The leave vote has posed more questions than answers in the aftermath of the referendum. This article looks at this historic event in the context of its potential effects on UK-based contractors and the UK construction industry. This article offers a balanced view of considerations post-Brexit, focusing particularly on the devaluation of the pound, agreed contracts and the potential effect on these contracts post-Brexit, resource shortage and cutting through the red tape.
Devaluation of the Pound
The referendum caused uncertainty and unpredictability in the UK markets, having a profound impact on the value of the pound through considerable devaluation.
A weak pound may be looked upon unfavourably; however, a weak pound could actually benefit UK exporters of goods/services, as these goods/ services can be marketed at a more competitive price with the ability of exporters to increase profit margins. UK real estate assets are also likely to be more attractive to "foreign" buyers due to the devaluation of the pound and this is likely to lead to more international acquisitions/disposals, in particular US, Asia and Middle East. However, practically speaking, the weak pound will only have a positive impact on UK contractors working in Europe, etc., if there is a call from those markets for the UK's exports or from incoming investors.
On this basis, although a weak pound can be beneficial to UK contractors working on projects outside the UK and potentially investment in the UK by making them more competitive, this competitive edge only comes in to play if there is a demand for the services of UK contractors. If the market is buoyant, then another consideration is how can these jobs be resourced - a question which is considered further below.
The potential effect of Brexit on agreed JCT Contracts
Most JCT Design and Build Contracts 2011 will be subject to a bespoke schedule of amendments which may or may not be effected by Brexit. However, the standard un-amended JCT Design and Build 2011 (still the most common despite the 2016 edition, but noting that the 2016 version deletes "Fluctuation Option C") could throw up some issues for the employer/contractor post-Brexit. For example, Schedule 7 "Fluctuation Option B" sets out that in accordance with the rules laid down therein, the risk of any increase in wages after the Base Date (as defined under the contract) would sit with the employer.
This would mean that the risk of wage increases due to a shortage of skilled workers/inflation sits with the employer, potentially eating into their profit margin unless this risk was factored into the agreed contract sum.
A further example of where Brexit may have invoked a risk shift toward the employer is, if argued successfully, that because the contractor is entitled to an extension of time under clause 2.26.12 where there has been the exercise after the Base Date (as defined under the contract) by the UK government or statutory power, of a power which directly affects the execution of the works, then this could result in any costs relating to the delayed/extended completion date sitting with the employer.
Whether this could be invoked in light of Brexit is not altogether clear and will very much depend on any regulations or enactments being repealed/ revoked etc., and what effect this may have on the contract. However, another way to approach this would be by looking at the resource shortage and how this is affected by the UK government and how it directly effects the execution of the works (i.e. by effecting the availability of materials/labour or fuel, etc.).
There are likely to be many other effects of Brexit on various contracts negotiated pre-Brexit, however, how these parties/contracts are effected (i.e. in terms of risk allocation, etc.) will not be truly realised until the UK's exit strategy is finalised, if it is.
The resource shortage has been heavily publicised in both written and televised form, but what does it really mean for the UK construction industry? The UK construction industry is reliant on European labour, so what issues could the UK leaving the EU create?
Firstly, European nationals working in the UK construction industry may opt to be repatriated, which would directly lead to a skills shortage in the UK. Repatriation has not yet been forthcoming; however, even if European nationals in this sector choose to remain in the UK, there may still be a shortage in years to come if the UK is no longer an attractive place to work.
For the reasons discussed above, a skills shortage in the UK would drive up the cost of labour, which could mean UK-based contractors are "tendered out" by non-UK based contracts. A shortage of skilled workers is also likely to impact on completion dates by creating delays.
One solution may be to continue to employ EU workers (i.e. those who have not been repatriated); however, depending on which EU model is adopted once (or if) the UK exits, there are likely to be additional hurdles to cross when living and working in the UK as a non-UK citizen (e.g. visas, etc.) and contractors may seek to push any additional costs of employing their work force up the supply chain to the employer.
If UK-based construction is such an unattractive prospect that UK contractors wish to look elsewhere, then that in itself could create issues; i.e. as it may be easier to employ local labourers on those overseas projects.
The incentive to do work outside the UK may be so strong that it could lead to skilled UK workers being unemployed or if they are sent to work outside the UK, then as above, it is likely that there will be the cost of visas/accommodation, etc., which may be pushed up the chain to the employer. Brexit could, therefore, have a devastating effect on the skilled workforce in the UK construction industry.
Cutting Through the Red Tape/ Bureaucracy
Avid leave supporters have spoken of leaving the EU and cutting through the red tape/bureaucracy. However, leaving the EU is unlikely to result in less regulation. For example, the recent Construction Design and Management Regulations 2015 that stemmed from an EU directive and deals with minimum levels of health and safety is unlikely to be repealed following the leave vote.
Furthermore, procurement in the EU by UK contractors will still include a requirement to comply with the EU procurement rules. The EU's procurement rules are currently enacted into UK legislation and, therefore, must be complied with until repealed or otherwise.
Regulations apart, it is also worth bearing in mind that the extent to which UK contractors can participate in EU tendering will depend on what exit model is adopted and what level of access to the single market the UK would have access to, if indeed Article 50 is invoked.
Whilst EU regulations (unless enacted under UK law) would no longer apply, the UK would still have to comply with EU regulations for any product/services that are exported to the EU.
This would mean that the UK would have to comply with regulations that it had no power or input in negotiating. The perception that there will be less red tape appears somewhat misguided, as there will still be requirements to comply with EU regulations/ legislation when trading with/within Europe.
Without the benefit of the EU’s multilateral trade agreements with the rest of the world, the UK will need to negotiate individual trade agreements with all countries.
In the months following Brexit some articles have indicated that Britain will have to work hard to secure a trade deal with the US. This was on the basis that Obama has quashed ideas of a fast track UK-US deal post-Brexit trade agreement at a meeting with Theresa May at the G20 Summit in China, stating that the UK will be “back of the queue”.
However, positively, the new president-elect Donald Trump thinks that the US should do a trade deal with the UK. Paul Ryan the speaker of the US House of Representatives is also quoted to have said that such an agreement with the UK would show that they remain an “indispensable ally”. Trump also openly welcomed the UK’s leave vote in June. Therefore, trade agreements may not be a cumbersome task as was first thought.
The prospect of the UK leaving the European Union is hanging in the balance following the High Court case brought by the “People’s Challenge” where it was decided that the government cannot trigger Article 50 of the Lisbon Treaty without parliamentary approval and a vote from MPs. This case is currently on appeal to the Supreme Court.
Given the above, the only thing clear in the aftermath of the leave vote is that the UK and the UK construction industry will be subject to uncertainty in the near future. In the short term, all that can be done is to prepare (as much as possible) for what could happen if the UK exits and feed this into any future projections of the construction industry.
Take Away Points
The points to take away from this article are that there are potentially wide-ranging effects on the UK construction industry postBrexit. The effects on the UK are likely to be both positive and negative in part, but these effects will not be truly realised until the exit is confirmed and/or the exit strategy is confirmed (if applicable). All that those in the UK construction industry can do is be alive to the potential short-/long-term ramifications when negotiating new contracts and tendering for new projects.