Brexit: the trade deal and the construction industry

This article considers four main respects in which Brexit and the recently concluded Trade and Cooperation Agreement (the ‘trade deal’) reached with the EU, which came into effect on 1 January 2021 are likely to impact on the construction industry in the UK:

1. The new UK regulatory framework and harmonisation of standards
2. Mutual recognition of goods and product marking
3. Movement and cost of materials
4. Workforce shortages

What does the trade deal mean for the construction industry?

The trade deal will enable construction companies to continue to reliably forecast the cost and availability of products and materials imported from the EU or comprising components made in the EU. The mutual co-operation in respect of reducing technical trade barriers and co-operation at the border will also undoubtedly help to avoid some of the risks of delay and disruption.

The head of policy at the National Federation of Builders and chair of the Construction Leadership Council’s Brexit working group commented: “What this means is that we will not see the inflationary shock of tariff and quota introductions or the expected currency depreciation associated with a no-deal. This deal delivers certainty at a time when it is needed most.”

However, the chief executive of RIBA, Alan Vallance, comments: “While this deal provides us with some certainty around the future relationship between the UK and EU, hesitation and vagueness around trade in services remains a serious concern for our profession. Architects in both the UK and EU were clear about the need for a continued agreement on recognition of professional qualifications, and it is deeply worrying that this does not seem to be part of the deal as it stands.”

He added: “It’s our hope, however, that this deal will keep the costs of importing construction materials down and – current border issues aside – at least provide some confidence over trading in goods.”

It was, in any event, important for the construction industry that the trade deal was reached; Construction Products Association economics director Professor Noble Francis notes that only 24% of construction products used in the UK are imported but, of those that are, two thirds come from the European Union. He states: “Keeping the trade flows going after 31 December was essential to ensure that imported products such as timber, roofing materials, white goods, paints and varnishes continued and activity in housing remained buoyant.”

Four ways in which Brexit may impact the construction industry

1. The new UK regulatory framework and harmonisation of standards

The Construction Products Regulation (CPR) provides harmonised rules (standards) for the marketing of construction products. Standards define the methods and criteria for assessing the performance of a product in relation to its ‘essential characteristics’. Such products are marked with a CE mark to indicate compliance with the applicable standards for each product. With the UK having left the EU, the European Union (Withdrawal) Act 2019 will convert the CPR into UK law.

The government produced a draft statutory instrument on 18 December 2018 (which came into effect upon the UK leaving the EU) detailing the future arrangements that are to apply. All existing European harmonised standards will become UK ‘designated standards’, meaning, in light of the UK’s exit from the EU, the European harmonised standards and UK designated standards are now identical.

The purpose of the amendments

The amendments were intended to adapt the former regime so there would be no disruption upon the UK leaving the EU, but without amending the CPR or the 2013 Regulations any more than necessary. To that end, the standards applicable in the UK will continue to be closely aligned with EU standards. The immediate key differences will be in how new products demonstrate conformity with the relevant standards.

Under the amended regime, the EU’s existing ‘harmonised standards’ will become UK ‘designated standards’. Construction products already placed on the UK market pre-Brexit will therefore remain compliant with the applicable UK standards, and so will still be able to circulate.

New UK standards will now be designated by the secretary of state (either by mandating a standardisation body to develop new standards or by adopting a standard already approved by the EU). Therefore, it is possible that UK and EU standards will diverge over time, though it should be noted that there is currently no policy intention to do so.

2. Mutual recognition of goods and product marking

On 17 November 2020, the government published various policy papers on the United Kingdom Internal Market Bill 2019-21, including two on the market access principle of mutual recognition:

(a) Mutual recognition of goods: general principles and relevant requirements
(b) Mutual recognition of goods: location of production

Mutual recognition of goods: general principles and relevant requirements

Mutual recognition will underpin the operation of the UK internal market for goods. A good must meet the relevant regulatory requirements in the part of the UK it is produced in, or imported into, to qualify for mutual recognition, thus allowing the good to be sold in any other part of the UK without having to meet relevant regulatory requirements in that other part.

Regulatory requirements to be disapplied under mutual recognition are known as relevant requirements and generally relate to the good itself, including its characteristics, its presentation and any accompanying documentation that must be supplied with it.

As well as applying to the sale of goods, the mutual recognition principle will apply to a wide range of supply-related activities, such as trial samples and free gifts, or where goods are leased or hired.

Requirements relating to the manner in which a good can be sold will not typically be ‘relevant requirements’. These types of requirements are dealt with by the non-discrimination principle.

Mutual recognition of goods: location of production

Products that comply with relevant requirements at the location of their production can be sold throughout the UK to ensure that local producers are subject to their local requirements. The Bill defines ‘produced in’ as the place where the most recent significant production step that is a regulated step, has occurred (clause 15(3)).

A production step must be significant in terms of the character of the goods or their purpose. A step is regulated if it would be subject to regulation in the part of the UK where it is being produced or, alternatively, it is a step which means that goods could not be sold in that part of the UK, as they would contravene regulation in that part.

