Scottish contractors' tender bids dive to below-cost

Fierce competition induced by the recession has driven down tendering prices in Scotland in both the private and public sectors, the result being that work-hungry contractors are putting in bids at less than cost.

The Scotsman newspaper says that the situation could get worse as the workload in Scotland is set to shrink further in 2009.

The warning came on the back of a report which has revealed that Scottish tendering prices will be reduced a further 5.5% this year as companies battle to avoid shedding jobs.

Building consultants Davis Langdon report that this drop will be on top of the 6.5% fall in tendering prices in the last quarter of 2008.  

The coverage reports that “contractors are passing on savings resulting from the collapse in commodity prices, including steel and reinforcement, as well as reducing their own margins.”

Michael Levack, chief executive of the Scottish Building Federation (SBF), has used the figures to warn that cuts to margins could prove fatal.

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

“Before the downturn, new building contracts were failing to attract more than two or three bidders but now the process has become much more competitive.”

Clients in both public and private sectors in Scotland find themselves triggering six to eight bidders as competition sharpens up.

“Somebody is always desperate to win that job and they are tendering at a loss,” he continued. “They aren't even going to cover their net cost. That has grave implications for the industry.”

The Davis Langdon report warns that the market is not likely to improve for at least three years, by which time “a large number of business failures, a shrunken labour pool and reverse migration will have affected industry capacity”.

The Scottish construction industry is thought to have lost 20,000 jobs last year, bringing the remaining total down to 230,000 in 2007.

Last month it was revealed more than £2.5bn-worth of construction projects in Scotland had been put on hold due to the downturn.