06 February 2019

The potential impact of Brexit on construction contracts

There is currently no clear picture of what will happen on after Brexit. Whether a deal is reached or not, the full process could extend far beyond the withdrawal date given the extent to which our laws, regulations, and economic activity are now woven into the EU.

Below, our Construction team has considered the impact Brexit may have on construction contracts and what you can do now to prepare.

Some of the potential issues which may impact on the construction industry may be due to:

  • Increases or changes in tariffs on imported goods and materials;
  • Delays or extra administrative burdens on imported goods and materials during the customs process;
  • Changes in the availability of workers;
  • A decrease in the value of the pound and the associated increase in cost of materials sourced from the EU; and
  • Trade agreements with countries outside of the EU.

Contract negotiations

The construction team at Shulmans regularly advises both contractor and developer clients on building contract negotiations. Indeed, we find it unusual that on larger and complex projects that the parties ever enter into an industry standard contract such as the JCT or NEC forms without amending the terms.

We have therefore been talking to our clients about how building contract terms may be negotiated in order that risks from Brexit uncertainty are managed. Unsurprisingly, there is no ‘one size fits all’ answer to what these amendments should be. Indeed, even for the same client, a different approach may be required on different projects.  

Care should be taken at the negotiation stage of both the tender and the contract terms to consider what particular procurement risks are identified for the project which relate to Brexit. For example, what is the lead time on orders for imported materials? Which party takes the risk of that order being held up at customs or for a price increase?

Developers are generally keen to pass time and cost risk to the contractor, particularly under a ‘design and build’ form of procurement - clauses relating to delay events and compensation events are typically negotiated accordingly. However in light of Brexit uncertainty, this may create too much risk for a contractor to reasonably accept. It may also push up a tender price in anticipation of issues to come.

What steps can be taken?

Both parties are therefore best placed by having a clear dialogue on Brexit when negotiating their contract. Bespoke clauses can then be drafted and incorporated into contracts to reflect what the parties have agreed on allocating risk, regardless of what happens with the Brexit negotiations.

If particular risks are difficult to identify and settle in advance, one alternative option may be to allow for wording in the contract which refers specifically to delay or additional costs claims which are directly attributable to Brexit. A particular mechanism or protocol could then be agreed to deal with those claims.

The parties could also agree a collaboration protocol to deal with Brexit related issues in an attempt to reduce areas of dispute and claims.

Summary

Simply, there are no clear answers to how Brexit will affect the construction industry and what economic conditions will prevail in the coming months. While it may feel like a certain amount of ‘crystal ball gazing’ is required, there are steps contractors and developers can be taking now to prepare themselves for whatever comes next.

We recommend that parties to a construction contract address the issue of Brexit head on and include it in their negotiations.

The Construction team at Shulmans can work with you to talk through risks and issues in a project and help you to develop a contract negotiation strategy and bespoke drafting. Please contact any member of the team for more information.