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Payment reform failures heighten ‘no deal’ HVAC risk, warns SEC Group

SEC Group chief executive Rudi Klein has warned of the “horrendous” realities facing sectors such as the HVAC sector from a no deal Brexit without drastic reforms of payment protection

Government threats to proceed with a ‘no deal’ Brexit on 31 October would be potentially “horrendous” for the HVAC sector and broader business if realised, a key industry body has warned.

The Specialist Engineering Contractors (SEC) Group, has argued that existing cost pressures and issues of poor industry practice around payments that has already hampered the building services sector will be further exacerbated by failure to reach an agreement with the EU. This would create a business environment that will be untenable without reforms in areas such as payment performance to ensure a viable industry for heating and ventilation specialists and product manufacturers of various sizes, the organisation added.

A harder line approach to Brexit planning that is committed to leaving the EU in less than three months has been put forward by key members of the new Cabinet, which was appointed last month by new prime minister Boris Johnson.

A funding package of £2.1bn has therefore been promised by Chancellor Sajid Javid, who replaced Philip Hammond last month after he resigned citing concerns about an ability to support a no deal Brexit while in office.

Mr Javid said the funds are to be made available this year and would see an immediate dispersal of £1.1bn to prepare “critical areas” for exiting the EU by November 1 to ensure the border, as well as business had more sufficient capability for the shock of a sudden exit. Ithe funds will also be required to support the supply of critical medicines. An additional £1bn would be set aside for ‘operational preparedness’ during the remainder of 2019, according to the government.

However, a statement on the funding did not make mention of efforts to ensure sufficient skills in areas such as engineering can be retained to meet industry demand.

It is not known at present whether government would be able to ensure sufficient support in parliament to leave without a deal, or what possible role the House of Commons might play in refusing such a drastic change in internal UK politics with the consent of MPs.

Some trade associations representing a wide cross section of businesses such as the HVAC sector have continued to warn that a failure to reach a withdrawal agreement with the UK’s most significant trading partner would be a worst-case scenario for business and the economy.

Finance fears

Rudi Klein, chief executive officer of the SEC Group, told H&V News that the challenges posed by failing to reach a deal with the EU on terminating the UK’s membership status might be weathered if not for the already perilous state of industry finances.  This includes concerns exposed by the collapse of Carillion last year.

He said, “I think that these cost pressures that we are talking about, particularly with a no deal, will mean that we have go to redouble our efforts to change our procurement and payment practices within the industry. If we are not going to do that, the outcome of a no deal Brexit could potentially be horrendous.”

“If you had a healthy, profitable industry and if all the firms we are concerned about in the M&E sector were all doing pretty well and payments practices were good and working well, we could weather no deal… But that isn’t the case.”

Mr Klein argued that the concept of a no deal Brexit had major implications for the whole of the UK, with the building services industry facing particular uncertainty around longer-term maintenance contracts that are a vital source of income for industry.

An estimated half of the building services sector’s revenue could be tied to maintenance work, creating a major challenge due to uncertainty over the exact direction for Brexit being undertaken by the government, according to Mr Klein.

He added, “To me one of the greatest risks from a no deal scenario is to that maintenance work. The reason I say that is because if a group’s costs are going up, and we do import a lot of materials and equipment from the EU, then this poses risks for longer-term agreements.”

“So let’s say you are picking up a contract tomorrow and that could be a two or three year agreement, then as costs go up, as will be the case in no deal for raw materials and components, then your risk is considerable.”

Supply issues were identified as another major concern as a result of a no deal Brexit, with Mr Klein warning of the potential for expanded delays for components from the EU that could be vital to repair or maintain equipment.

He added, “That could last weeks or months rather than perhaps days at the moment. This is because you have to go through customs.”

Mr Klein cited estimates from HMRC that predicted a delay of three or four times the existing processes to clear goods to enter the country.

The possibility of labour shortages was also played up by the SEC Group alongside the risks of severe delays for components and equipment entering the country. Mr Klein said that an exodus of vital skilled engineering labour out of the country and towards the EU was feared as another likelihood that could hit maintenance contracting costs in areas such as HVAC work.

Payment reforms

Calls for drastic change in payment terms and contract obligations are nothing new from bodies such as the SEC Group, which has been involved in efforts to push for major legislative change in parliament. The group has worked with bodies such as BESA and the ECA for many years to try and introduce legislation in the form of two draft bills that would make it mandatory to use project bank accounts and ringfence retentions payments in contract work to prevent loss of funds in the case of upstream insolvency.

However, Mr Klein argued that Private Member’s Bills for ringfencing retentions and mandating project bank accounts, introduced respectively by MP Peter Aldous and MP Debbie Abrahams, were now effectively in limbo. The changed parliamentary schedule and attention of Brexit were cited as limiting the broader political focus on payment and building safety reforms issues by Mr Klein.

Trade body BEAMA has meanwhile told H&V News that it was in the process of helping members to better prepare for the possibility of no deal on a range of issues such as product certification, tariff changes and the impacts on CE marking that denotes compliance with safety standards.

Earlier this year, BEAMA chair Dr Howard Porter wrote to the future prime minister and all other candidates standing at the time for the role about the potential additional costs to ensure regulatory compliance and additional administration placed on exporters might be too hard to bear for some companies.

Dr Porter wrote an open letter that demanded a no deal Brexit be avoided at any cost to ensure the survival of UK manufacturing sector that contributes £148bn to the UK economy.

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