08 Sep 2017
While it is not yet known what the impact of leaving the European Union will be, because it is still not clear what form the Brexit agreement will take, it is becoming clearer what will be affected.
We can see what outcomes will affect the drivers for construction tender prices, ie demand, the cost of labour, materials and plant, and the availability of contractors. These will be affected differently depending on the final agreement.
The terms ‘hard’ and ‘soft’ Brexit have been used as short hand for: the complete withdrawal from the single market and customs union with no agreements to replace them; and an agreement that has similar terms to the existing agreement, with some light restrictions on the movement of labour.
Demand for construction work will be affected by:
- The general economic situation – there is a broad relationship between Gross Domestic Product (GDP) and construction output (see graph). A hard Brexit and a soft Brexit are likely to affect both consumer and commercial confidence, which will in turn have an effect on GDP.
- Private sector demand for construction – inward investment from the EU is likely to suffer in a hard Brexit but further falls in the value of Sterling may see the losses replaced by Non-EU investment.
- Public sector demand for construction – if GDP rises, the government may be able to afford more investment, while a stalling economy may well trigger construction investment to revive it.
The supply, and therefore the cost of labour, will be directly affected by the agreement. The UK construction industry’s reliance on EU labour means that the harder it is for workers to come and work here, the greater pressure there will be on site rates. The key issues to be resolved in the negotiations are:
- security for existing resident EU workers
- security for existing travelling EU workers
- UK government administrative barriers to individuals
- UK government administrative barriers to EU firms using their own work force.
There are two other factors that will affect the flow of labour:
- effect of exchange rate on the attractiveness of working in the UK for those who send money to their home countries
- the availability of work elsewhere in the EU.
Materials prices will be affected by:
- Tariffs on imports. This may be mitigated by the availability of domestic substitutes or substitutes from non-EU countries with lower tariffs.
- Exchange rates. The falling value of Sterling makes imports more expensive. A hard Brexit is likely to have a negative impact on the value of Sterling against all currencies not just the Euro.
- Where companies report their finances in Euro, the value of Sterling sales are affected even if the goods are manufactured in the UK.
It is not clear if the Brexit deal will affect the availability of contractors in the UK, but the issues that might do so are:
- What barriers there are for EU based companies to work in the UK.
- Most main contractors are likely to have an acceptable UK legal entity, this is less likely for specialist sub-contractors.
- What barriers will there be to firms, particularly specialist sub-contractors, to use their own, non-UK, workforce.
Although there is a deadline of March 2019 for completion of an exit agreement, the current pace of negotiations would suggest that there will be a transition agreement, which will delay any direct impact but may well affect business confidence, the flow of EU labour, and the value of Sterling.
These issues are discussed in the BCIS forecast briefings, published quarterly in:
- BCIS Online – Building construction
- Infrastructure Information Service – Civil engineering
- Building Running Costs Online – Facilities management (Maintenance and Cleaning).
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