How should the Northern Ireland construction industry prepare itself in the event of a ‘hard’ Brexit?

20 Feb 2019

The political climate is of course far from clear and the government has been steadfast in its unwillingness to remove ‘no deal’ from the negotiating table. This isn’t a discussion on the political situation - but the prospect of a no deal has been a potential for some time with some advocating that it is actually the only option. That being said, for those of us who have been involved in offering advice around Brexit, we see businesses of all sizes who are still struggling to get to grips with the issues.

Preparations are by no means limited to SMEs and if you have yet to get to grips with your own planning, then this article will hopefully help you identify some of the main areas to consider

Overview

The construction industry of Northern Ireland, as with the rest of the UK, is one which has benefited greatly from the rights of being a member of the EU. Construction is of course an enabling industry supporting the economy both in the public and private sectors in the delivery of new homes, infrastructure and services. In Northern Ireland alone, 65,000 people are employed in the sector which produces an output in excess of £2bn.

The ability for the free movement of people and goods underpins the strength of the construction sector in Northern Ireland, as well as across the UK.

Tens of thousands of people move freely over the 500km of Irish Border every day. Since the moment the ROI was founded, citizens have been free to travel across both jurisdictions, whether this was part of the Common Travel Area or the free trade agreement as first set up in the 1960’s. Following on from that, both sides of the border benefitted from the Good Friday Agreement, unlocking over 1bn Euro of so called ‘peace funding’ investment from Europe enabling the North and South to work together. The local market has therefore been developed and existing jointly on both sides of the border.

The Northern Ireland construction industry however, again as with the rest of the UK, retains some fragility. Some specific areas might point to increasing local demand or interest from investors, but ultimately the sector will always be susceptible to uncertainty and economic shock.

Current issues already facing the sector

The sector is of course already facing significant challenges, even without the issue of Brexit. Construction and property are typically amongst the first sectors that suffer in an economic downturn, and are also the often slowest sectors to bounce back after a recession. The recovery from the financial crisis of 2008 has been particularly slow.

Additionally, recruitment in the sector continues to be an issue, and construction suffers from a lack of ‘new blood’ coming into the industry – fewer and fewer young people are entering into construction, and there is a general perception that good apprentices are becoming harder to recruit. The skills gap is however not something that only affects Northern Ireland – it is across the board. The average age of the existing workforce of the sector is ageing – take for example that the average age of a bricklayer is now over 50. It goes without saying then, that the ability to recruit or ‘buy in’ the relevant experience from countries in the EU has to date been invaluable in ensuring developments are progressed and delivered in a timely manner and in limiting the negative effect of any skills deficit.

Following the referendum in June 2016, sterling has lost around 18% of its value and has remained roughly 1.14 against the Euro for around the past 18 months or so. Margins for anybody having to acquire supplies from the Eurozone have been squeezed in that time. Challenging the cost risk in currency fluctuation is difficult as historically the contractor assumes the risk, and neither side will of course want to assume risk for something that is entirely outside of each parties control and entirely unpredictable. Economists are unable to predict what might happen – some suggest that a hard Brexit will result in a further fall in the value of sterling, others say that the removal of uncertainly (irrespective of whether a ‘good’ deal or a ‘bad’ deal) will result in an increase. However, at least for the time being, any client is likely to resist any attempt to pass this risk.

Future issues in the event of hard border

The title for this discussion relates to what would happen in the event of a hard Brexit – there are many permutations of course as to what might or might not happen. Here, let’s imagine one scenario – a hard Brexit, and a hard border.

In practice, this means that the UK has opted out of the single market and the customs union. The practical effect is that the border between the North and South will become an external border of the EU, and EU regulations and tariffs will start to apply. Those regulations will limit and restrict the movement of citizens. Prior to the EU Membership there was of course the Common Travel Area, the reinstatement of which is amongst some of the suggestions being made to prevent any border checks but any arrangement would of course need to be approved by both the UK and the 27 Member States. In the event of a hard Brexit though with no other agreements in place, border checks will be needed and workers crossing the border might be required to provide evidence of their nationality and their right to work. This will, as it stands, undoubtedly create confusion and delay.

