Has Brexit damaged the construction industry?

It’s just over two months since the UK-EU Trade and Co-operation Agreement was signed – all within the midst of a global pandemic – so, is it living up to our expectations?

For the construction industry, the key questions have been:

  • Can we still get access to materials?
  • Do we still have a sufficient workforce?

And for the longer term:

  • Will the UK continue to attract investment for construction projects?
  • Will the UK have a sustainable construction industry post-Brexit?

Direct and Indirect Implications

Although the Trade Deal imposes no direct charges on construction, materials or products, new legislation on importing materials, accessibility to the required workforce and changes to the supply chain may well have an impact on the UK’s ability to deliver on its construction needs.

The Agreement includes measures that aim to ease any restrictions on goods moving between the UK and the EU post-Brexit, by removing import tariffs, as long as rules of origin regulations are met and declarations made and, particularly important it seems, for the right forms to completed in the right way at the right time!

However, it’s expected there will be indirect cost increases with those additional customs checks and product conformity assessments leading to an increased administrative burden and potential time delays on projects.

There has been a lot of attention on the movement of fresh goods, where increased waiting times at the borders have had obvious physical consequences. For the construction industry, the impact is as serious, where building materials are procured on a ‘just-in-time’ model so any delays can have significant impact on the delivery of schemes.

We are seeing a trend of ‘stealth stockpiling’ whereby the supply chain is mitigating against any potential material delays (Brexit) or production issues (Covid) by advance purchasing at the earliest opportunity and storing at centralised warehouse / storage facilities. This is causing a spike in some material prices and particularly with repeatedly specified products where Contractors can take calculated risks to advance order ahead of detailed Contract specifications.

Fortunately, there is a 12-month grace period on some elements of rules of origin declarations, giving businesses some time to adapt to new legislation and prepare.

Who pays for any cost increases?

Companies will need to account for potential additional expense associated with the large volumes of materials currently imported and exported from the EU, and the possibility of limits on quantities of materials and goods being imported into the UK.

The Construction Leadership Council estimates that around 22% of materials are sourced from outside the UK, so there has been a significant amount of concern around the potential impacts of Brexit on the construction industry.

This raises the question of who will absorb the costs of any additional expenses? Typically, Contractors work on small margins and will pass on their costs to the developers, who ultimately will pass on cost increases to the renter or purchaser. It’s not good news for the end user.

In recent tender returns we have seen a Contractor focus on ‘shortening’ the supply chain by increasing the use of domestic products and materials where possible. Whilst this will support a strengthening economy, any efficiencies may well be offset by higher production costs. The new ‘Super Deduction’ announced by the Chancellor will only promote the establishment and purchasing of new plant and materials to help bolster the UK’s manufacturing capabilities.

Waiting for a workforce?

With free movement also no longer existing between the UK and EU, employers will need to register in order to recruit from abroad, and the individual must meet job, language and salary requirements as part of the new global immigration system.

A number of industry bodies have warned that the new Brexit immigration system will be ‘extremely challenging’ for the construction industry. In short it will be much harder for UK companies to hire lower skilled workers from abroad and there are a number of challenges being made against the roles classified as ‘skilled’. The government have recently announced that the rules for construction trade immigration could be reviewed.

Approximately 10% of all construction workers in the UK are EU nationals, and up to 33% in London. Anecdotally it is thought that up to 30% of those migrant workers have returned back to their homelands since the Covid pandemic. This reduction in labour supply is preventing any major labour rate drops caused by lower construction outputs.

This will be less of an issue for companies and contractors who have had time to prepare for these recruitment changes. It remains to be seen whether there will be a sustainable volume of EU workers coming to and remaining in the UK to support the industry. This may be mitigated to a degree by the special workforce arrangements between Ireland and the UK, but we could see project costs increase if the demand for labour starts to outstrip the supply.

The weak pound, compared to pre 2016 (Brexit referendum) levels, is another factor working against the UK’s ability to attract a high volume of migrant workers. Anecdotally, labour gangs can earn more ‘take home’ cash working in major EU cities than they can in the UK.

Are we overconfident?

Potential negatives aside, the uncertainty of what the Trade Deal would be has been looming over the industry for a prolonged period, leaving many companies reluctant to make decisions without knowing what was happening in the long term.

With no additional tariffs on the construction industry, companies can feel confident in making decisions on expansion and progression knowing exactly what legislation is in place and the longer-term implications.

As the initial impacts wear off and the industry adjusts to the changes put in place, the UK Construction sector can be confident about future growth. There may also be more opportunities for the UK to increase its manufacturing of building materials to mitigate any future import issues.

Throughout the pandemic and these first few months of 2021, our project management and cost management consultancy, CPC, has been supporting its clients to successfully adapt and navigate through the complexities of Brexit.

Regardless of the changes that have been made, and the ones we are still yet to experience, CPC’s volume of new appointments over the last few months has led me to be confident that construction will remain an integral part of the UK’s recovery and economic growth.

brandon-stringer

This guest blog was written by Brandon Stringer, CPC Partner and Finance Director

Date: 22/03/2021
Category: Steve's Blog