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As the deadline for leaving the European Union looms, construction companies are considering how best to protect their business and mitigate the possible risks.

Making accurate predictions for the forthcoming months is proving difficult. Whilst the UK finalises a deal to leave the EU more than two years after the Brexit referendum, questions remain unanswered about how this step into the unknown will affect the construction industry.

There are  differing opinions about whether Brexit will provide the industry with greater opportunities or difficulties – but it is largely agreed that continued uncertainty has posed the biggest challenge so far.

With that in mind, statistics around the condition of the UK’s construction industry is relatively encouraging.

The August 2018 Office for National Statistics’ report shows the output in the UK construction sector continues to recover following a relatively weak start to the year, increasing by 2.9 per cent in June, July and August [i].

Additionally, according to a report in The Telegraph, demand for housing and commercial space remains strong, boosted by a government commitment to deliver 300,000 homes a year by the mid-2020s – and by a new brownfield register which highlights more than 26,000 hectares of developable land.

Encouragingly, the Government’s Analysis of the National Infrastructure and Construction Pipeline report estimates that there will be around £600bn of public and private investment in infrastructure over the next decade [ii].

However, these statistics do not mean that the industry will escape the challenges that are anticipated by the UK’s withdrawal.

Having the right insurance to protect and mitigate against all potential risks is becoming increasingly important.

 

The biggest risks and concerns around Brexit in the construction industry

 

The effect of new migration controls on low skilled works

Although there are currently no deals in place, the UK has communicated intent to restrict the number of low-skilled workers allowed into the country to work post-Brexit.

There are said to be over 224,000 EU migrants working in Britain’s construction industry [iii] making up 10 per cent of the workforce. That percentage rises to 40 per cent in London.

Mark Herbert of Construction Insure said recently: “Depending on the outcome, Brexit could have a huge impact on foreign workers working for UK-based construction firms. The main worry for UK construction firms is that instead of using foreign workers they will start having to increase their costs by training up UK workers. They are also likely to have an increased wage burden as they are forced to use higher skilled UK contractors to plug the gap.” [iv]

 

How to address a growing skills gap

The number of EU migrants in the industry highlights a bigger issue around the lack of skilled workers in the UK’s workforce.

Richard Forrest Smith, CEO at ECIC, said: “As our skilled contractor workforce has aged with 500,000 expected to retire in the next 10 years, the younger generation joining the sector are struggling to fill the gap.”. [v]

“This has created a real dearth in skills which has been filled to an extent by migrant workers - the Construction Industry Training Board’s research shows one in three construction firms employ migrant workers, and Office for National Statistics data shows these workers are on average much younger than UK nationals working in the sector. Just 18% are aged 45 or above, compared with almost half of UK nationals (47%). This valuable human resource is at risk of dissipating following Brexit.”

The government has responded by announcing a £22m investment in skills training centres for the industry, with the aim of creating 158,000 new jobs in construction over the next five years. [vi] However, fears remain about the possible affect that this shortage of workers could have on short term costs, especially when using sub-contractors.

Using more sub-contractors can also result in greater risks for businesses. Companies will need to ensure their policies cover all those employed – and that all sub-contractors fully understand the company’s risk assessment strategy.

 

Greater complications and increased costs when dealing with EU clients

There is uncertainty over the value of the pound and the cost of imports and exports after Brexit– especially if supply chains are impacted by costs and delays.

It is possible that materials will cost more  if they are subject to new tariffs. This could lead to reduced supply and spiralling prices.

 

A related threat to construction safety

If contractors opt to use cheaper, lower-standard materials this may also have implications for worker safety and the overall quality of builds. Using sub-standard wiring, for instance, could prove a great fire risk and  cheap materials used in roofing could increase the risk of water damage.

The potential for a downturn in business once Britain leaves the EU

No-one is certain about the effect of Brexit on the UK economy. The possibility  that it may reduce business opportunities in the short-term should be considered, although many businesses also see potential in new markets outside the EU opening up

 

Investment decisions being delayed

 Boards may opt to put investment on hold until the genuine effect of Brexit becomes clear, and this could not only reduce business opportunities but also lead to manufacturers missing deadlines – making them vulnerable to contractual penalties. Delays in the supply chain would further exacerbate this.

 

A need to exit the UK

In some cases, businesses should be prepared for job losses or changes to headquarters. In the financial sector, for instance, recent reports have suggested that some corporations are moving out of the UK to bases in Frankfurt and Paris. This could drive up costs for talent mobility. [vii]

 Phil Smith, Global Director, Financial & Compensation Services, Crown World Mobility, said:

“As the UK continues to pursue Brexit, other established financial centres such as Paris have seen a large influx of roles created (or planned) out of the uncertainty around it.

 “This has had the knock-on effect of diluting the London talent pool and from a talent recruitment perspective a more far-reaching search area or approach may be needed to fill vacancies."

 

Changes to health and safety regulations

Changes to the Construction (Design and Management) Regulations (CDM Regulations), originating from a 1992 EU Directive setting out minimum health and safety standards in construction, could have an impact on businesses and insurance policies.

 The HSE consultation on the new CDM Regulations has been delayed, but it is clear that changes are on their way,” said James Burgoyne, Director Brunel Professional Risks.  “It will be important to review the consultation and any proposed changes to the regulations as they emerge to consider whether protection contained in Professional Indemnity Insurance policies remains in step with the legislation.” [viii]

Raising concerns around cost-cutting and sub-contracting, The Health and Safety Executive stated that there was a 27 per cent increase in construction fatalities in the past year. [ix] Strong and effective insurance cover is therefore vital to ensure health and safety standards do not deteriorate further.

 

How to reduce risk

Having the right insurance policies in place is vital to reduce and mitigate risk, regardless of the outcome post March 29, 2019.

 Companies within the construction sector can safeguard themselves by ensuring that they are protected by making sure they have the right cover in place; insurance for property and employer’s liability. Adequate Professional Indemnity Insurance is particularly important.

 It is likely that the insurance industry will also be affected by Brexit.  Current policies mostly require construction projects and professionals to be insured with insurers operating in the EU.  Post Brexit construction firms will have to ensure that their insurer is functioning within the UK.

 

 

[i] https://www.ons.gov.uk/businessindustryandtrade/constructionindustry/bulletins/constructionoutputingreatbritain/august2018

[ii] https://www.gov.uk/government/publications/national-infrastructure-and-construction-pipeline-2017

[iii] https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/internationalmigration/articles/migrantlabourforcewithintheconstructionindustry/august2018

[iv] https://www.insurancebusinessmag.com/uk/news/construction-engineering/construction-sector-to-feel-brexits-brunt--and-insurance-implications-could-be-huge-109304.aspx#

[v] https://www.insurancebusinessmag.com/uk/opinion/the-impact-of-brexit--a-testing-combination-of-factors-for-contractors-insurance-107483.aspx

[vi] https://www.citb.co.uk/news-events/uk/2018/22m-fund-launched-to-boost-construction-skills/

[vii] https://thefintechtimes.com/increased-costs-amid-paris-claims/##

[viii] https://www.brunelpi.co.uk/news/construction-property-pi/changes-in-cdm-regulations-to-impact-pi-cover

[ix] http://www.hse.gov.uk/statistics/pdf/fatalinjuries.pdf

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