Summary – the key things you need to know
- The construction industry relies on a steady flow of investment to keep the cash flow wheels turning. Uncertainty about how the mechanics of a Brexit will work and the nature of future trade agreements is already affecting investor confidence which might lead to reduced project investment.
- Available manpower is already an issue for the industry – and the prospect of workers' rights to free movement being restricted is likely to have a negative impact on recruitment, staffing and project costing within many construction businesses. It will also trigger an urgent need for training provision.
- While a comprehensive review of the UK legal system will be needed, laws and regulations affecting the construction industry are unlikely to change in the short term. Longer term, changes are likely if only to reduce perceived red tape. Given that EU and UK laws have been intertwined for 40 years, it is by no means clear what would happen to our current laws.
- The UK's ultimate trade agreements post Brexit with both the EU and non-EU countries could have a significant impact on export and import costs and affect project costs.
The UK will remain subject to all EU laws and treaties during any negotiation period prior to a formal exit from the EU, and in the meantime, there will be uncertainty on a number of crucial issues affecting the construction industry including workers' rights to free movement and the nature of trade agreements.
An impending Brexit will affect projects throughout the wider construction industry in different ways depending on factors such as the sector, the investor and the type of project. For example:
- Infrastructure projects could see investment being withdrawn from key proposed projects while those under way could be mothballed.
- The house building sector is just as difficult to call. The great need for housing and the attractiveness of the weak pound to foreign investors in the luxury market might just help those companies suffering the initial brunt of losses on the stock market to recover more quickly than expected. Some domestic house builders have even reported business as usual on new sales.
- Regeneration projects might be affected: the leaders of various large cities including Birmingham, Manchester, Leeds and Glasgow, have confirmed that Brexit will damage their regeneration plans. This is because foreign investment is likely to fall away. Also EU structural funding would end. Various council leaders issued a report on this issue: The importance of EU membership for the North (link courtesy of Construction News).
Staffing issues and employment law
Brexit is likely to give rise to multiple issues relating to the availability of staff and potential changes to employment law. This would particularly affect those businesses that rely on foreign labour.
Skills issues and maintaining an adequate workforce for current and planned projects are of primary concern for construction businesses. Some businesses have already had to turn down work because of a lack of skilled workers. Brexit is likely to reduce the labour pool further.
Currently workers in the EU have a right to freedom of movement. If this right were to be restricted, the labour market in the UK would be affected. Fewer EU nationals could work in the UK. Those who did would probably have to obtain visas. EU workers might conclude it is too difficult to work in the UK and choose to work elsewhere in the EU.
No one yet knows what will happen to those EU nationals already working in the UK. Will they feel less secure in their jobs and start looking for work outside the UK? Will there be an amnesty to allow them to remain? Costs may have to rise as businesses pay more to keep current employees in work.
If there is an ensuing skills shortage, the construction industry would have to gear up its training provision to UK nationals. This would come at a cost and it will inevitably take time to have a meaningful effect on staff numbers.
- Industry leaders have said UK construction could not survive without foreign labour (e.g. Mace's CO Gareth Lewis, CN 16.6.16.)
- See also: "Brexit would lead to shortage of construction staff, says Barratt boss" (via The Guardian).
UK staff might not be able to move so freely in the EU to work on projects in Europe.
Changes to employment law are likely, although the extent of such changes – and which laws might be affected – can't yet be predicted.
However, the UK government might agree some rights to freedom of movement for EU and UK workers in return for UK access to the EU's single market and more advantageous trade deals. Also, the mothballing of projects during the uncertain times ahead might actually reduce labour costs.
It is likely that the UK will have to renegotiate all its trade agreements with the EU and other countries. The construction industry's import/export trade with the EU is significant and necessary to maintain UK economic growth. Trade agreements will be crucial to protect this trade.
Depending on the nature of these new relationships, tariffs could be imposed on goods and there could be a consequent increase in prices for imported goods as well as a decrease in demand for UK goods exported to the EU.
So far as exports are concerned, the Construction Products Regulation 2011 currently governs marketing construction goods in the EU. It would not apply after a Brexit, but EU importers could still – given their stronger negotiating position – demand compliance for goods we export. Businesses' trading relationships with their European trade partners and their trading terms and conditions could also be affected by the international trade agreements negotiated after Brexit. There may be a very significant increase in costs of imported material – in particular steel – due to the weakening of the pound.
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) are embedded in UK law. There will continue to be an obvious need for health and safety laws to remain in place despite a Brexit. There is little prospect of these laws being repealed in the short term although amendments may be made in the longer term.
- The Energy Performance of Buildings Directive, which requires energy performance certificates for properties may be changed over time but probably not in the short term.
Generally speaking, the EU laws enshrined in UK law are likely to remain the same until a Brexit is effected. Some (possibly significant) changes to UK law are likely after a Brexit although the extent of such changes – and which laws might be affected – can't yet be predicted.
EU procurement rules are a part of our laws in the UK and will stay the same unless repealed by the government. Whether they are repealed will depend on the trade agreements negotiated with the EU. Some changes are likely over time, and might affect not just how tender processes are handled but, potentially, also the chances of success for UK bidders in Europe and the scope for encouraging EU businesses to bid for work in the UK.
In practice, the uncertainties caused by the negotiations required to withdraw from the EU will place additional strategic burdens on procurement teams. While they might not be able to rely on their forecasting skills, they will need to create and implement new strategies for procuring new projects if they are to stand any hope of getting these projects off the ground – and secure a profit.
The exchange rate and financing issues
Businesses will need to factor in much higher possible exchange rate fluctuations when planning projects.
Construction businesses should also be aware that the downgrading of the UK's credit ratings might make finance harder to obtain. The Bank of England is likely to reduce interest rates to stimulate the economy but, in the short term at least, businesses might be nervous of taking on more debt given the pervading uncertainty.
Law stated as at 5 July 2016