Adding up what Brexit could cost the construction industry

The anticipated decline in construction workers migrating to the UK from Europe and the rapidly increasing imported construction materials could cost the UK’s construction sector millions.

According to built-environment specialist Scape Group, the cost of EU building material imports is at its highest level in seven years – up 15.3% annually. The £5.7 billion worth of materials currently imported from the EU could increase in cost by 10% – which equates to a ‘Brexit cost’ of £570 million to UK construction.

“The construction sector is facing a toxic mix of issues which will inhibit its ability to deliver projects,” said Matt Carrington-Moore, Chief Marketing Officer at Scape Group, said. “The prospect of a fall in the number of construction workers from Europe, combined with the soaring cost of imported materials as well as the magnetic effect that large scale projects such as HS2 will have on the local supply chain, pose a serious risk to the quality and timely delivery of buildings and infrastructure.

“All of the evidence suggests that Brexit could trigger a significant decline in this country’s construction sector, and the impact that this has on UK PLC would be significant.”

The most recent government data shows that 61.6% of imported building components and materials come from the EU, which equates to a net total of £5.7 billion, up from £4.9 billion in 2015. At the same time, the construction materials price index increased 5.8% annually in January 2017. This unprecedented growth has seen net imports from the EU rise to the highest level since 2011 – up by 15.3% annually.

Separate data shows construction companies reported the second-fastest rise in input costs in February 2017, since August 2008. There were reports of higher prices for a range of materials, driven by the weak sterling exchange rate against the U.S. dollar and euro. The Federation of Master Builders has already found that 70% of UK builders have experienced price hikes as a result of the falling pound, with some firms anecdotally reporting 20% price increases on some materials.

Additional increases of 10-15% are anticipated in 2017 – and this doesn’t include any further impact the triggering of Article 50 and the ongoing Brexit negotiations might have. A 10% increase on the current net costs of EU imports amounts to £570 million.

The fall in the value of the pound is just one factor to consider. The potential impact of tariffs, if the UK leaves the EU without a trade deal, could be highly significant, with research showing EU exporters could also face £12.9 billion in tariffs on goods coming to the UK. EU exporters to the UK will face tariff costs of £144 million for electrical machinery and equipment and £134 million for organic chemicals.

Matt Carrington-Moore commented, “The terms of Brexit are still far from being agreed, but construction firms are already reporting considerable increases in the costs of raw materials. The key economic and industry indicators show this situation is likely to continue. These heavy costs will be passed on to clients and will act as an additional disrupting factor to the sector. A 10% increase on the net value of imports from the EU would be highly significant.

“Despite this challenging environment, we must continue to deliver vital built environment projects that support and facilitate growth, which means the industry must again consider where additional efficiencies could be found – it is increasingly difficult to see where the fat might be trimmed.”

The number of EU migrants working in the construction sector has been on the rise over the last decade. The proportion of EU migrants in the construction sector rose from 3.65% to 7.03% between 2007 and 2014. If this trend was able to continue unabated over the next seven years, 10.41% of the UK construction sector would comprise workers from the EU by 2021.

Now that Prime Minister Theresa May has ruled out membership of the single market, the flow of migrant workers will likely be disrupted. The skills crisis in construction is already at breaking point. Scape’s own research suggests a lack of workers with the necessary skillsets is negatively affecting the quality of projects according to 85% of public sector managers.

Matt Carrington-Moore concluded,“Since the financial crash in 2008, the UK construction sector has become increasingly reliant on talent from the European Union, and EU migrants now comprise around 7% of the construction sector workforce. The Prime Minister has made clear that UK membership of the single market is not on the table and there is a serious question mark hovering over the issue of what our deal will look like – and when it will be negotiated. The skills gap will turn into a gaping chasm if the talent flow from the EU is not swiftly addressed.

“As a result, the construction sector is in a very vulnerable position. Our research has shown the skills crisis is already at breaking point and already impacting the speed and quality of public sector construction projects. It is critical that the Government seeks to address this uncertainty to ensure that we are able to continue to build a strong, well connected built environment that attracts inward investment.”