Pictured left to right: Alison Short, partner, Richard Black, partner, and Jennifer Fitzmaurice, principal associate PSL, Eversheds Sutherland
Construction in the UK is heavily reliant on the importation of goods and materials. Unfortunately, the process of sourcing, acquiring and paying for goods has recently been beset by problems, such as the Covid-19 pandemic, Brexit and the Russia-Ukraine war. In this article, we consider the top three procurement challenges facing the UK construction industry, their origins, and how parties can seek to mitigate them.
Custom formalities and global sanctions
Since Brexit, we have been seeing a general reluctance from suppliers to supply into the UK on a delivered duty paid basis, ie, the seller delivering goods at their own expense and risk. Principally, this is because they are not yet set up to deal with the UK customs formalities. And, more importantly, there are uncertainties as regards their ability to recover import VAT, even if they own the goods at the point of import, unless they have an established UK presence. This has led to negotiations as to how risks arising from import and customs regulations should be allocated and mitigated.
“With the forthcoming election in the US, and potential further market volatility, the position is unlikely to improve soon”
Internationally speaking, global sanctions that different jurisdictions have introduced in response to the war in Ukraine have also caused disruptions to supply chains. The need to consider the application of different sanctions regimes, and the differences between them, and their business impact, have created uncertainties. These are particularly about the extent to which businesses may continue to procure products and technology from their suppliers across Asia, Europe, the Middle East and the US, leading to unpredictable lead times and increased costs.
Global businesses, both on the demand and supply sides, are having to react to and overcome these challenges. Practically, we are advising our clients to enhance supply chain visibility and de-risk supply chains, for example, by reconsidering and/or diversifying their sources of goods and materials. Suppliers are also having to actively enhance their internal controls and management of their upstream suppliers to satisfy the demands of their customers and bankers, which in some cases can be a steep learning curve.
Taking these proactive steps to reduce supply risk will require investments, and the associated costs are often passed on to employers, which in turn will push up construction costs.
To combat these issues, parties to supply and construction contracts need to collaborate, assess relevant risks and consider alternatives to avoid overdependence on a particular supplier that creates exposure from a sanctions perspective. Employers must also look for ways to protect themselves, including ensuring they can terminate the contract at will if the supply agreement becomes commercially unreasonable.
Inflationary pressures
Geopolitical events also have a profound impact on inflation. Construction projects rely on imported materials and, as inflation rises, so do the prices of materials.
Traditionally, clients had the benefit of a fixed-price contract and contractors bore the risk of inflation. But in the current economic climate, contractors are artificially increasing their prices to address this risk or holding bid prices for short periods.
Strategies can be adopted to help proactively address inflation risk. These are: including fluctuation provisions, value engineering to help identify and eliminate any unnecessary or wasteful elements, and working collaboratively with contractors to source alternative supplies.
Market volatility has also made securing materials more difficult, as well as more expensive. There is increased pressure to pay for materials in advance, to secure their availability and price.
To avoid supply chain insolvency putting these advanced payments at risk, it is advisable that employers take certain steps, such as procuring a vesting certificate and/or by procuring an advance payment bond.
They can also include additional contractual protections such as storing goods separately and making them to order.
Labour shortages
The impact of Brexit and changes to working practices following Covid have led to a shortage of available labour in the UK.
Contractors may face increased labour costs due to the reduced availability of workers and the need to offer higher wages or incentives to attract and retain staff, affecting cashflow and solvency.
This has resulted in overseas contractors being reluctant to take on any obligations that would require them to perform any onsite services in the UK, including the rectification of defective work. It can be more cost-effective for the defective goods to be transported back to the suppliers for rectification at their facilities and then transported back again and/or replaced; and for maintenance services to be provided remotely.
It is therefore worth the parties considering such alternative options even if it is clear cut as to who bears the risk contractually, in order to resolve these issues and allow the parties to focus on the ultimate goal of a successfully completed project.
Agility is key
The impact of global events on procurement in the UK construction market cannot be underestimated. With the forthcoming election in the US, and potential further market volatility, the position is unlikely to improve soon.
International suppliers will continue to have to be agile, and will need to take steps to make their supply chains robust, which will be challenging and may also push up prices, but will help future-proof their businesses.
It is paramount to put in place strategic and considered procurement strategies to ensure they are aligned with market conditions and risks, providing sufficient flexibility and protection for unforeseen events.
