Industry insight: Brexit and the construction industry

Sarah Schütte of Schutte Consulting Limited sets out her top ten observations and predictions as to how ‘Project Brexit’ will impact on the construction and engineering industry. Among other things, she looks at market access, labour and skills availability and the effect on small and medium-sized enterprises (SMEs).

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So, Brexit is going to happen. It’s official. The Supreme Court has spoken and Parliament has voted. Our Prime Minister has declared her intention to trigger Article 50 by 31 March 2017. Given that the House of Lords is still to be persuaded, that’s a tall order. Uncertainty continues. But no business can put its operations on hold. So what does all this mean for the construction and engineering industry?

Many of my previous articles have talked about the need for good planning, solid project management support, and consultation with stakeholders (see News Analyses: The future of portfolio, project and programme management—part 1 and part 2 and Stakeholders—managing the challenges and opportunities). Brexit is a 'project'. A big one, certainly, and a long one (maximum 2 years under Article 50, subject to any agreed extensions of time), and it has lots of moving parts, needs constantly revising and has a requirement for agility. A project like this is a nightmare for the best planners and project managers!

For legal advisers too, Brexit presents a huge challenge. How can we support clients at this time, who feel in limbo? The 10 observations and predictions made in this article follow an unscientific straw poll of my industry clients and contacts. Continuing the project management parallel, they are all 'project risks'.

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Market access

The EU-UK free trade arrangement is the most important trading bloc, permitting tariff-free import and export. The lack of visibility about possible alternative trade agreements, both with the EU and other major trading partners around the world, is the biggest concern right now. The prospect of the UK negotiating fresh agreements is a major task and will take significant time, unless a swift practical solution can be found.

Guaranteed access to the EU can only now be effected via an EU hub or office—it doesn’t have to be big. Clients are considering establishing such a 'post box', or have it in motion already. Ireland is the easiest in many ways, since the countries have a close and long-standing relationship. An association with an EU-centred organisation is an option, but could be more fragile (another risk) depending on the terms of agreement entered into.

Compliance and legal matters

Some clients, particularly heads of legal, are not overly concerned about this risk, insofar as they see an opportunity for taking more control of contractual risk, for example jurisdiction and law clauses.

In addition, compliance is already strong in the UK. For example, something like 'safe harbours' would not in my opinion be difficult to agree since the principles are well-established globally and human rights watchers follow closely data protection matters.

Generally, the extent to which any EU legislation is subsumed into UK law will depend on negotiations at EU level. Remember, EU Directives need to be transposed into law through national legislation, in contrast with EU Regulations, which have direct effect and are automatically incorporated. Draft EU laws on the books now can expect to have a rough ride if they do not chime naturally with UK principles or objectives.

Labour skills/shortages

This is the biggest concern for the supply chain, such as my vendor-clients who hire out labourers to the rail and other industries and those in specialist trades.

Already there is competition in this risk and that means uncertainty as to commitment from customers, and leverage on pricing. It is trite but true that several skilled trades are underpinned by highly-experienced, hard-working eastern Europeans.

The risk of skills-shortage is also of concern to the technology sector, where London has the edge. No other country in the world has embraced the internet like the UK has—it contributes a significant wedge to GDP (second only to the construction industry (save the public sector)). It is estimated that around 40% of those working in the tech sector are EU-born (ref: Douglas McWilliams, The Flat White Economy), and the diversity of background, culture and education brought innovation and new ways of problem-solving. One can easily see, hear and feel this in London’s technology hub (known as the 'East London Tech City') of Shoreditch and its environs.

Let’s see how the debate over cross-guaranteeing the rights of EU citizens currently in the UK, and vice versa, goes.

Practicalities—materials, plant and office overheads

Tendering and procurement specialists are having a tough time, whatever contracting tier they work at. Typically asked to guarantee prices for 90 days or as long as 6 months, the risk of fluctuation lies with them, traditionally, insofar as employers usually seek to put the risk of price change onto the contractor.

The fear of increased prices in imported materials is very real for those at the forefront of procurement in tier 1 contractors in particular, and currency instability does not help (see 'Sources of funding' below). In addition, customs duties are likely to increase.

The costs of data roaming could become a real problem for those who have business in the Eurozone (i.e. the Digital Single Market) if the 'roam like at home' rules, which come into force in June 2017 after a decade of negotiation with telecoms operators, are deconstructed for the UK.

