With the pandemic (hopefully) winding down, and Brexit rearing its head once more, how does this change the business landscape for electrical contractors? ECA’s director of business and legal, Rob Driscoll, answers some of our questions.
- Construction did a great job at remaining open during the pandemic. Has the electrical industry been as effective at staying operational?
Yes – it has been a tough period for the electrical sector and the experience of each contractor will depend on which markets they operate in and clients they work with. On the whole, the electrotechnical market serving both construction and FM has remained as resilient as ever and is now facing the equally tough challenges of bouncing back to more than full capacity.
- You have previously described the current business landscape as ‘one of the most hostile in living memory’, could you please elaborate?
Traditionally the electrotechnical market sits at the back of construction, which itself sits at the back of the UK economy, in terms of time lag. Economic peaks and troughs conventionally run in seven-year cycles. This means that when the front end of the UK economy (house prices and retail) picks up, there is an inevitable 12-18 month delay until the industry experiences the same buoyancy.
The current market has experienced the stagnation which followed the Brexit referendum, the initial crash caused by the first lockdown, and the challenges and constraints caused by subsequent national and regional lockdowns.
In addition, the market has had to pivot and adapt to cope with: VAT Reverse Charge from the March 1, the inception of changes to the IR35 regime in April, the tapering off of Government pandemic-based support, the beginning of the requirement to repay some of the pandemic support systems put in place, and worst of all, the current global and national materials shortage crisis which is storing up an exponential inflationary issue, at a time when demand is up nearly 20% on 2019, but only for opportunities to fix contract prices now with no control over prices during the delivery period.
- Is Brexit causing any importation issues?
A global and national materials shortage is being brought about by Brexit, caused by:
- Rising freight costs
- Disrupted global transportation issues
- Shortages in containers
- Shortages in raw materials
- The move by 2022 from CE marked products to UKCA marked products and the lack of testing facility capacity
- The political landscape surrounding the fall-out of Brexit, and
- A shortage in available hauliers and staff.
This has led to drawn-out lead times for goods and materials and rapidly rising prices at a time when inflation within the wider UK economy is at a low.
- Are there any changes to post-Covid tax rules that those in the electrical space should be aware of? Does this impact the self-employed particularly?
Yes, as we touched upon earlier, on March 1, 2021, VAT Reverse Charging came into effect, meaning sub-contractors generally get paid net of VAT – which is now collected by HMRC at tier 1.
Whilst VAT money didn’t belong to sub-contractors, it acted as a cyclical overdraft for the supply chain. Further, sub-contractors still pay VAT on their materials and have to seek repayment from HMRC – which should be done on a monthly, rather than quarterly basis, to optimise cash-flow. The changes have been planned for three years, but nevertheless the timing of inception of this anti-fraud initiative in a sector already stretched by the pandemic has been extremely tough.
On April 1, 2021, the changes to the UK IR35 system were implemented, shifting the risk of false self-employment to clients who use labour-only self-employed sub-contractors to top up their workforce.
This has caused contractors to put safeguards in place to protect themselves against the risk of falsely self-employed sub-contractors. Some will have preferred to maintain self-employed status, being happy to live with the disadvantages because of the perceived tax benefits, but where their commercial relationships and operations do not pass the relevant tests to confirm their legitimate self-employment, this may also have led to challenges in the way they operate.
The longer-term advantage to both tax initiatives should be stronger, healthier businesses and increased direct employment leading to better training and skills within our sector.
- How do contractors mitigate the materials shortage, so it keeps business disruption to a minimum?
There is a combination of mechanisms:
- Advanced payment/off-site vesting certificates
- Free-issue materials
- Volume supply arrangements with suppliers
- Shorter tender/quote acceptance periods to allow for revisiting pricing
- Examination of specification to ensure they are flexible and achievable within the contract period and backdrop of materials availability.
It is important to manage the risk in materials supply agreements as well as upstream with clients.
- What about very small independent businesses that perhaps can’t afford some of the methods mentioned above?
Some of the most prudent, shrewd businesses are the smaller contractors. Whilst size might impact buying power, it also means at the smaller end businesses are able to pivot and be more agile.
The short-sighted will buy work to survive, but that simply stores up problems for a later date and creates an environment where variations and claims are key to covering cost and making profit.
The more astute ECA members will have proactive conversations with clients about advanced payments, free-issue materials, exceptionally tight and inflexible specifications and excluding inflation of materials in order to cater for a longer-term business strategy.
- How can contractors amend their contracts, so they aren’t stuck with fluctuating material prices?
JCT and NEC are the two most widely used standard-form contract suites. Both have the facility to carve out the risk of inflation in materials costs. In JCT these provisions are known as fluctuations, and in NEC they are referred to as secondary option X1. They are far from commonly used, but they were originally conceived for exactly these circumstances and the market will have to find a way to insist with clients that they are factored into the contractual model.
- Various products now need to carry a UKCA mark. With the deadline for this being January 2022, will all products be amended in time?
Most construction products, including M&E, are affected by the deadline that requires products (or their packaging) to carry the UKCA mark by January 1, 2022. The difficulty is getting products tested in time to carry the UKCA mark as there is limited testing capacity to get all the products tested in time.
Tight specifications that insist on products that are not available, may lead to contractors being delayed and in breach of contract. Specifications for projects being priced now will have to be carefully examined to ensure there are contingency plans in place and flexibility in the face of the materials shortage.
Contractors often forget that they contract for a finished product, not a process. Their broad contractual promise is to deliver a finished installation in line with the contract documents (including design, specification and application statutory and regulatory requirements) at the point of completion.
- Finally, how can contractors ensure time is of the essence when ordering materials?
Adjust their supply agreements to ensure this is the case.
Most contractors set up an account and inadvertently agree to the supplier’s terms and conditions. Every time they place an order they call-off of that account against those pre-agreed terms and conditions. Supply only contracts generally won’t take the risk of on time delivery, but now is the time for contractors to insist. Making delivery a ‘time of the essence’ provision should allow the buyer to cancel, order elsewhere and/or recover any losses resulting from late delivery.