Scots building companies forced to work at a loss – or face a worse fate

Published on Monday 2 February 2009 20:32

DESPERATE companies have been forced to make loss-making below-cost bids for the precious few construction projects going out to tender in Scotland this year, The Scotsman can reveal.

Fierce competition induced by the recession has driven down tendering prices in both the private and public sectors – and they are set to fall further this year, a report out yesterday showed.

Last night, experts warned that the trend had "grave implications" for the construction industry, as companies face the prospect of shedding more jobs or going bust.

The warning came on the back of a report which yesterday revealed Scottish tendering prices will be reduced a further 5.5 per cent this year as companies cut their prices in a desperate battle to win business.

According to building consultants Davis Langdon, this comes on top of 7.5 per cent fall they estimate tenders reduced by in the last quarter of 2008 – a steeper cut than anticipated.

According to the firm, contractors are passing on savings resulting from the collapse in commodity prices, including steel and reinforcement, as well as reducing their own margins.

But yesterday Michael Levack, chief executive of the Scottish Building Federation (SBF), used the figures to warn that cuts to margins could prove fatal to companies already suffering a serious downturn in the market.

Levack told The Scotsman: "The big concern is the fact construction companies in good times will make an operating profit of 2 to 3 per cent. You don't have to be a mathematical genius to work out 5.5 per cent less is tendering at a loss."

He argued that, before the downturn, new building contracts were failing to attract more than two or three bidders – now the process has become much more competitive.

Levack added: "Now clients in the public and private sectors are getting six, seven or eight-plus bidders. The problem is, because the competition is now really sharpened up, somebody is always desperate to win that job and they are tendering at a loss. They aren't even going to cover their net cost. That has grave implications for the industry."

The Davis Langdon report gives little hope for the immediate future, warning the market was not likely to improve for at least three years.

Maren Baldauf-Cunnington, one of the authors, said that, by 2011 "a large number of business failures, a shrunken labour pool and reverse migration will have affected industry capacity".

Last year the SBF estimated the Scottish construction industry lost 20,000 jobs in a sector that employed 250,000 in 2007. There are currently no accurate estimates how many more jobs will be lost this year.

The Scotsman last month revealed more than 2.5 billion worth of construction projects in Scotland had been put on hold due to the downturn.