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Scottish construction confidence dips

5 Oct 15 The latest survey of building firms in Scotland indicates a decline in overall confidence and mounting concern about clients’ demands for performance bonds.

The percentage of respondents who are more confident about their prospects for the next 12 months compared to the past year has fallen from 64% last quarter to 51% this quarter. Conversely, the percentage of respondents less confident about their firm’s future prospects has risen from 4% in Q2 2015 to 16% this quarter.

This is the ninth consecutive quarter when the overall confidence rating of the industry has been positive. However, following three consecutive quarters of rising confidence, the industry’s overall confidence rating has dropped by 14 points this quarter and, at +21, now sits broadly where it was during the first two quarters of 2014.

This is one of the headline findings of the latest Scottish Construction Monitor, a quarterly survey of the members of the Scottish Building Federation

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.

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% 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.

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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.”

However, according to the latest JLL / Glenigan Construction Activity Index, construction activity in Scotland increased by 17.6% between July 2014 and end of June 2015.

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