Thinking the unthinkable

Next week, the EU 27 will agree the text of their negotiating mandate for Brexit – the text that deliberately binds the hands of the negotiating team and guards against a split in the ranks of the remaining EU states. After nearly two years of phoney war, the process is about to get serious – with the risks of dissembling, delay and disagreement by the parties growing as the stakes get higher. Irrespective of whether people agree or not with the referendum result, no one voted for a no-deal scenario. However, this outcome is becoming increasingly plausible.

While there were some suggestions of areas of compromise in statements by both the UK government and the European Commission, the reality is that the two sides are locked in a zero-sum game. Hard-ball negotiating strategies could easily result in an accidental “no-deal”. Now is the time to think like Donald Rumsfeld – not just to plan for the known unknowns of Brexit such as the workforce challenge, but also the unknown unknowns – the issues that businesses don’t know they don’t know.

Given the complexity of the interwoven supply chains that feed into construction projects, in practice the Brexit clause is helping to kick the can down the road 

Most of the attention of the industry has naturally focused on the long-term post-Brexit challenge of rebuilding the industry’s workforce. However, given that the status of current migrants is built into the withdrawal agreement, this issue has at least been addressed for now. What about customs procedures, changing patterns of VAT payments, and the requirement for suppliers to hold more inventory just in case products are delayed? None of these issues can be quantified but must be seen as a practical consideration for design and construction contracts that are now under negotiation. It is not hard to foresee a scenario where a European supplier of programme-critical components such as bathroom pods or items of plant will not be able to accept risks associated with the knock-on costs of delay, should their products get stuck in a customs queue. Who should take this risk? Similarly, who will take the cash flow hit on VAT charged at the border when the UK gains the status of being a Third Country in relation to the EU? 

From September, Ryanair is going to include a warning on its tickets that will read: “This flight is subject to the regulatory environment allowing the flight to take place.” Increasingly, other organisations on either side of the contractual divide are introducing a Brexit clause into their agreements. The use of a Brexit clause will help to kick the liability of an event to the other party. Given the complexity of the interwoven supply chains that feed into construction projects, in practice the Brexit clause is helping to kick the can down the road – buying time for one of the contract parties to better understand their unknown unknowns.

But think of the wider impacts of Ryanair’s measure. People might choose to book flights with other airlines, meaning that the airports and destinations served by Ryanair could lose business. Similarly, if a Brexit clause upsets the delicate balance of liabilities enshrined in agreements, contracts could become unworkable. Imagine an industry slowdown that occurs not because clients don’t want to build, but because it is too risky to build. Clients and their suppliers should not allow this to happen, but given the dearth of preparation for Brexit, particularly among SME businesses, this should be considered as a known known.

So how does industry mitigate the gathering risk of Brexit-induced inertia? If we take the example of our European pod supplier, they could reduce their exposure by bringing forward production, shipping to the UK earlier and holding the materials in a warehouse rather than relying on just-in-time delivery as they do now. However, these provisions cost money and if one bidder makes these assumptions and the others don’t, the chances are that they won’t win the contract. Can they take the risk to manage the Brexit risk? In reality, mitigation must be driven by the client and the client’s team as well as by the specialists who are directly exposed to changes in the way that markets operate.

If clients are to make these interventions, then they need to be confident that they are making the right ones. Detailed scenario planning is a well-established method for envisioning future states. Royal Dutch Shell famously claim to have modelled the 1970s oil crisis as one of their scenarios, equipping the business at the very least to have a developed point of view on how the situation might develop – even if they don’t have all the answers. So far in connection with Brexit, scenario planning hasn’t been that helpful. The potential outcomes are so varied and complex that it is difficult to develop an actionable view of what might happen. However, at the level of the project, where the boundaries of what is known and what is not are easier to agree, the process has a lot to offer. Scenario planning is, however, more than an excuse for a workshop. The scenarios need to be evidence-based, there need to be multiple options and – most importantly – the scenarios have to consider a different chain of events from those that are expected. Now is the time to be thinking in terms of Brexit scenarios – positive, neutral and negative.

Recent data pointing to a creeping slowdown in construction activity highlights the industry’s delicate balance between entrepreneurial confidence and Brexit-induced risk aversion. By recognising the unthinkable, and by planning to mitigate the worst outcomes of a no-deal Brexit, we will be better able to keep the industry’s show on the road.