Currency and inflation

Linking in with the above item, this is another risk for tendering organisations. The balance is tipping in favour of end users/ promoters. They of course want certainty in budgets (as they always did). NEC3 contracts include X options as to multiple currencies (X3) and inflation (X1), which I think will become more prevalent (i.e. people will actually think about them more actively).

The good news is that goods and services have become cheaper with the devaluation of the GB Pound. So vendors who have clients outside of the UK could benefit (and are benefitting now, in fact).

Intra-UK selling becomes harder, and is vulnerable to inflation. Already we have seen this impact as the weak pound continues to stoke inflation and prices are rising. This puts more pressure on organisations and individuals.

Sources of funding

Without the crutch of the EU for some well-deserving regeneration or development projects, the UK is going to have to find creative ways of attracting investment. The risk is again one of uncertainty. The UK needs to attract new sources of money, and circulate its existing 'own' money in order to stimulate development. The need to find non-traditional funding sources is already important, but will become greater. See, for example, the Hinckley Point C Nuclear power station, part funded by the Chinese and with EDF at the helm (see News Analyses: Hinkley Point C nuclear plant deal agreed by UK—the reaction so far and Stakeholders—managing the challenges and opportunities).

Without new sources of funding, the UK risks being unattractive to investment, which will stifle growth, especially in the construction and engineering sectors which often require huge budgets, plenty of foresight and years of planning to deliver large developments and infrastructure.

This is a key risk for everyone at every level. Clients are making contingency plans, putting non-urgent projects on hold and recalibrating projects which are in delivery phase, to try to mitigate the uncertainties ahead.  Some projects are being phased, or divided into more manageable budget-friendly chunks. Although this approach risks being more expensive overall, it is probably sensible in some cases.

The EU as a stakeholder

Public-sector industry clients and contractors are generally happy that the EU will no longer be able to oversee and scrutinise projects. This comes from a place of frustration, which is understandable given the overly-bureaucratic approach to the stakeholder role notwithstanding the importance of 'value to the taxpayer' (see News Analysis: Stakeholders—managing the challenges and opportunities). However, this relief comes at a cost and they appreciate this is as a result of the withdrawal of a key source of regeneration funding (see 'Sources of funding' above).

SMEs

These clients fear the withdrawal of the free trade arrangements as the biggest risk, along with labour shortages and increased costs. SMEs (defined as organisations with fewer than 250 employees) are the backbone of the UK economy. Look more closely, which is more interesting to my mind, and see that micro-businesses (defined as organisations with fewer than 10 employees) comprise 96% of all businesses. The Federation of Small Businesses estimates that:

  • 60% of the UK private sector is employed in SMEs
  • 3% of all private sector businesses are 'small'
  • 76% of SMEs employ no-one except the owner
  • there has been a huge increase in the number of SMEs in this millennium: 5.5m now, 2m more than in 2000

Most interestingly, perhaps, is that 18% of SMEs (numbering 975,000) operate in the construction industry. This figure is a significant proportion of the SME pie, and the largest representative industry or sector (professional services comes second at 15%).

Whilst this pattern of growth has links to the way that technology has changed work patterns over the past decade, and tax laws, the truth is that SMEs contribute significantly to UK GDP, and to the construction industry. If they struggle to survive, then contract stability is put at risk and the supply chain becomes more fraught and fragile. For wider reading, I recommend the House of Commons Briefing Paper Number 06152 (23 November 2016).

Tendering to the world: selling the UK’s strengths

On a more positive note, the UK has strengths to sell! The UK government and the professional associations have to ramp up their offering to the outside world. The '#Londonisopen' campaign, launched by the Mayor of London in the wake of the Brexit vote, has been a creative and fun opportunity to show off London’s skills with a serious undertone.

Other industry associations are using their strength in member numbers to promote the collective’s skills and value of accreditation. The legal system has a chance to carve out an even better place than it has already on the world scene—independence from the over-reaching Court of Justice of the European Union.

The 'Northern Powerhouse' movement too must rise to the challenge if efforts to empower these communities without the future prop of EU regeneration money are to remain strong.

Planning for the worst

All good planners think about what could happen on their projects. They might not show every possible outcome in their plans, but they must anticipate risk and uncertainty, and 'stress-test' worst-case scenarios. The UK government must do the same—let’s hope it has great planners on board!

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Sarah Schütte is a solicitor-advocate and runs her own legal and training consultancy, Schutte Consulting Limited. She has more than 15 years’ experience as a construction and engineering solicitor, including ten years in industry. She works with a wide variety of industry clients, law firms, seminar organisers and educational establishments to support their projects, disputes, risk management and insurance strategies and training programmes.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Filed Under: Construction

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