With the UK’s Brexit transition period expiring on 31 December 2020, businesses across the country are making their final preparations for new rules due to come into force on 1 January 2021. With a no-deal scenario looking ever more likely, what does the future hold for the construction industry?
Deal or no deal?
A report jointly authored by Irwin Mitchell and the National Federation of Builders (hereafter referred to as ‘the report’) shines some light on the main issues the industry will likely face in the event of a no-deal Brexit. It covers three main areas: supply chains, labour and contracts.
The EU was the source of 51% of all UK imports in 2019. If the UK does leave the European Union without a deal, then the UK will initially trade with the EU on World Trade Organisation (WTO) terms, including tariffs on imported goods, which could prove very costly. For an industry characterised by high costs and low profit margins, higher tariffs could prove extremely challenging.
It is also likely that imports from the EU will face increased delays after Brexit.
As a result, the report makes the following recommendations:
- Price jobs to take account of increasing costs
- Check with supply chains regarding the origins of imported materials
- Speak with key players in the supply chain to see how they plan to take account of changing rules from 2021
- Plan for the additional time it will take to receive goods imported into the UK as a result of new checks and customs controls
- Plan for how potential changes might impact the business’s cash flow
- Find out who the business’s supply chain contacts are in the event of disputes.
In 2017, migrants accounted for 14.5% of the UK’s construction workforce, according to the Labour Force Survey. However, the influx of migrants to the UK has now slowed to a trickle in response to Brexit. And, although the EU Settlement Scheme offers EU citizens already living in the UK by 31 December ‘settled’ or ‘pre-settled’ status, many others will see their right to live and work in the UK expire.
What’s more, the UK’s new points-based immigration system poses serious issues for the continued influx of EU construction workers into the country. Designed to attract ‘skilled workers’ earning at least £25,600, those in lower-paid but vital construction jobs such as plumbers, electricians or bricklayers are likely to see their access to the UK barred post-Brexit. Therefore, it’s likely that UK employers will have to look closer to home for labour.
The report’s recommendations for employers include:
- Encouraging employees to apply for settled status, if they have not done so already
- Searching for domestic talent to fill vacant posts
- Encouraging young people to take advantage of new training and apprenticeship funding to enter the construction sector.
Contractors will need to consider the terms of their current contracts, in order to assess and understand the potential contractual consequences of a no-deal Brexit and (if possible) mitigate them. The wording of existing contracts should be checked carefully, while the terms of future contracts should be negotiated with Brexit in mind, in order to de-risk them where possible.
With most standard form contracts (JCT and NEC), the responsibility for increased costs, procurement delays and labour shortages lies squarely on the shoulders of the contractor. Yet, while many contractors may think that Brexit constitutes a ‘relevant event’ that would entitle the contractor to an extension of time or the recovery of loss of expense, this isn’t always the case. Meanwhile, those thinking it may constitute a ‘force majeure’ event are likely to be disappointed – an event only qualifies as ‘force majeure’ when it renders the contract impossible to perform – not just more difficult or expensive.
The report recommends that the following clauses be given particular attention:
- Timing – what is the commitment to timing and delivery?
- Delivery – what are the consequences if delivery is late?
- Termination – is there a right to terminate the contract where the materials are not supplied by the date of delivery?
- Damages – if the contractor is exposed to a claim for damages, does the contract include any provision to limit or exclude liability, and under what circumstances?
- Mitigation: when negotiating contracts, the parties should work to identify and seek to mitigate any losses that may arise, in order to minimise exposure.
Insurance – another way to mitigate risks
It is vital that construction contractors continue talking with their brokers to mitigate the many risks that lie ahead. For example, if rising costs lead to the use of different materials, or an economic downturn results in a construction projects being put on hold, the contractor’s policy may be invalidated. As construction specialists, we’re here to ensure our Brokers can continue providing their clients with competitive cover for a wide range of insurance needs.