An external border will then also mean that customs checks will need to be undertaken on goods passing. One potential option here is that the UK could utilise its role in the World Trade Organisation (WTO) to govern its trade with the EU. By doing so, the UK would be in the position where it would have to ensure compliance with the WTO’s trading regulations. But if WTO tariffs and quotas were to apply, basic construction materials could then be subject to a levy of between 4-8% at the border.

How to prepare and protect yourselves

There are practical points that you can consider in relation to your businesses in identifying and managing any risks presented by a hard Brexit.

Contracts

The biggest issue will of course be in relation to any contracts which have been entered into or awarded when the prospect or likelihood of a no-deal situation was a lower possibility. If you haven’t already, any such contracts need to be identified and reviewed in order to consider what the potential exposure might be for additional costs or penalties for any unexpected delays.

Supply chains should also be assessed in order to measure the extent to which they are reliant on the EU after the end of March – products may well be coming from China or elsewhere, but what route do they take to reach you? It might be that they landed in a member state before reaching you. Also give consideration as to whether any of your suppliers are themselves in a potentially vulnerable position – are they reliant on products coming from member states?

Once you have fully understood the risks of your existing contracts, only then can you start to consider whether and how to address them – options would potentially include shifting suppliers from EU or overseas companies to a UK based supplier, or whether the client would be willing to bring forward the expenditure of any key materials or items prior to Brexit. Consider whether there is any scope to renegotiate contractual provisions around delay or the ability to substitute to materials which are more readily available.

If cash flow allows, you can of course also consider stock piling any key items or materials at this stage in order to shield yourselves in the event of any material issues being encountered. However, if you are doing this then you must give thought to your insurance position as all policies carry a limit above which you will not have adequate cover. If you are proposing to stockpile goods or equipment, keep an eye on the total value and ensure your insurance is varied accordingly.

If none of the above is available to you however, in the event that any existing contracts are representing such a significant risk to your businesses, you should give consideration to any termination provisions to see if there is a way of walking away in the event a project is no longer viable or is undeliverable.

A word of warning though: most standard contracts will contain a clause known as ‘force majeure’ which typically includes a list of circumstances or events, which if they prevent one party from performing its obligations under a contract, the other party is precluded from claiming a breach of contract – an ‘Act of God’ is the one which is most recognisable. However, as a principle of law, in order to rely on a force majeure clause, you need to be able to demonstrate that the contract can no longer be performed owing to a specified event that has happened. However, there is a fundamental issue with relying on a force majeure clause as it stands  since a hard Brexit will make performance of a contract difficult. More time will be needed, meaning that there are greater costs and potentially damages. It is important to note that the performance of the contract is not impossible but rather has become less desirable. This will not be sufficient on its own to rely on a force majeure clause.

If you are currently negotiating any contracts, there are a number of specific contractual provisions that you can consider in order to deal with risks relating to Brexit. The key will of course be flexibility – understanding what the principles of any risks are and ensuring that a completely fixed contract is avoided will be crucial around matters such as late delivery of materials, costs increases and any fluctuation in the value of relevant currencies. It is of course impossible to identify all potential eventualities for what may or may not occur, but creating around time scales and costs should stand you in good stead.  For example, you could carve out, where possible, any risks attributable to unfavourable or significant changes in law, or even the ability to recruit and/or retain key personnel, the loss of which would risk the delivery of the contract.

Break/Brexit clauses

You could also give thought to whether you can include a specific break clause (or “Brexit Clause”) that gives an express contractual method by which a contract can be terminated. Clearly, such clauses which require exceptionally careful consideration with clear and specific drafting as to what circumstances a contract could be terminated, and what the implication of termination might be. Examples of this could be if tariffs are imposed upon the materials needed for the project, or if owing to a change in law a contractor was no longer entitled – by law – to deliver services.

Risk management

From a practical perspective, consideration should also be given to your existing risk management and compliance policies – particularly if you have to employ people with less experience. When were your policies and procedures last updated, along with your induction and training? Not only would such a review be prudent in any event, but the burden and ‘time-cost’ to employers will invariably increase where a workforce is becoming less skilled in a short space of time, if your training and induction processes are weak.  

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Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to customers of BLM. Specialist legal advice should always be sought in any particular case.

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Mark Alexander

Mark Alexander

Partner,
Manchester


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