Product marking

From 1 January 2021, there are three different product marks that manufacturers and others in the supply chain may need to apply. The rules governing these marks will depend on where the product is intended to be used. The three marks are:

(a) The EU’s marking for product conformity (CE marking)
(b) The United Kingdom Conformity Assessed mark (UKCA mark)
(c) The United Kingdom Northern Ireland mark (UK(NI) mark), which is additional to the CE marking in some instances

Depending on the regulations of each jurisdiction, a manufacturer may be required to use the services of a conformity assessment body to show their product meets the required criteria.

A summary of the changes in product marking is outlined in the below table:

Notably, the role of ‘notified bodies’, which were previously authorised to assess products’ conformity with the CPR, have now been taken over in the UK by ‘approved bodies’. Notified bodies based in the UK will automatically become approved bodies, and new approved bodies can be authorised post-Brexit.

New products assessed by a UK-approved body will have to be marked with a UK mark to indicate compliance with UK designated standards, in the same way that products previously had to have a CE mark.

EU products with a CE mark will still be able to be placed on the UK market without the need for further testing or additional UK marking. This approach is designed to minimise any disruption to the availability of goods from the EU. The policy intention is that this option will only be available for a limited period, albeit the duration has not yet been decided. It is therefore possible that all products used in the UK will eventually have to have a UK mark, although the government has said that businesses will be given sufficient notice in advance of the limited period ending.

Where manufacturers can self-declare conformity with a standard, they will, during the limited period, be free to choose to use the existing CE mark, the new UK mark or both.

While EU and UK standards may remain aligned for some time, and there will be at least an initial period when CE marking will be sufficient for products to be sold and used in the UK, both manufacturers and users of construction products should ensure they understand the changes being made to the rules that apply in the UK.

3. Movement and cost of materials

Brexit is going to have a significant effect on the trade of goods between the UK and the EU. If a business relies on goods imported from the EU, it would be prudent to take action to ensure that its supply chain is not disrupted. Practical steps that can be taken to minimise the negative impacts of Brexit on importing goods from the EU include checking with EU partners on what arrangements they have put in place from 1 January 2021. There are now in place additional checks and paperwork involved at the UK borders and forward planning will be needed to manage the new customs process. Equally, if buying through UK wholesalers, ask the same questions of them and check that they have processes in place with their EU suppliers to mitigate the effects of Brexit. Wholesalers may be prepared to negotiate advance terms for delivery of goods post-Brexit if UK stocks run low.

It is also essential that contractual terms with EU suppliers be reviewed and updated, not least for example to ensure faulty products can be returned and made good at no cost.  What are the existing commitments on time for delivery and damages for late or non-performance or recovery of increased costs?

Ultimately, parties should seek to identify and understand the possible effects that Brexit-related events (which might have been unanticipated when the contract was entered into) may have on existing contractual rights, obligations and remedies, including any consequential impact on timing, performance and enforcement.

Performance of a contract may become inherently more difficult and consequently more time may be required for performance, driving up costs. Parties need to understand where commercial risk lies in any contract entered into and what the consequences are, including termination, due to default.

4. Workforce shortages

Freedom of movement for workers has been one of the most contentious aspects of Brexit and is critically important for the construction sector. Across the whole of the UK last year, EU nationals accounted for 10% of all workers in the UK’s construction of buildings sub-sector, although this percentage rose to nearly 40% in London.

Freedom of movement between the UK and the EU ended on 1 January 2021. After this date, anyone wishing to work in the UK will be subject to a points-based application system. This is designed to attract ‘skilled workers’ with skill level thresholds of RQF 3-5 (A-level or equivalent). This will include architects, engineers and quantity surveyors, and also trades such as bricklayers or carpenters, but excludes several roles such as general labourers and some plant operators.

An applicant will need to produce evidence of a job offer at the required skill level that meets a new minimum salary threshold. There are obvious implications for the construction industry, as the majority of the labour force do not attract salaries at the required threshold. Even if the criteria is met, the ongoing sponsorship costs to bring workers to the UK will likely be prohibitive for some employers.

Notably, while visas will not be required for most business travel across the EU for short stays of up to 90 days in a 180-day period, work visas will be required for those intending to work for a longer period of time.

A common amendment to the JCT suite of contracts clarifies that ‘a mere shortage of labour will not in itself constitute a relevant event’. Contractors working under a contract with this wording should therefore note that they will not be afforded additional time or extra money if visa issues lead to staffing issues. On a tight programme, even delays of a few weeks while visa issues are resolved could be extremely costly.

In addition to the programming implications, a shortage of labour could create wage inflation which, ordinarily, is a cost borne by the contractor.

If the employer is risk averse, they may be accepting of the higher cost and longer programme as a fair price to pay for certainty. Where the works are urgent and/or the employer is less risk averse, the parties may agree to a lower price and shorter programme, but with a mechanism to compensate the contractor if labour issues arise as a direct result of Brexit.

For further information or project specific advice please contact David Rintoul.