermath of COVID-19, to produce a toxic combination of effects for the construction industry worldwide. These range from supply chain disruption to (sharp) price rises of almost all building materials – especially energy prices. In almost all jurisdictions, lawyers are grappling with issues such as (steep) price increases and delays caused by supply problems.

The underlying trends and developments in most jurisdictions seem to crystallise in similar ways. It proves difficult to pass on rising prices to employers, exceptions notwithstanding; for most jurisdictions, the legal possibilities can be summarised as: "time, but no money". One has to bear in mind that, already well before the war in Ukraine started, prices of construction materials, particularly steel, wood lumber and concrete elements, had risen significantly. This process has, of course, been exacerbated strongly by the war, but in terms of "‘unforeseen events", these latter price rises did not easily qualify as such.

We are witnessing ongoing innovation in building techniques and processes, notably digitalisation and prefabrication. Furthermore, the main market sectors keep moving in the same directions: expectation of massive public investment in infrastructure, fired by large stimulus packages; eg, for the overhaul of public infrastructure (such as in the US) and climate transition (such as in the EU); ongoing urbanisation and the rising demand for (affordable) housing; retail giving way to leisure and logistics developments; and, finally, rethinking of the (office) workplace.

From a legal point of view, there are a number of noteworthy legal innovations, both legislative and in (standard) contracting.

War in Ukraine – Inflation

Having just weathered the effects of COVID-19 rather well, the war in Ukraine, combined with already nascent inflationary trends, has hit the construction industry worldwide. The construction industry is struggling to offer fixed prices, especially for large projects with a long duration. Prices for construction materials such as steel and lumber often qualify almost as "daily rates". The war and inflationary trends have produced a toxic cocktail of serious supply chain hiccups and unpredictable price developments.

So far, the customary legal remedies in most jurisdictions fall short. Most existing contracts and standard terms do not provide for the passing-on of price rises and the best contractors can hope for is extra time. As far as new contracts are concerned, there exists a strong tendency to negotiate mechanisms to deal with extreme price rises and supply chain hiccups. Almost all jurisdictions report that this is a matter of "tailor-made" contract terms. The outcome of such negotiations is also, of course, to a large extent dependent on the relative bargaining power of employers versus contractors. In some jurisdictions, authorities have come to the aid. In Canada, for example, "prompt payment" legislation has recently come into force for most provinces. In Denmark, the updated AB Standards (standard provisions used for sizeable projects) provide for compensation in case of extraordinary increases in prices. On the other hand, there is broad consensus that the standard indexes fall short of providing comfort, the main problem being that these almost always "kick in" too late. Indeed, there just does not seem to be a one-size-fits-all solution.

Market Trends and Developments

It is remarkable to observe that market trends and developments, roughly speaking, keep moving in the same directions globally.

Across the board, there is a promising pipeline of work in the infrastructure sector.

In the USA, Biden’s USD2 trillion infrastructure and jobs plan seeks to improve the nation's infrastructure and promote a shift to greener energy over the next eight years. In Europe, the EU Green Deal is aiming for zero greenhouse gas emissions by 2050, which will be funded by a EUR0.6 billion investment plan. This plan has recently received an additional boost from the goal of becoming energy-independent of Russia. In Germany alone, LNG terminals are already being built in Brunsbüttel and Wilhelmshafen in record time, involving a total investment of roughly EUR2.5 billion.

The same goes for residential and area development projects. Globally, the trends of urbanisation and ageing populations keep fuelling demand for quantitative as well as qualitative housing and residential space, especially in the low- to mid-range of the market. An interesting development is the recently implemented Urban Development Law in Japan. The purpose of this law is to achieve high-level use of land and renewal of urban infrastructure through demolishing old buildings and other structures in the project area. Shortage of suitable locations and the energy transition increasingly necessitate innovative solutions; eg, the Danish Lynetteholmen, a whole new island to be constructed in Copenhagen harbour, serviced by tunnel, bridge and metro access, and to be inhabited by 35,000 residents.

Everywhere, climate targets make their imprint felt – not only in CO₂-neutral buildings, but also in sustainable building materials and "cradle-to-cradle" building processes. Almost all researched jurisdictions show the same picture, from the Netherlands to China, from Russia to Switzerland, and from Singapore to Peru.

In the office and retail sectors we are also witnessing a transformation. Here, the existing trends of online shopping and working from home have received a marked impetus from COVID-19 measures. Almost everywhere, office and retail developers have had to reimagine their rationale. This may lead to the development of smaller satellite offices, sometimes benefiting from rural hub initiatives.

The developments in retail are, on the other hand, greatly promoting the logistics and transport sectors. Logistics was already big, but has ballooned during COVID-19 shutdowns. Across the board, this trend seems here to stay. Changes in mobility will further influence this trend. A pioneering project in Switzerland named Cargo Souterrain features a complete underground logistical system for the flexible transport of small-component goods, with tunnels connecting production and logistics sites with urban centres.

Digitalisation and Automation

Digitalisation is a priority for all market players in the construction industry. Implementation of BIM (Building Information Modelling) methods is becoming increasingly important and ever-more widespread in jurisdictions such as Russia and Peru.

In parallel, we are seeing increasing use of prefabrication methods, especially in the construction of housing. China, for instance, has recently issued the Guiding Opinions on Intelligent Construction and Building Industrialisation. This includes the development of prefabricated buildings, internet platforms for the construction industry, and intelligent production lines for steel structures and precast concrete components. In key areas, these new production methods already account for 20.5% of the total newbuilds there. These methods not only speed up the building process, but also reduce waste, energy use, materials, and noise and pollution on site. In the Netherlands, assembly of a prefab house now only takes one working day.

In short, the construction industry, across the board, is showing a remarkable "green" ambition and an appetite for innovation.

Legal Trends and Developments

As for global legal trends and developments, the construction industry is showing a growing degree of alignment, both in legislative initiatives and in the use of standard conditions. Here, too, innovation can be seen.

There have been a number of noteworthy legislative developments. In May 2020, China passed the long-awaited new Civil Code of the PRC. A great number of countries have also adopted legislation to help achieve the Paris Climate Agreement goals.

Globally, the implementation and use of internationally accepted standard contract forms continues to gather momentum. A number of countries have recently updated their commonly used standard conditions, including Denmark, the Netherlands, Peru, Singapore and Switzerland. Furthermore, the use of the FIDIC (International Federation of Consulting Engineers) and NEC (New Engineering Contract) suites is becoming ever-more widespread, not only in the English-speaking world, but also in South America and Africa. At the same time, we are seeing the introduction of new contract models, such as "collaborative contracting" in Singapore. These models seek to align the interests of all project participants in order to achieve project objectives, through a co-operative management approach, profit- and risk-sharing, and the development of mutual trust and confidence between stakeholders.

Conclusion and Outlook

The construction industry has been hit hard by the war in Ukraine, combined with already nascent inflationary trends (caused by the end of quantitative easing) and the disruption of supply chains (remnants of COVID-19). On the other hand, underlying demand, both in the infrastructure and the residential sectors, remains strong.

Predictions are difficult. Nevertheless, it seems fair to say that the effects of the war in Ukraine and global inflation will prove temporary and that market circumstances for the upcoming years remain promising for the construction industry. Both the necessary overhaul of public infrastructure and the up-and-coming climate transition, as well as urbanisation and the demand for (affordable and durable) housing, all seem powerful propellants for developers, constructors, financiers and investors in these sectors across the developed and developing world.