Brexit and the procurement puzzle

Regardless of your Brexit stance, it is likely that construction will be disrupted when the UK leaves the EU. Whereas the UK’s highly capitalised car manufacturing sector has spent over £330 million in preparation, construction firms have done far less and many of the risks will be passed down through the supply chain.

One major contractor has estimated that, if all their contracts were delayed by Brexit disruption, the cost associated with reduced turnover and delay damages could be equivalent to 5-10% of turnover. Brexit planning has to focus on short-term mitigation, but also not overlook the wider transformational opportunity in a post-Brexit UK.  Whether it’s innovation to increase productivity, or new opportunities for domestic product manufacturers, there is the chance to create some positive change from a momentous and long-lasting process. 

Unpicking the Brexit Challenge

After three and a half years of steady commentary on the pros and cons of an EU exit, it is reasonable to expect that the full implications will be understood and prepared for, if not actually acted on.  

Construction businesses are exposed to three main risks:
 
• Labour - The easiest to describe but the hardest to forecast – not only because it is difficult to tell if the current labour force will stay, and also because proposals for a new migrant labour scheme are under review.  EU workers in construction account for 10-12% of the UK’s 2.4 million-strong labour force.  

• Materials - Particularly focused on just-in-time logistics and disruption to ports.   The greatest impacts could be felt in sectors like Mechanical & Engineering, where products like wiring, light fittings and air-conditioning units criss-cross the channel as part of a complex, integrated supply chain.   

• Currency – Impact on the cost of materials is well known and is likely to be the most immediate consequence of a poorly managed Brexit.  Sterling could fall by a further 10% as a result of a disruptive exit.


Other issues and risks that clients and suppliers need to take into account in the immediate proximity to Brexit will include:

• Management of client and personnel data across borders in accordance with GDPR

• Continuity of workload from both public and private sector clients

• Ability of contractors and sub-contractors to fully allow for increased programme and cost risk 

• Impact of Brexit-related cost and time penalties on the ability of the supply chain to trade

• Risk to availability of finance from overseas investors and banks

How ready is the supply chain?  

There is a concern that many of the 200,000+ construction businesses in the UK have put Brexit preparations in the too difficult box.  Unfortunately, while many of the problems are complex and time-consuming, the obligations set out in most unamended contracts are equally immovable.

Individual specialist contractors are taking steps to de-risk their business by reducing the amount of labour needed on site, or by purchasing materials in advance.  However, these initiatives are being undertaken on a contractor-by-contractor basis, and with projects only being as secure as their weakest link, there needs to be more assurance.  

This highlights why it is increasingly necessary for clients to take the initiative in assessing supply chain readiness and the thoroughness of mitigation planning.  Our 5-point framework below provides a useful guide. 

Planning for no-deal mitigations: What are the opportunities?

With a no-deal Brexit potentially only weeks away, there is still time to implement a short-term mitigation plan for projects on site and to build-in contingencies in design and procurement. The business challenges that a no-deal is likely to trigger are best faced collectively, supported by a transparent overview of risk ownership and exposure.  

Planning for projects currently on site could cover the following:

• Better understanding of project status – Greater focus to provide assurance that completion dates can be met.  This is particularly important on projects that are already subject to some delay or change in scope.

• Contingency planning – Putting in place plans for the effective management of disruption, such as having a plan for the lack of availability of resources or disruption to traffic.

• Detailed programming – Eliminating programme constraints that prevent early purchase of materials – for example early completion of design work ahead of contracted information release dates.

• Payment for offsite materials - Clients and their advisors can proactively use valuation procedures backed by advance payment bonds to support early sourcing.

• Instructing as changes any acts of forbearance agreed by the client and supply chain, 

In the longer-term, a wider range of options are available to project teams to de-risk projects for Brexit.  These are best considered as part of a wider risk management strategy.  Examples of these include:

• Design and specification changes to mitigate disruption – E.g. sourcing products and systems from within the United Kingdom to avoid border disruption. 

• Programme allowances – Incorporating client-controlled programme float to allow for potential logistical delays.

• Change of law clauses – For longer-term contracts only, incorporating the ability to renegotiate an agreement in response to changes with an unforeseeable impact.

• Re-alignment of planned workload to supply chain capacity – Rescheduling and reallocation of a programme of work to take into account reduced supply chain capacity.

• Reconfiguring supply chains – To reduce dependence on imported goods or to focus on businesses with a more robust balance sheet.

• Reduction in use of labour - Adopting solutions that require lower skill levels or which reduce overall operative numbers 

The Arcadis 5-point plan: Essential steps to increase transparency and readiness.

Our experience is that while many clients and project teams are only too aware of the potential implications of Brexit, they are prepared to rely on conventional contract measures to deal with any fallout should it occur.

We have been using a five-step tool to support project teams in developing their proposals.  The key features of the plan include: 

Headline Activity	Context	Key Readiness Actions
Step 1. Engage with the supply chain.	By understanding supply chain exposure to risks associated with the availability of labour or customs barriers, a project team can build a full picture of the potential for Brexit fall-out.	- Assess the share of labour force sourced from the EU. - Identify sources of materials and components.
Step 2. Review the procurement strategy.	This concerns risk allocation and in particular checking whether the risk transfer is cost effective and watertight.	- Check timing of procurement events – e.g. exposure to currency fluctuations. - Examine improved commercial outcomes from a change to proposed risk transfer.
Step 3. Check the contract.	In anticipation that disputes might arise, it’s a good idea for all parties, at all levels of the supply chain, to ensure contracts are in place, that they are being administered correctly and that contract provisions – particularly amended clauses - are properly understood.	- Ensure that all instructions are issued and that assessments of relevant events are in place so that any Brexit impacts can be isolated. - Agree in advance contract provisions that can be flexed in response to potential disruption – e.g. payment for materials offsite.
Step 4. Review finances.	Given heightened levels of uncertainty, the financial health of project team members could suffer if projects or project payments are delayed.	- Monitor speed of payment to the supply chain. - Maintain open channels of communication in case of difficulty.
Step 5. Prepare contingencies	Putting in place practical plans for known unknowns such as constraints on labour and materials availability.	- Include internal planning for negotiations – e.g. in connection with contract forbearance. - Increasing the momentum of planning will also help to increase the focus of project teams in advance of Brexit day.

Plan for the worst to deliver the best

Construction’s approach to Brexit so far has been to wait and see, relying on the operation of tried and tested contracts and project management processes. While these tools will probably protect clients and main contractors from the immediate impacts, ultimately the levels of uncertainty associated with the quality, programme and cost of projects will rise, potentially to a point where clients and their funders feel their interests cannot be protected.

However, one potential upside of Brexit-driven change could be the economic stimulus package that government has promised as part of its wider post-European strategy. This is almost certain to involve incentivising capital investment - potentially driving additional demand into construction. This could be a nice problem to have, even if materials and labour supplies are scarce.

In an ideal world, a Brexit resolution will be found. However, even during a transition period, changes to established ways of working are likely to crop-up. By planning for the worst, clients and the construction supply chain will be in a better position to deliver the best possible outcomes in an increasingly unpredictable world.

An extended version of this viewpoint was first published as a feature in Building magazine on 20 September 2019.