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03rd May 2019

BREXIT and Construction

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The news that the contractors building Crossrail have claimed £900m in additional costs having issued more than 21,000 compensation claims highlights the importance of following the procedure under construction contracts when delays and cost overruns occur, or when they are threatening to arise. The Hewitsons’ Construction Team has been running a series of seminars which have covered the need to anticipate not just the standard factors for which compensation might become due under such contracts but those also events which might arise in the context of Brexit.

As we are all well aware a resolution to the decision to leave the EU has yet to be agreed upon. Even if Brexit is achieved we will still be in the ‘agreement to agree’ stage, meaning that the detailed terms of a future trading relationship with the EU will have to be worked out either in a hard Brexit no deal scenario or in the event of one of the softer Brexit outcomes.

Whichever part of the construction industry supply chain you represent; employer, contractor, end user, developer, investor, consultant, sub-contractor or supplier, the full impact of Brexit remains in the field of the unknown although the industry has for some time been experiencing some of the early implications.

The question for those managing construction contracts is, how does your contract provide for what might come once Brexit is achieved or in terms of what has arisen already?

Potential Brexit related consequences include the impact of currency fluctuations on the costs of materials and their shortages (from both inside and outside the EU) along with pressures on the supply of labour.

Shortages could arise due to changes in the tariff regime. If we end up with a no deal exit whereby the UK no longer has tariff free access to import materials from the EU, the overall cost of purchasing materials from overseas will quite simply increase, along with the related time periods for their delivery given the impact on transportations times, customs checks and so on. We don’t know how long or short all of that will be and if could of course be very short, but if the current negotiations are anything to go by, we would be foolhardy to believe they will be quick to resolve and introduce new systems and arrangements.

In regard to labour, ‘deal’ or ‘no deal’, the Government has made clear that it intends to restrict access to the UK for EU workers, in particular those deemed as “low skilled workers”. Given the dependency of the UK construction industry on foreign labour and that it already struggles to maintain a sufficiently skilled work force this is one area where some risk applies.

Under the JCT and NEC building contracts, it is the employer generally who 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.

As an example of what is involved, for NEC contracts (the basis of the Crossrail contracts), under clause 15 the Contractor and the PM are expected to give an early warning by notifying the other as soon as either is aware of any matter which could increase the total of the Prices, delay Completion or delay a Key Date.

The early warning mechanism under the NEC is intended to support the good management of a project, to anticipate issues before they impact and cause issues. It is not intended as a stick for either of the parties to beat each other up about.

That said, clause 63.5 of the NEC emphasises the importance of the Contractor giving a required early warning. If the Contractor fails to give a required early warning and a Compensation Event (a ground under which a claim for extra cost of time might be made) then occurs, the clause gives the Project Manager the opportunity to assess the compensation event as if the Contractor had given an early warning.

This enables the Project Manager to consider the mitigation measures that could otherwise have been taken by the Contractor, as it may be possible that an early warning could have allowed actions to be taken which would have reduced costs and/or saved time. The Project Manager is effectively allowed the benefit of hindsight when carrying out their assessment of delay and extra cost, reducing the Contractor’s entitlement.

So, the consequences of the Contractor failing to issue the appropriate early warning in the event of a Brexit related matter can be serious and substantial.

Clearly on Crossrail there has been substantial use of the Compensation Event procedures which will no doubt be a continuing feature of that project as delays and overruns continue to be reported.

For more information please contact Colin Jones on 01223 461155 or click here to email Colin.