The impact of Brexit on FM

THE TFM SUPPLIER’S VIEW
MARTIN REED, 
CEO, INCENTIVE FM GROUP

Within the service industry, there has, quite rightly, been a lot of discussion about the potential skills and people crisis that might be a result of any Brexit deal. In particular, there is much speculation on the impact it will have on finding recruits for the lower paid, non-skilled roles. There is no doubt that in recent years the industry has struggled to recruit homegrown workers and has come to rely heavily on European workers. The uncertainty does not help and neither does the fact that whatever the outcome of negotiations, there will likely be tougher immigration rules, which will make it harder for firms to hire migrant labour, and make those migrants already living in the UK consider whether they should continue living in the country.

There is another real area for concern, however, that is getting fewer headlines and that is the supply chain and its associated rise in costs, which will inevitably impact our sector. New research from the Chartered Institute of Procurement and Supply (CIPS) indicates that nearly one third (32 per cent) of UK businesses with EU suppliers have already increased their prices as a result of the June 2016 referendum vote to leave the EU. This is understandable as they have little choice if they are to protect their profit margins and remain solvent, whilst consumers will ultimately decide if they want to swallow the extra costs or not buy.

In service sectors such as facilities management, however, I fear that it is the suppliers that will bear the brunt of these increases, which may end up being catastrophic in an industry known for its low margins. Whilst labour is by far the biggest cost for companies in the sector, we are also responsible for the purchase of a wide range of consumables, such as cleaning products and toilet paper, which can run into tens of thousands of pounds. For our mechanical and electrical maintenance service business, Incentive Tec, the cost of equipment and parts, for example for heating, venting and air-conditioning systems, is considerably higher.

The majority of these products are manufactured in Europe, often Eastern Europe, where production costs have traditionally been lower. Whilst nothing is certain, it makes sense that these products will become more expensive and possibly subject to additional customs and tariffs.

So, who will bear these increased costs of products and people? In simple terms, it depends on the terms of your contracts.

The real impact will be on companies that offer fixed cost contracts that operate over a number of years. Generally, these types of agreements contain strict clauses about what, if any, increases in costs will be covered. A raise in UK VAT, for example, would be covered, but I doubt there are many Brexit clauses. Of course, there are some clients who will feel morally obliged to at least contribute towards this, but equally, there will be others that won’t. With margins in some sectors on low single figures, this could be, at best, damaging.

Of course, it might be possible to argue that Brexit triggered a change in legislation that could not reasonably have been predicted. Companies that are affected will probably need to look at ways to recoup this money, however. For new contracts and those being negotiated now, it is vital that companies seek to include clauses that offer them protection from the uncertainty of Brexit and protect themselves from open-ended cost increases.

In conclusion, the FM industry is often a key target for cost reduction during times of economic uncertainty. I think we need to brace ourselves for more contracts being re-negotiated and downwards pressure on pricing. This can be seen as an opportunity, although my experience is that during these times projects and investment are put on hold. Whatever the outcome of Brexit, I think we are in for some challenging times. 

THE BENCHMARKING EXPERT’S VIEW
MIKE BOXALL, 
MD, SITEMARK

Leave or remain, very few would argue that the negotiations have panned out well. As a result of this mishandling, we have been left in a state of paralysis, with a deal unlikely to pass through parliament on one side and the undoubtedly damaging prospect of a clean break with the EU on the other. It’s sobering to think that we are now just over a month away from the deadline with little progress or breakthrough in sight. Despite this, the FM market, like many others, has responded bullishly. Perhaps this gives us some indication of how the sector will perform once a formal exit is made, or instead shows that no one can really know the true extent of Brexit’s impact until its actually happened. Either way, uncertainty is seldom good for business and most now would welcome some clarity.

As a benchmarking business the direct implications of Brexit are less pronounced when compared to, say, a service provider who will be in the firing line when a reduction in costs is required. That said, the past two years has given us solid insight into our clients’ most pressing Brexit-related concerns. With good reason, labour most often sits at the top of the list, both in terms of cost and access. For those that employ large numbers of migrant works – which is virtually every FM organisation irrespective of whether it offers hard or soft services – a restriction on the movement of free labour will inevitably result in wage inflation and other rising costs. For a sector that already sees a large portion of its overheads spent on labour, this knock-on effect will be really troublesome. While this is already widely known among the industry, it’s worth restating as even with a points-based immigration system costs will continue to rise. This of course leaves aside the issue of a weaker pound and the possibility of tariffs on imported equipment and consumables. Ultimately, Brexit is going to cost everyone more money in the short term, be it directly or indirectly.

Perhaps a less discussed topic for the industry is the issue of legislation for public procurement which is currently estimated to represent almost 20 per cent of UK GDP. As it stands, everything must be advertised in the Official Journal of the European Union in order to give every member state organisation an equal opportunity to bid. Although UK procurement legislation arises from EU Directives, it has been implemented into UK law through UK Regulations, so any change is going to be long term. Public sector clients will continue using the current process, albeit having to register contract award and notices in a UK journal instead of OJEU in the event of ‘no deal’.

While intended to be transparent and non-discriminatory, EU procurement rules are generally seen as being long-winded, complicated and litigious. In addition, they require a level of expertise that is becoming less prevalent in many sectors such as local authority, housing and education. The Public Contract Regulations 2015 did simplify the procurement process and helped boost the success rate of SME businesses but, longer term, there could be much greater freedom over procurement rules to ensure that contracts are awarded with a much greater weighting on previous performance and best value, rather than just a competitive process of lowest cost.