‘Deal’ or ‘No deal’: are your construction contracts Brexit-ready?

Wherever you sit along the supply chain in these uncertain times (as employer, contractor, end user, developer, investor, consultant, sub-contractor or supplier), there is still time to re-assess the associated risks in the contracts you are about to enter into, or in the tender responses and prelims you are about to provide.

Consequences of Brexit or a ‘no-deal’ scenario

Shortages of materials and labour can dramatically impact the costs and/or programme of a construction project, and these risks are amplified by the current uncertainty surrounding how the UK will leave the EU on 29 March 2019.

Increased cost and shortages of materials

If the UK no longer has tariff free access to import materials from the EU, the overall cost of purchasing materials from overseas will increase, along with the related time periods for their delivery.

In the event of a ‘no deal’ outcome, however, the UK Government may try to alleviate the impact of any increased custom tariffs under World Trade Organisation rules. With the associated worldwide currency fluctuations, UK produced materials could be cheaper in the long term to purchase from outside the UK, which could lead to an increase in UK exports to the EU and elsewhere.

In the short term where materials may only be available from outside the UK, however, parties need to manage the consequential additional procurement time and money risks. As far as the risk allocation of ‘relevant events’ for delay is concerned, contractors and employers will need to take account of the potential consequences of changes in import tariffs, increased custom delays and changes in the scope of insurance cover.

Increased labour shortages

‘Deal’ or ‘no deal’, the UK Government intends to restrict access to the UK for EU workers, in particular those deemed as “low skilled workers”. The UK construction industry already struggles to maintain a sufficiently skilled work force. Real pressure is now being felt by contractors on their labour capacity, and they will now more than ever need to understand their related employer immigration obligations to make use of non-UK labour.

Whilst contractors may seek to recover some of the associated costs in their tender prices, some employers are taking advantage of the current “buyers’ market” and continuing the squeeze on contractors’ prices.

There is a tipping point, however, and employers should beware of pushing for unrealistic prices and programmes, which may inadvertently lead to a delayed and poor quality project, unsustainable supply chain cash flows, and ultimately contractor and sub-contractor insolvencies.

Allocating these risks in construction contracts

As always, parties should allocate risks in their respective construction contracts following a commercial discussion about who is best placed to manage each risk. Brexit now imposes a further level of risk. Contractors may have a clearer understanding of certain risks, but employers may opt to maintain a contingency fund rather than pay an upfront price premium to contractors.

Parties need to carefully review the consequences of a ‘deal’ or ‘no deal’ scenario in their standard form construction contracts.

In JCT and NEC contracts, for example, the employer generally takes the risk of price increases or delays in completion of the works in the event of certain changes in law, depending on the scope of the JCT Relevant Events and Relevant Matters, and NEC compensation events provisions. Both the JCT and NEC standard form provisions, however, were drafted before the concept of Brexit came into existence. In addition, any bespoke JCT contract amendments, and applicable NEC Secondary Options and Z clauses will also need to be reviewed.

For NEC contracts in particular, consider when the related early warnings should have been given, whether the risk register has been pro-actively updated, and the implications of the compensation events time bar.

Changes ending the free movement of EU workers, or the alteration of customs tariffs, for example, may be caught by contractual provisions, but the need remains to prove a causal link between such changes and the effect on the works.

Conclusion

The outcome of the Brexit negotiations over the coming weeks will alter the UK political and legal landscape. For each project, parties should be assessing whether the traditional risk allocation under construction contracts needs to be re-balanced against the backdrop of the current Brexit negotiations. Parties who understand and pro-actively manage the Brexit risks in their current and future construction contracts will be best placed to face wherever this rollercoaster takes us.