Re-building after Brexit - how the EU Referendum Result could impact UK construction

This blog was first published on 18 July 2016 and will be updated regularly as the impact of Brexit on the Construction Sector becomes clearer. Items that are new since the previous version will appear in italics below.

The first months of 2016 saw little positive news for the UK construction industry.  Yes, there were announcements of some excellent high profile projects, but the sector’s figures weren’t looking all that bright.  The word on everyone’s lips seemed to be “Brexit”: the uncertainty, and therefore lack of activity, was blamed on Brexit Uncertainty. 

Now that the referendum result is known, notwithstanding the apparent state of flux in Westminster, business leaders and investors are seeking to re-group.  There are increasing calls for the country to “unite” and “move forward”. 

It is, perhaps, nonetheless worth re-visiting some of the pre-vote articles to remind ourselves of what key figures in our industry said before 23 June 2016.  More importantly, I will seek to summarise below, some of the key statements made in the last few days following the result and to provide some thoughts on practical matters in the short and medium term.

Whilst the property market and construction markets are inextricably linked, this article seeks to deal specifically with construction. 

Predictions
Back on 21 January 2016, David Blackman wrote in Building Magazine that it was time for the UK construction industry to end its reluctance to have an opinion: “time [was] running out for the industry to take a stand.”  His article cited a then recent survey conducted by Smith and Williamson, which stated that, at that time, 85% of construction and real estate companies backed a Remain vote.  Blackman also noted that the majority of UK construction companies carry out a vast majority of their work here in the UK – that, however, does not insulate our sector from the impact of Brexit.  The article also mentioned the possibility of a reduction in demand for offices in London (in light of some businesses stating that they would re-locate following a Leave vote) and for housing across the country (if immigration were slowed).  Immigration is key for the construction sector: Blackman quoted Simon Rawlinson of Arcadis who estimated that more than 10% of the UK construction workforce is from outside of the UK, and who further expressed concerns about the UK’s ability to train/re-train enough UK citizens to plug the gap should EU labour no longer be able to work in the UK.  

In March, BuildingSpecifier.com sought to summarise thoughts from both sides of the argument.  That article also cited the 85% support figure from the Smith and Williamson survey and the thoughts in favour of an “In” result centred on free movement of labour.  This article was published after Lord Bamford, Chairman of JCB had aired his views.  His view was that Brexit could reduce the amount of red tape which meant that “it’s easier selling to North America than to Europe sometimes”.  Lord Bamford was quoted as saying “I don’t think we or Brussels will put up trade barriers” so it should be noted that his call for an “out” result, appeared to be based on continuing free trade. 

By 12 May 2016, the figure of 85% support had apparently fallen to 63% when Building Magazine commissioned its own survey.  Building Magazine’s website is visible to subscribers only, but SCS Group summarised the results in its own article.  Building Magazine went on to run their own “Building says IN” campaign.  Many large contractors also backed the Remain Campaign, including Osborne, Mace and Carillion. 

In May 2016, Julia Kollewe interviewed David Thomas, Chief Executive of Barratt Developments for an article in the Guardian.  Mr Thomas was clear on his position: a vote to leave would mean “even more pressure in terms of skills shortages” – he estimated that 30-40% of his workforce in London hailed from mainland Europe.  I would encourage readers to click the hyperlink above and scroll to the bottom of the Guardian article to see figures of migrant construction workers in the UK by nationality.

Just the day before the referendum Construction Enquirer reported that Galliard Homes warned of a potential 15% rise in construction costs following a “leave” result.  The developer’s Managing Director, Don O Sullivan, said that this rise would be caused by increased materials costs and more expensive labour. 

In summary, the mood of the construction sector prior to the referendum seems firmly, albeit quietly, to be in favour of a vote to Remain.  The primary reasons cited for this were the UK industry’s reliance upon EU labour, potential increased materials costs and a concern that demand/investment would drop following a vote to Leave.  That said, it was clear that there were some key industry players who were in favour of Brexit. 

Reactions
Supply of labour continues to be the key focus following the result.  Even before 10am on Friday 24 June, ITV was reporting that the Chief Executive of the Federation of Master Builders was calling for a new system of immigration to protect the industry: “If Ministers want to meet their house building and infrastructure objectives, they have to ensure that the new system of immigration is responsive to the needs of industry... At the same time, we need to ensure that we invest in our own home-grown talent through apprenticeship training. We need to train more construction apprentices so we are not overly reliant on migrant workers from Europe or further afield.”

Amongst the uncertainty, some employers have been keen to confirm that their projects will continue, notwithstanding the UK’s vote to leave.  Aston Martin announced on Monday that their £200m plant in South Wales will go ahead.  In addition to the 750 jobs in the completed factory, the project is expected to create a further 3,000 jobs. 

