BREXIT – What does it mean for the fit-out market?
Dean Manning, leads Structure Tone’s International business overseeing the London and Dublin offices. He brings more than 30 years of experience in construction and structural refurbishment. Dean joined Structure Tone in 2006 and has spearheaded the company’s significant growth.
It is still early days since the decision by the population of the United Kingdom (or 51.8% of us anyway) on 23 June 2016 to leave the European Union and all of the benefits and hindrances that are attached to it. There is much speculation about whether the BREXIT decision will result in the downfall of the United Kingdom or, perhaps, in such a successful transition that other countries will follow our lead. Whilst the answer to this question will inevitably be answered over the months and years to come, there are a few immediate effects of the BREXIT decision which are tangible now and will certainly affect the construction industry.
Reduction in the strength of the pound
The fall in strength of the pound has been widely reported and means that, right now, the exchange rates are extremely favourable for foreign companies that are still keen to invest in the United Kingdom. Although costs are likely to increase for products and materials that are sourced from outside of the United Kingdom, this is more than offset by the strength of the US Dollar and the Euro against the pound.
This cost benefit certainly seems to be attractive to companies looking to remain and/or build upon their presence in the United Kingdom as the volume of work in the marketplace has not dropped.
From a contracts perspective, the key concern of our clients remains procuring a lump-sum, fixed-price fit out of their workspaces and data centres. Although there are uncertainties in the currency market, it is unlikely that our overseas clients will be willing to accept the risk for any fluctuations in material and goods prices. This could mean slightly increased prices from subcontractors; but, again, the additional cost associated with this risk is expected to be offset by the strength of the US Dollar and the Euro against the pound.
However, for domestic clients, it may well be that the traditional position of refusing to accept some form of fluctuation provision will need to be revisited.
Free movement of people
Another key concern is whether the construction industry will be affected by the inability or restriction of the ability to recruit from countries within the European Union for construction jobs. Such a restriction could result in a lack of skilled workers to carry out and complete the construction jobs still being (and yet to be) carried out in the United Kingdom.
The good news is that any such restriction is unlikely to be in place until the exit from the European Union has been completed, which is at least two years after Article 50 of the Lisbon Treaty is invoked by the UK Government. The current expectation is that the invoking of Article 50 is unlikely to take place until Q4 of 2016 (at the earliest), meaning any restrictions will not take effect until Q4 of 2018.
However, if and when any restrictions are imposed, it’s entirely possible that fewer skilled workers will be available in the marketplace. The demand for them will, therefore, be higher, and this will likely result in increased costs.
One of the greatest uncertainties following the BREXIT decision (for all market spaces) is the relationship that will exist between the United Kingdom and the rest of the World when it comes to trade agreements.
Once the invocation of Article 50 has taken place, the United Kingdom will have a minimum of two years to negotiate trade agreements with the European Union and the 56 other countries with whom the European Union has a trade agreement with. This is no small task. Whilst the two-year deadline can be extended by agreement of the European Union, the current position appears to be that this is unlikely to happen.
It is not an exaggeration to say that the future viability of the United Kingdom as a global business centre hinges on the ability of the team tasked with negotiating these trade agreements to agree on beneficial terms of trade with these countries. Fortunately, the appetite of these countries to maintain their relationship with the United Kingdom is strong and there is an early indication from the European Union that it will even seek to offer the United Kingdom an ‘associate member’ status, which would allow the United Kingdom to retain many of the benefits of the European Union without the bureaucracy and supra nationalism associated with being a full member of it.
We anticipate that a clearer picture of the United Kingdom’s position in the global marketplace will develop during the course of 2017 but, again, any effect of these new agreements will not be felt until the two-year exit period has expired and the United Kingdom is no longer recognised as a member of the European Union.
Whilst there are clearly implications for businesses as a whole as a result of the BREXIT decision, such implications are unlikely to have a material effect on the forms or content of the commercial contracts that we enter into with our clients. The standard forms of contract used in the marketplace will continue to be used, and the allocation of risk between the parties will remain a commercial negotiating point.
Again, it is possible that parties may now be forced to consider the incorporation of fluctuation terms for movements in the prices for materials and goods in contracts. However, this is likely only to apply in larger contracts or for those with a long duration.
As the dust settles, the way forward for the immediate future remains unclear. But with change comes opportunity, and the shift in this global paradigm will undoubtedly continue to reveal more of them.