Survey finds drop in Scottish construction industry confidence

The latest Scottish Construction Monitor, a quarterly survey of the membership of trade body the Scottish Building Federation (SBF), found that confidence fell 14 points to stand at plus 21 on the monitor index.

Employers surveyed are asked to rate how confident they feel about their company’s prospects during the forthcoming 12 months compared to the past year. The latest result follows three consecutive quarters of rising confidence to a record high of plus 35 in the second quarter of the year and has taken the industry’s confidence rating back to where it was during the first half of 2014.

The latest survey also asked a series of questions about employers’ experience of being subject to performance guarantees or bonds as a condition of carrying out new work. Typically, these guarantees require the contractor to hold a defined percentage of the total contract value on deposit with their bank. This can then be paid to the client in the event that the contractor defaults on the terms of its contract.

Most respondents who had experience of being subject to these terms reported that they took the form of performance guarantee bonds. A large number also reported instances of being asked to provide a collateral warranty while one in four had been asked to produce a parent company guarantee. In a large number of cases, bonds were requested in the form of a bank guarantee. In most cases, the bond would be equivalent to 10 per cent of the total value of the contract.

Almost half of respondents asked to provide a bond reported that its wording had created difficulties in obtaining the bond from the guarantor, typically a bank.

SBF is concerned that the routine use of performance bank guarantees or bonds on particularly larger contracts can have a critical impact on the cash flow of building companies since it requires these companies to hold large sums of their own money on deposit in their bank account until they have fulfilled the terms of their contract. SBF argues that this is a particularly serious issue for SMEs which may struggle to find the necessary reserves of cash to fulfil this requirement without being put into financial difficulty.

Scottish Building Federation commercial director, Ian Honeyman, said: “The decline in industry confidence this quarter underlines employer concerns about the long term sustainability of the growth in construction output we’ve witnessed over recent months – and the growing issue of skills and capacity shortages within the industry.

“Our survey suggests that too many contracts are still subject to bank guarantees and this is having a negative impact on cash flow – particularly for smaller companies which can least afford to keep significant reserves of cash on deposit in their bank account.

“Instead, we would like to see the industry move towards a situation where a standardised form of insurance backed guarantee becomes the norm. This will give the client suitable protection against a contractor failing to fulfil its contractual commitments while reducing the barriers to particularly smaller construction companies tendering for larger contracts.”