Brexit has fully come into effect with the new 2021 year. We all knew it will happen but we may not be aware of how it affects the construction industry. What will this new reality look like? What are the changes?
On 1st January 2021, Brexit has ultimately come into effect. Although the United Kingdom has officially left the European Union on 31st January 2020, the post-Brexit transition period kept most of the arrangements the same for the past year.
Since the beginning of the new year, EU rules will no longer apply in the UK. What changes will it bring for the construction industry? What can we expect from this new reality?
The Committee for European Construction Equipment (CECE) had urged UK and EU to achieve an agreement before the end of the transition period, as they stated that no-deal scenario would be "the worst of all outcomes" for construction. CECE secretary general Riccardo Viaggi said "Complex industrial value-chains need frictionless trade, absence of tariffs and mutual recognition of markings. The expected regulatory divergence will create administrative and financial burdens that are not even imaginable in some cases, considering the depth of integration provided by the EU Single Market."
That's why the construction market on both sides of the English Channel shared a sigh of relief when after 11-hour negotiation European Commission's president Ursula von der Leyen and UK prime minister Boris Johnson have reached the Trade and Co-operation Agreement ("TCA").
The head of policy at the National Federation of Builders has commented that the deal ensures the construction will not see the inflationary shock of tariff and quota introductions or the expected currency depreciation associated with a no-deal. He also said that TCA brings certainty when it is needed the most. However, there are voices that the deal is surrounded with "hesitation and vagueness" and does not address all concerns the construction industry had toward Brexit effects. What are the main changes and concerns the UK's construction industry must face in the post-Brexit reality and how does the Trade and Co-operation Agreement address these issues?
In the discussion about the effects, Brexit will have on the sector, the restriction in freedom of movement and therefore decrease in the EU migrant workforce is the one brought up most often. There are some serious concerns on how it will impact the industry given that UK construction has faced the labour shortage even before the Brexit. Office for National Statistics (ONS) shows that an estimated 7% of the UK's total construction workforce and 28% of London's construction workers are EU nationals.
EU workers already present in the UK before the end of the transition period will likely have a right to remain and work here if applied to the EU Settlement Scheme until 30th June 2021. EU nationals who have not applied for settled or pre-settled status can be at risk of deportation.
Since the beginning of the year, anyone wishing to work in the UK will be subject to a points-based application system designed to attract 'skilled workers' with skill level thresholds of RFQ 3-5 (A-level or equivalent).
An applicant will need evidence of a job offer at the required skill level that meets a new minimum salary threshold. It will impact workforce shortage as most of the labour force does not attract salaries at the mandatory entry.
81% of contractors believe that post-Brexit labour shortage will raise the construction costs and 76% of the respondents said that they don't think initiatives undertaken by the government to facilitate more apprenticeships will provide sufficient skilled tradespeople insufficient time.
The decrease in the number of EU workers may increase labour costs as there are high demand and few new workers. It may also lead to wages inflation, especially in the areas and sectors where EU workers make up for a large workforce.
TCA has not addressed this issue, as free movement of workers is a basis of EU single-market, that UK has decided to leave. Controlling the UK's borders and tighter controls over the domestic labour market were two prime reasons for Brexit. Businesses need to ensure any new EU workers they wish to hire have the necessary visas and permits before starting work.
Construction Leadership Council estimates that UK construction businesses imports around 22% of all materials, products and components. Around 60% of these are sourced from the EU. There were serious concerns over the risk of disruption with trade flows, such as the imposition of tariffs, which could lead to unforeseen costs and disagreements as to who should bear those.
Thankfully, the TCA has ensured no tariffs or quotas on goods moving between the EU and UK, under the condition that rules of origin are satisfied concerning the goods. Despite that, there still are some practical issues that can impact construction.
From 1st January all goods entering the UK will have to go through many checks including customs declarations, rules of origin checks, product safety certificates and inspections. Due to COVID-19 disruptions, the government is delaying full customs checks until 1st July, but it is likely that when they start, they will cause delays which could impact materials and supplies used by the construction industry. Extended delivery timescales and efforts may increase delivery costs and delay projects delivery. The delays and uncertainty may also increase the demand for home-sourced materials which may cause a rise in prices.
The UK's procurement legislation is based on EU Procurement Directives, which remain in force following Brexit. Despite this, there have been some consequential amendments to UK regulations. A notable example is removing references to notices being published in the 'Official Journal of the EU' and the introduction of the new 'Find a Tender Service' notification system.
EU rules require projects procured by public entities to be subjected to a competitive tender process. Interested parties across the EU and European Economic Area and those established in one of the signatory states of the WTO Government Procurement Agreement ("GPA") must be able to tender. UK leaving EU posed a risk of UK construction companies' exclusion from the process. In December 2020 UK have signed GPA resulting in construction companies being able to compete in the EU tender process. However, companies should still ensure if the projects they are competing for overseas are included in the GPA and TCA.
The EU single market is characterised by shared, mutual recognition of standard marks which contributed to frictionless trade. UK leaving the EU resulted in a possible inconsistency in trading, lowering standards, and increased bureaucracy for businesses.
After Brexit, there no longer is single "CE" mark used across the UK territory and EU. Instead, there are three different types of product marking, depending on where the product is intended to be used:
The EU's marking for product conformity (CE)
The United Kingdom Conformity Assessed mark (UKCA)
The United Kingdom Northern Ireland mark (UK(NI) mark), which is additional to the CE marking in some instances.
The TCA does not unify the standard marks in the same way it was before Brexit. However, the new regime does not prevent the sale or use of CE marked materials in the UK straight away. Most imported goods which already carried a valid CE mark as at 31st December 2020 can still legally be used in the UK until 31st January 2022. The UKCA will not be recognised for products exported to the EU, so any goods exported to the EU must still meet the CE criteria and carry the CE mark.
Although the Trade and Cooperation Agreement has addressed some most worrisome issues that Brexit posed onto the construction industry, there is no doubt that significant changes are ahead of us. Contractors will still need to face the negative consequences of post-Brexit reality. The best thing we can do right now is to take proactive steps to protect the workforce, avoid higher costs and delays, and continuously monitor the situation until it stabilises.
We can hope that after the turbulent transition into a new reality, the UK construction sector will come out stronger and more efficient.
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