Redrow’s fortunes seemed to have been mixed in the few days since the referendum result.  Construction Enquirer reported on 28 June that the housebuilder’s shares had dropped 30% since the result, but its chairman, Steve Morgan, noted that the initial feedback was that “sites remain busy, reservations continue to be taken.”  It should be noted that Redrow are by no means the only construction company to suffer a fall in share value following the referendum result, and further contractors and developers’ share prices were already down, having fallen when the referendum was announced, apparently due to market uncertainty. 

Student housing company Empiric also spoke to Construction Enquirer following the result and noted that “EU students represent only 6% of all full-time students in the UK” and therefore they did not anticipate a drop in demand for student housing. 

It would not be fair for this piece only to reflect upon the views of contractors – architects and other professionals are, of course, crucial to our sector.  BDonline.co.uk collated the views of many architects on Friday 24 June.  Whilst the quotes do not appear to be balanced, that is not to say with any certainty that they are not reflective of architects’ feelings generally. 

On 12 July, Ministers issued a statement that was designed to reassure many sectors, no doubt with construction at the forefront of their minds.  As reported by Construction Enquirer however, the statement did not say anything more than “When we do leave the EU, we fully expect that the legal status of EU nationals… will be properly protected”.  So nothing more than a vague statement. 

In summary therefore, as with most sectors, the initial reaction has been one of shock and surprise, followed by calls for calm.  Businesses are keen to display an air of certainty and confidence, understandably to protect their own interests. 

Practical matters
As with the rest of the nation, the construction industry is now turning to practical matters and considering how the Brexit result will actually affect them in the coming weeks, months and years. 

One of the key arguments of the Leave campaign related to “red tape” and cutting the bureaucracy that Brussels has brought to UK companies.  Clearly this must be highly significant for construction since we are a highly regulated sector.  What of the impact of changes to immigration policy?  How will employers react to the market uncertainty?

In practical terms, what could the UK’s departure from the EU mean for the construction industry?

• Regulations

o CDM Regulations 2015 – these UK regulations flowed from EU Directive 1992/57/EEC but are now enshrined in UK law.  There has been no suggestion from either side of repealing the CDM Regulations, or indeed of significantly amending them.

o Health & Safety Generally – following our July newsletter we received a helpful insight into predicted changes in UK Health & Safety law from Bruce Sutherland of Aspire Safety, who said “We in the health and safety profession broadly agree with your summary. Workplace health and safety performance is something that the UK is probably the world leader at and it is highly unlikely that politically there would be any enthusiasm to change very much. It is more a question of tampering round the edges; the likely candidates could be CDM with regard to Domestic Client Duty and Principal Contractor for more than one contractor, free glasses under the DSE Regulations and possibly part of the Working Time Directive.  It would seem that this may be for very specific employment categories.”.  Lisa Gettins deals more specifically with employment law issues in her Brexit Blog.

o Working at Height Regulations 2005 – these implements the EC Directive 2001/45/EC – again it seems unlikely that the WH Regs will be repealed. 

o Energy Performance Certificates – again, this is borne out of an EU Directive.  Changes to the EPC regulations may be less controversial than amending the CDM Regulations, since the latter is, of course, health & safety related.  Any change will not, however, happen quickly.

o Construction Products Regulation 2011 – once the Brexit process is complete, these regulations will no longer be applicable to the UK, but any manufacturer of construction products who wishes to export to the EU will need to continue to comply, leaving them potentially with the choice of a two-tiered production process, or simply continuing to comply across the board. 

o Eurocodes – similar to the products regulations, the UK construction industry is used to design standards influenced by the EU.  It seems unlikely that the situation would change. 

• Tendering
o OJEU Tendering – we frequently refer to the “OJEU Process”, which gives certain procurement a very European feel.  There are large numbers of employers and contractors who are not fans of OJEU tendering, feeling that it is a costly process.  However, in reality, the “OJEU Process” is actually governed by the Public Contracts Regulations 2015 and so some sort of regulation of public procurement is likely to remain.  In practical terms, however, one can’t help but wonder where adverts are to be placed: the Official Journal of the European Union no longer feels appropriate for the procurement of projects taking place within a non-EU country.  If we are no longer part of the EU, will the government amend the regulations to allow employers to specify “UK-only” contractors for tender?  If employers sense that the procurement rules are likely to be changed quickly, might some of them be tempted to delay projects in the hope of avoiding the red tape?

• Labour and materials
o Labour – if the free movement of EU workers comes to an end, and indeed while it is in doubt, there are two practical points to note: firstly, changes to visa and immigration law may mean that contractors/sub-contractors need to hire additional office staff for their HR department; and secondly, traditionally, labour shortages have led to wage increases, at least in the short term. 

o Materials – a 2010 study for the Department for Business Skills and Innovation estimated that 64% of materials were imported from the EU and 63% were exported. 

• Legal documents
o Contracts – short-term market uncertainty could see an increased preference amongst employers for Target Cost contracts. 

o Bonds – in the short term, financial uncertainty may mean that there is an increased requirement for On Demand Bonds which will increase project costs.

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice