Brexit: The effects of leaving the EU on the UK construction industry
Investment is a major driver of the construction industry. Just look at the High Speed 2 (HS2) - the planned high-speed railway linking London, Birmingham, the East Midlands, Leeds, Sheffield and Manchester. This development has had a number of setbacks largely due to the increasing cost. The Institute of Economic Affairs estimates that the final cost will be over £80 billion.
Earlier this month Prime Minister David Cameron warned that flagship investment projects such as HS2 could be at risk if the UK voted for Brexit.
Germany, the economic powerhouse of the EU, with its many influential construction and manufacturing businesses, has already expressed hesitation to invest in the UK due to the uncertainty surrounding the leave vote – a sentiment likely to be felt by other investing countries outside the EU such as China, India and Japan.
The availability of both skilled and non-skilled labour
A particular worry for those involved in the construction industry will be the availability of both skilled and non-skilled labour within the UK.
There is currently a shortage of construction skills here and many are concerned that the industry relies heavily on the EU for the provision of its workers. This supply line may be choked off as a result of the withdrawal from the EU. While the UK may then be compelled to introduce new visa systems to compensate, this is likely to take a considerable period of time and the uncertainty of security of employment in the UK for EU workers may discourage them from seeking to work here, preferring other European destinations in the longer term. This in turn is likely to lead to calls for higher wages by those workers who are already in the UK, and will undoubtedly increase the cost of projects going forward.
While the amendment or repeal of legislation which protects the environment or the health and safety of workers might provide some relief in terms of construction project cost, such amendment or repeal is likely to prove extremely unpopular politically and is certainly unlikely in the short term.
Construction companies that struggle to find local labour resources are also likely to be faced with increased bureaucracy in dealing with visas and immigration law which in turn will increase their head office overheads.
Contractors relying upon an EU workforce will need to consider whether they have the resources to be able to commit to long-term projects and put arrangements in place to secure local/domestic labour availability.
What should construction companies and developers do now?
For those construction projects already underway consideration also needs to focus on the strength of project funding in the short term and, if this is uncertain or at risk, on contractual termination provisions with a view to devising possible exit strategies.
Likewise, for those projects that are not yet procured, an urgent review of the contractual grounds for termination would be wise as well as a review of the mechanisms for price adjustment. Given the short-term uncertainty of the markets construction contracts such as those based on Target Cost are likely to become the order of the day.
It is also likely that companies from the EU working in the UK, as well as domestic companies, are likely to require greater levels of financial security from those they engage on projects. This is likely to prompt an increase in the use of “on demand” bonds, which will also increase the cost of construction projects.
Next week [30 June] I will be speaking at a breakfast seminar aimed at contractors where I'll be discussing payment notices and getting paid on construction contracts, but I'm sure this Brexit vote will raise a number of new questions.
Quite timely, the seminar also includes a talk from our insolvency expert, Philip Banks-Welsh, who'll be considering the implications that an insolvency in the chain of contracts on a construction project will have, in relation to the new payment regime - a prospect which now seems highly likely for some of those in the industry.