PERSPECTIVES ISSUE 01 2017

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Dealing with the unknown
The real challenges of Brexit are yet to be fully
understood and, even though the official exit process
has begun, we can still only speculate on likely scenarios,
outcomes and how these will affect UK construction. The
truth is that until the respective trade agreements are in
written form it is impossible to estimate the full impact.
Larger, longer term projects being procured at present
will have to somehow address potential post-Brexit
changes. These projects could see contractors factoring-
in large amounts for risk related items, especially where
they are committed to lump sum costs over a two or
three year period.
It is worth noting that immediately after the vote in
June 2016, the BCIS revised its TPI forecast to show a
steady decrease through to 3Q 2018. However, six months
down the line, it fundamentally revised the same forecast
to an equally steady increase over the same period.
Uncertainty during the next five years could see a shift
in the procurement options that contractors are willing to
commit to. In an attempt to transfer or off-set risk back
to the client, contractors may well push for two-stage
procurement and/or actual cost contracts that see sub-
contractors procured much later in the programme. This
will enable the contractor to better manage and control
their risk profile.
Areas of concern
Based on what we know today, the main areas of concern
within the industry for the coming years are a reduction
in skilled labour, increased wages and potential increases
in import costs.
The potential loss of a motivated workforce is perhaps
the toughest challenge to overcome. UK government
figures estimate that 12% of the industry’s 2.1m workers are
from abroad. If freedom of movement is restricted then we
could see the existing skills shortage get much worse.
According to the CIOB, the UK needs to find 224,000
new recruits by 2019 to cover the current skills shortage.
This situation will become even worse if the influx of
workers from Europe is disrupted.
In turn, the increasing skill shortage is pushing wages
further out. Within booming markets, particularly
London, salaries are increasing across all sectors and thus
driving output costs up. Again, this is another problem
that could become more pronounced if large sections of
the workforce are compelled to leave post-Brexit.
Another effect following the Brexit vote was an
immediate 10% fall in Sterling against the Euro to a
low not seen since 1985. This affected the contractor’s
ability to procure materials from Europe on fixed price
contracts, which significantly impacted on outturn profit
on projects already secured. Since then, all new projects
have seen an increase in materials costs and thus in
tender prices. Although competition helps keep the
increases in check, there is no way of predicting what
the future will bring.
On top of everything, the industry also needs to
consider the loss of EU funding for public sector
projects. In recent years the UK has been one of the main
beneficiaries of EU funding and so, by leaving the union,
we are disqualifying ourselves from future investment.
Thinking differently
With the increase in material and labour costs, one area
of the industry that may see an increase in investment
and usage could be off-site/modular construction. It
might be that developers chose to have elements and
perhaps whole building units mass produced in factories
at a reduced cost and in a more controllable environment
than is possible in-situ.
Another effect is the inevitable squeezing of
contractors’ margins. This will see contractors who have
committed to lump sum contracts trying harder than
ever to generate post contract variations to drive up their
revenue and profit. This is not new to the industry, but
it will be something that cost consultants need to be on
their toes to combat.
A matter of opinion
Everything said so far is, of course, speculation based on
observations since the vote. The truth is that we will have
to wait until way beyond the triggering of Article 50 to
see how negotiating positions unfold.
Parliament being responsible for the final approval of
deals with the EU provides reassurance to investors and
the markets that any such deals will be in the best interests
of the UK and the long term prospects of UK GDP. There
is no benefit for either the UK or the EU in prolonging
negotiations beyond the prescribed timeline and so we
can hope that deals will be mutually acceptable.
Despite the potential issues that Brexit brings,
it doesn’t change the fact that our ever growing
population will continue driving demand for new
housing, employment opportunities and the associated
infrastructure. While the future may be uncertain, there
are many positives to explore as the next period of UK
growth awaits us.
12% of the
industry’s
2.1 million
workers
are from
abroad
According to
the CIOB, the
UK needs to
find 224,000
new recruits
by 2019 to
cover the
current skills
shortage
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