What does Brexit mean for your Facilities Management contracts?

19 July 2016

Facilities Management is probably not the first thing that comes to mind when thinking about the implications of Brexit on your business. But look around you when you come into your workplace in the morning. Who owns the company that provides your FM services? Where are your Security Guards and Receptionists from? Who is preparing your coffee? The chances are that many of the people your business relies upon to provide the services that keep your buildings safe, clean and operational are migrant workers taking advantage of the right of free movement within the EU. There is also a strong chance that some of your key suppliers are owned by European parent companies or that your services are provided under a European wide contract. Think what this might mean for your business post Brexit.

The impact that Brexit will have on property occupiers will take some time to be known, however I believe that there are four main areas of risk in the short and medium term.

Firstly, input costs. The cost of labour is the single biggest cost component of FM. In-house or outsourced, labour is where most of the cost sits. Soft FM services in particular employ a large number of workers from other EU member states. In London and the South East, a significant proportion of more skilled technical staff are also from other EU member states. The implication for FM is therefore clear, restrictions on the free movement of labour will result in a reduced supply of workers leading to upwards wage inflation and increased costs. If a points based immigration system is adopted, this will also result in higher overheads for employers. Imported equipment, parts and consumables may also be more expensive due to weaker sterling and potential import tariffs.

Who will bear increased costs? It depends on the terms of your contracts. For existing fixed price contracts, the cost will most likely be borne by the suppliers. However that does not mean you can sit back and not worry about it. Suppliers may still try to pass increased costs on, for example by arguing that Brexit triggered a change in legislation that could not reasonably have been predicted. If you have a cost plus contract, the cost will be yours and you will need to work with your suppliers to identify efficiencies to offset cost increases. If suppliers have to accept a reduction in margin they will attempt to recoup it. Look out for reductions in service quality and higher costs for variations, discretionary works or contract extensions. For new contracts and those being negotiated now, I would expect suppliers to seek to include clauses that offer them protection from the uncertainty of Brexit. Buyers should give any such terms careful consideration and seek professional advice to protect themselves from open ended cost increases and excessive risk pricing.

Secondly, if the economy goes into recession or even if an economic downturn is feared, I expect to see more business focus on cost reduction measures. This is especially true for those sectors who will be hardest hit by Brexit. FM is often a major target for cost reduction and I would expect to see more contracts being re-negotiated, more outsourcing, more consolidation and bundling of contracts and downwards pressure on pricing.  In addition we would expect to see less discretionary spend. Projects and investment are likely to be pushed back, backlog maintenance liabilities will grow.  For contracts where discretionary spend forms a significant part of the suppliers revenue this will put more pressure on them to grow margins from the rest of your business. As buyers of FM you will need to be commercially minded, focused on detail and ready to be flexible. 

Thirdly, if you are in a European, EMEA or a global contract you may be in a difficult position. These contracts and their legal and commercial terms will have been agreed on the basis that the UK was part of the EU. As this changes so the contracts must change. Post Brexit the UK element of these contracts may need to be carved out or the terms changed to reflect the new economic and political situation in the longer term.

The fourth area that may be impacted is the FM supply market itself. Many FM companies active in the UK market are owned by European parent companies and/or are invested in by European investors. Will the focus of these companies shift to countries remaining within the EU where business may be easier and more profitable in future? Will they make lower investments in their UK operations? Will they seek to dispose of UK subsidiary companies? Even if your FM supplier is UK owned what is their level of exposure to European markets? There could a loss of interest in bidding for UK contracts and a wave of disposals and merger and acquisition activity causing disruption in the market.

In conclusion, although we need to wait before the true impact of Brexit takes effect, some key risks are predictable and you should start to assess the potential impact on your business now. Do you know the level of risk to your business? Do you have a strategy for responding to the challenges ahead?

Derrick Tate | Director, Corporate Finance
Email | +44(0)20 721 21465

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