A brief recap – where are we now?
Leaving aside the political issues arising from and following the snap General Election, what progress has the UK made towards Brexit since June 2016?
Parliamentary approval to serve Article 50: in December 2016, the Supreme Court upheld the High Court's decision in Miller v. Secretary of State for Exiting the EU , ruling that the government must seek Parliament's approval before serving Article 50 notice. The Prime Minister accepted the result, MPs voted in favour and Article 50 was served in March 2017.
The government's service of Article 50 notice in March 2017 triggered a two-year countdown to the UK's withdrawal from the EU. Formal negotiations with the EU began in June 2017.
At the start of the exit negotiations, the EU insisted that three key issues must be resolved before they would begin trade talks: citizens' rights, the UK's obligation to pay a financial settlement and issues relating to the Irish/Northern Irish border.
Theresa May's preference for a hard Brexit ("Brexit means Brexit") remains politically divisive – across the parties. A hard Brexit would entail a clean break from the EU, tighter controls over immigration and coming out of the single market. Trading tariffs would be applied and future trading with the EU would be based (probably) on the World Trade Organisation model and rules. A "soft" Brexit would leave the UK in the single market but would mean continued UK contributions into EU budgets and some free movement of goods, services, capital and people. In reality, there is no clear "either/or" option: the ultimate agreement will be the result of compromises made by both sides.
Recent news from the Cabinet suggests that the UK will request a three year transitional period after Brexit to allow more time to negotiate and agree trade agreements. This will give rise to many issues such as whether the UK will still be subject to the jurisdiction of the Court of Justice of the European Union during the transition (on which topic a government position paper was issued in August 2017). It is not clear what the UK's trade relationship with the EU would be within that transitional period. It could, for example, remain within the European Economic Area (EEA) as a member of the European Free Trade Association (EFTA).
In July 2017, the government introduced the European Union (Withdrawal) Bill (formerly the " Great Repeal Bill"). Broadly speaking, the Bill proposes as a starting point, that those EU rules which apply to the UK at the point of Brexit will remain part of UK law. The Bill includes powers for Ministers to modify those rules (in their new guise as "retained EU law") by regulations, but only for certain purposes. In most cases, repeal or substantial changes would require an Act of Parliament. Early on 12 September 2017, the House of Commons voted to allow the Bill to move on to the next stage where it will be further scrutinised by Parliament. There is considerable concern about the draft wording of the Bill, particularly regarding the extent of the powers that the Bill would give to the government to change laws: expect some turbulent debate in the coming months.
The key issues for construction businesses
The need to plan and keep up to date
Nearly five months after Theresa May served Article 50 notice triggering the two-year countdown to Brexit, the UK and its economy remain entrenched in a period of uncertainty. The pound has been weakened, inflation is rising and the pressure on public finances is likely to continue. This uncertainty makes it hard for businesses to make specific plans to deal with post-Brexit business. All businesses must, however, assess the range of risks and prepare contingency plans. The risks arise largely from a reduced pool of labour, nervous investors reducing or withdrawing investment and the effects of uncertainty about trade agreements and the fluctuating pound.
Keeping up to date with the government's negotiations with the EU is essential for all businesses: the more information we have about what will happen after Brexit, the easier it is to plan.
Available manpower has emerged as one of the key Brexit-related issues for the construction industry. Concerns about restrictions to workers' freedom of movement are already having a negative impact on recruitment and project costing within many construction businesses.
The government published its proposals on the rights of EU citizens on 26 June 2017, making clear that any agreement about citizens' rights must be reciprocal. The proposals confirm "the creation of a new ‘settled status’ for EU citizens who arrive before a cut-off date" but the detail is dependent on the ongoing negotiations. In the meantime, EU nationals working in the UK feel less secure in their jobs and some have left or are starting to look for work outside the UK. The knock-on effect for businesses is that they may have to pay more to persuade current EU employees to remain.
Fewer EU workers are arriving in the UK meaning labour shortages, which, given the prospect of restrictions on freedom of movement, are likely to get worse. Again this will lead to fewer skilled workers available, increases in wages and project costs and, potentially, project delays.
Businesses that rely on foreign labour or UK operatives working in the EU should be working closely with their HR teams to ensure sufficient cover to meet contract requirements on their current and planned projects.
Developing the skills of the British workforce is becoming more urgent. Businesses should be bolstering their training programmes as well as making long-term provision for training.
Employment laws will remain the same initially (under the European Union (Withdrawal) Bill). Over time, we can expect changes to EU laws such as those on working time regulations, disability and discrimination. The extent of such changes – and which laws might be affected – is unpredictable.
The UK will remain subject to all EU laws and treaties during the negotiation period and prior to a formal exit from the EU. A substantial body of EU law that affects construction businesses is already enshrined in UK law, for example: The Construction, Design and Management Regulations (CDM) , the Building Regulations and The Energy Performance of Buildings Directive.
With the government's publication of the European Union (Withdrawal) Bill, all EU law current at the effective date of the UK's exit from the EU will be retained in UK law (subject to the Bill being passed by Parliament). Thereafter, the laws and regulations affecting the construction industry may be reviewed but are unlikely to change in the short term. Longer term, changes are likely if only to reduce perceived red tape.
Even if the UK decides not to keep in step with EU regulations, in the longer term, EU importers of UK goods and services could still – given their stronger negotiating position – demand compliance from UK suppliers of goods and services into the EU. This could mean additional costs for UK businesses.
While the weak pound is helping to encourage foreign investors into the property market, there are signs that the lack of clarity about post-Brexit trade agreements is affecting investor confidence in UK projects. The government continues to promise investment in housing and massive infrastructure projects such as HS2, but these are nervous times for many businesses.
The UK is keen to proceed with renegotiating its trade agreements with the EU but the EU are, to date, insisting on certain key issues being first agreed (see above). The UK's ultimate trade agreements post Brexit with both the EU and non-EU countries could introduce trade tariffs and other restrictions which would affect project costs and lead to a consequent increase in prices for imported goods as well as a decrease in demand for UK goods exported to the EU.
Uncertainty about future trade agreements is placing additional strategic burdens on procurement teams – on top of the pricing issues for importing materials caused by the weak pound and currency fluctuations.
Contracts already in place need to be reviewed to ensure that Brexit does not fundamentally change the nature of the agreement. Renegotiation might be needed to ensure Brexit does not lead to contract frustration. Particular clauses to focus on, where rights or obligations could be triggered or affected by Brexit, include, for example: force majeure, material adverse change and change in law clauses.
Parties to contracts should also consider those terms dealing with dispute resolution, jurisdiction and choice of court, service of proceedings and enforcement of judgments.
The Bank of England has so far kept interest rates steady but expectations of an increase are growing. Generally speaking, businesses are nervous of taking on more debt given the pervading uncertainty. These nerves are also affecting employer confidence with regards to day-to-day costs: some businesses are, for example, holding back on wage increases.