Countdown to Brexit: How it will impact commercial fit-out
With the distractions of 2020, Brexit has slipped off the radar for many. Ready or not, Brexit becomes reality in 5 weeks with the 11-month transition period ending 31st December. The impact on the Design and Build industry in the UK will be significant. However, with the UK and world economy, how people work, how people live, policies, regulations and trade deals not certain, we can’t yet be sure of the net effect.
Since the invocation of Article 50, we have been putting in measures to mitigate Brexit risk and adjusting them throughout 2020. We expect knock-on effects in construction including architecture and fit-out with risk mitigation initiatives required to control for four areas of concern:
Project time to completion. The time to start and complete projects may increase due to a reduction in supply of skilled workforce, increased logistic complexity and potential customs lead times.
Cost. Costs may increase due the inability to rely on foreign workers, potential new customs charges on goods from the EU, and increased demand for goods in the UK.
Quality. When cost or time is not flexible and skilled talent unavailable, businesses may use unskilled talent they train on the job, potentially compromising on quality.
Delivery. Finally, with only part of the future spelled out, and the impact of the Covid-19 pandemic not yet fully known, delivery risk becomes more unpredictable than ever.
Here’s some more detail.
REDUCTION OF SKILLED EU WORKERS WILL REDUCE THE SUPPLY OF FIT-FOR-PROJECT LABOUR AND COULD IMPACT LEAD TIMES AND COSTS.
Sub-contracted labour is typically between 20% and 40% of a construction project’s costs. Companies that supply contracted workers have historically relied on skilled labour from EU countries, excluding the UK. Traditionally, working in this way was cheaper and faster.
As free movement of persons and the ability to work will no longer be allowed between the UK and the continent, the supply of available sub-contractors will be reduced. As a result, with demand being greater than supply, companies may find they need to pay higher contractor fees. The lack of available resource could potentially also cause longer lead times to start work and therefore time to market of any project requiring such workers.
The implementation of the new immigration system is set to be phased, so until it is fully established, we will not be able to fully understand the impact. As it stands, if contractors have already been living in the UK and qualify for settled status, Brexit regulations shouldn’t apply to them. However, they will affect anyone who is in an EU country after January 1st and would otherwise want to come to the UK for employment.
This week, the Office of National Statistics found that London’s EU-born construction workforce has dropped from 115,000 to 53,000 in the last two years – a fall of 54% - and IPPR’s Associate Director for Immigration, Trade and EU Relations stated that it is social care and construction that are set to face increasing skills shortages.
Additionally, RIBA has expressed concerns for the architecture sector where one in four architects working in the UK in 2019 were international, 80% were EU citizens. Nearly half of the 600 architects who are non-UK nationals said Brexit had made them consider leaving their jobs in the UK.
It is possible that there could be an off-set with the predicted reduction in total construction work as a result of post-pandemic economic factors. But how much that would be off-set is currently unknown.
Earlier this month the government drew up a checklist for the construction industry which detailed the new points-based immigration system and the need for companies who hire workers from abroad to be a visa sponsor. Those wishing to work in the UK will need to apply with a total of 70 points, accumulated by characteristics such as skill level, skill shortage, salary, sponsorship and spoken English ability.
Companies who are not already a licensed sponsor who plan to sponsor migrants in the new year should be applying now.
On the flip-side, Britons in this sector may also require a work visa to travel to the EU for work purposes, and depending on the nature of the work may have some additional bureaucratic hoops to jump through.
IMPORT & EXPORT OF MATERIALS WILL BECOME LOGISTICALLY TAXING, INCREASING COSTS AND INHERENT RISK
Companies importing goods should expect cost and time to be impacted. Due to the likely increase in customs duties, UK contractors could see an uplift in costs to bring any products and materials into the UK.
As EU and UK design and build regulations may also now differ, there may be further additional cost to source products of the same standard.
Similar to other increased costs, at least for now, the increase in building materials could be off-set by the current drop in market costs in light of the economic crisis.
The main disruption to material importations will be in the form of lead times and at least two additional weeks to add to transit times from the EU in normal post-Brexit circumstances. With many projects on hold due to Covid 19, lockdowns and social distancing requirements, the industry is already facing an unprecedented back-log, potentially exacerbating these delays.
It’s a similar story for imported furniture. Whilst the cost of a chair, for example, should not change in local currency, the way in which it is sourced affects time and resource. Commercial furniture suppliers should have the option of DDP purchases (where the supplier takes care of import, freight, labelling, customs, duties, taxes etc.) or DAP, where they are responsible.
At Thirdway the majority of our contracts are on DDP terms however these are subject to change as different suppliers are likely to offer different terms come January meaning we might have to take on the administration ourselves or hand over to a freight forwarder to manage.
While delayed furniture could have an effect on clients occupying real estate, the consequences of large construction programmes over-running because of freight delays could prove more costly, with contractors paying late delivery penalties and landlords facing unplanned, increased void periods.
Companies exporting materials are likely to face more challenges as they are at a competitive disadvantage from firms who operate within the EU or have better trade deals. With a decrease in demand and increase in time to go to market because of new required documentation, they can expect reduced margins.
THE IMPACT ON COMMERCIAL FIT-OUT
While demand for office space in London is expected to decrease in the coming years, there is also a significant back-log of work that is committed to start in 2021 once the restrictions around the workplace begin to ease.
Landlords are planning to rejuvenate grey space in early 2021, with tenants readying to move into new or redesigned spaces come spring and summer.
At Thirdway, one of the things we have been doing is identifying alternative suppliers and stock in the UK using a risk-based approach. All firms in the construction industry should be working on this as soon as possible if they haven’t started already. We have a large pool of UK suppliers which we can transition to over time, as they will likely become more cost effective and will offer faster delivery. While they still import components from abroad we don’t expect delay to be as severe due to as our suppliers are in a better position (with a more limited offering) to stock take and forecast.
When it comes to building contracts, these will likely include Brexit clauses to maintain an element of flexibility around the risk of unavoidable freight delays or could include labour and materials risk in initial cost-plans. Careful review of programme duration on new contracts will be critical, as will following the advice of the Construction Leadership Council who launched a Brexit Working Group earlier this year to help ready the industry.
Given the unusually long, secured pipeline, we are engaging suppliers and contractors with enough advance notice to counter transit delays. With this backlog of work now coming due, demand is higher, and planning is more important than ever.
Certainly, where we can find opportunity to off-set costs and get ahead of the game to counter any challenges, we are, and where there remains uncertainty we are working with our clients to forecast and manage any risk.
We have always maintained a relationship of transparency with our clients and that will matter even more in the future as 2021 brings new ways of working.
So, what can we all do now to be ready for 1st January 2021?
- Plan for multiple scenarios, including pipeline and delivery, to ensure you can respond quickly to market needs.
- Identify operational risk including suppliers and stock as well as alternative sources should you need to transition to new.
- Have communication plans in place to ensure transparency of issues and ensure clients and suppliers trust is not compromised.
- Ensure all contracts have been updated to be mindful of the inherent risks related to Brexit.
- Ensure you are aware of where your key talent is and set plans in place to ensure the ability to continue to work with them. This includes contractors and furloughed staff. If you plan to employ EU workers who are not eligible for settled status from January 1st, apply for your visa sponsorship now.