Brexit's Hidden Costs
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 and 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 continue living in the country.
However, there is another real area for concern that is getting less 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 a third (32%) 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.
However, in service sectors like facilities management, 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 M&E business, Incentive Tec, the cost of equipment and parts, for example for HVAC 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 just who will bear increased costs of products and people? In simple terms it depends on the terms of your contracts. At Incentive FM, the vast majority of our contracts are ‘open book’, which basically means we charge everything at cost plus a management fee. This essentially protects us from ‘unexpected’ increases in costs and responsibility falls to the client. As a result we will need to work closely with them to identify efficiencies to offset those cost increases.
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. For example, a raise in UK VAT 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 are others that won’t. With margins in some sectors on low single figures this could be, at best, damaging.
Conversely, it might be possible to argue that Brexit triggered a change in legislation that could not reasonably have been predicted. However, companies that are affected will probably need to look at ways to recoup this money. 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 and 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.