January 2019 

With Brexit uncertainty continuing, this thought piece considers some of the potential issues and management actions for construction clients.

29th March 2019 – Brexit Day

EU nationals make up approximately 8% of the UK construction labour force however the proportion of EU labour is significantly higher in London.

The government and the construction industry are training UK staff to cope with the Brexit impact to meet a 2020 withdrawal deadline. A “No Deal” scenario brings that deadline forward 21 months. 

The EU has recently stated that it will recognise qualifications obtained in the UK up to the March 2019 date.

Delays – Materials not stock piled for typical “just in time” delivery on UK construction projects may need to be procured earlier than usually planned due to expected changes in border control procedures. This could result in the need for earlier project funding and a potential increase in storage costs for stock piling.

Trade tariffs – The trade tariffs that will be applied are not yet confirmed, but the general sentiment is that there will be change which will result in an increase of 5-7% of material costs sourced from the EU.

Quality – The EU quality standards are known and governed. Sourcing outside the EU is an alternative clients may wish to explore, however increased delivery cost and time (from further afield) and unknown manufacturing standards or quality assurance processes may require additional time and cost being invested to assure that building components meet the required quality standards.

Exit from the EU free trade agreement may put pressure on exporting UK suppliers and consequently increase the volatility in some supply chain sectors.

The proposed introduction of “Brexit clauses” into construction contracts is becoming more common as contractors look to manage the potential time, cost and delivery risks associated with unknown Brexit consequences.

Some Statistics

Labour

8% Proportion of UK construction labour force that comprises EU nationals¹

27% Proportion of London construction workers born in the EU²

45% London construction industry reliance on labour from abroad²

Material

61.6% Proportion of construction materials imported from the EU for UK projects

£10bn pa Value of EU imported material employed in UK projects

£4bn pa Value of construction materials produced in the UK for export to the EU

5-7% Forecast increase in imported material costs due to trade tariff changes.

£6.9bn Amount invested by the EIB in the UK in 2016; 47% of which was invested in infrastructure projects.

1. RICS 2017 Construction Survey
2. Labour Force Survey data 2014 to 2016

Construction Materials Import / Export

Material

The graph demonstrates UK reliance on imports. Imports from the EU represent more than 50% of total materials imported for construction in the UK.

Labour

Industry commentary suggests that non UK workers will not be immediately withdrawn or choose to leave the UK. 

The strength of Sterling may have a longer term impact on the volume of net migration. If Sterling remains strong, EU nationals may view staying in the UK as a favourable option.

Potential issues facing projects being procured or delivered during the transition period.

• EU tariff changes cause increased material prices
• Changes to border controls increase cost  and delivery time for material supply from the EU
• Currency fluctuations – a weakening pound resulting in labour migration overseas and increased overseas material prices
• Increase in contractor risk pricing due to uncertainties about the future
• Increased lead times for goods and services sourced from the EU
• Increased demand for UK supplied materials creates UK supply side pressures – shortages and cost increases
• Potential cost and programme pressures on contractors create solvency pressures.

Thoughts on potential mitigations and management actions

• Consider UK suppliers where feasible
• Switch to non-EU overseas suppliers
• Pre-purchase EU sourced materials and store in the UK
• Consider shared price and programme risk with Contractors – does not necessarily provide cost and programme certainty but could result in better client outcomes
• Use hedging to mitigate currency risk  
• Incorporation of currency fluctuation provisions in construction contracts to reduce contractor risk pricing
• Increased utilisation of supply chain management approaches to secure sufficient supply for delivery of planned projects 
• Potential longer term move to UK manufactured modular components – to ease material and labour issues 
• Increase in UK trade training programmes to increase the size of the UK national labour force.