Moves to allow the Scottish Government to borrow on the open market independently of the UK are providing some consolation to contractors facing an exceptionally tough market.
With the strongest growth in commercial markets expected to come from the South-east of England, the Scotland Bill currently going through Parliament could bring significant change.
It would see the Scottish Parliament given the power to decide how to raise finance and the right to spend a portion of Scottish income tax as the UK government cuts its grant for capital spending in Scotland by around 38 per cent over four years.
Grahame Barn, director of the Federation of Master Builders Scotland, said: “The Scottish Government is trying to explore new funding mechanisms, and the power to borrow money on the open market is an area where they will try to fund capital projects.”
The National Housing Trust provides a good example of innovative financing, Mr Barn says.
This scheme has ensured £6 million funding from the Clydesdale Bank for the construction phase of 51 new homes in Galashiels through a joint venture, Tweedside LLP, between Scottish Borders Council, contractor Tweed Homes and the Scottish Futures Trust, an independent company established by the government in 2008 to deliver value for money in public investment.
“There is no private sector housing work of any great volume going on so work from schemes like the NHT is to be commended but is hamstrung by conventional funding being down,” Mr Barn says.
The SFT has awarded a Cyrill Sweett and Miller joint venture a £435m deal to build regeneration schemes through its Northern Hub, one of five hubs set to spend £1 billion on community projects over 10 years.
Heather Pearson, partner and head of social housing and regeneration at law firm HBJ Gateley, says the NHT initiative, set up to improve access to affordable housing, could be a lifeline for the country’s construction sector.
“Scotland’s construction industry has been under pressure for several years and so far there doesn’t appear to be any great comfort on the horizon,” Ms Pearson says.
“The NHT is a novel way of accessing low-risk funding for new building projects which has the potential to encourage more activity in the sector.”
A survey commissioned by the Scottish Building Federation and the Chartered Institute of Building published last week found 39 per cent of the public identified new housing as their top priority for public capital investment.
Schools work was the second-highest priority for 25 per cent of respondents, while building new hospitals was the third priority, supported by 19 per cent of more than 1,000 respondents.
However, just 1 per cent of people thought building the new Forth crossing should be the Scottish Government’s top investment priority.
As the country’s major infrastructure project, the Forth Replacement Crossing is worth £790m and was awarded to a consortium of Dragados, Hochtief, American Bridge International and Galliford Try’s Scottish infrastructure arm Morrison Construction in March.
Meanwhile, Brookfield Constructions was awarded the country’s second biggest scheme currently under way, the £670m construction contract on the new £840m South Glasgow Hospitals.
Cabinet secretary for infrastructure and capital investment Alex Neil points to the boost to the construction industry the Forth scheme will bring through subcontracting opportunities.
However, Scottish Building Federation chief executive Michael Levack says there is a danger of too much emphasis on infrastructure.
“If Scottish ministers were to allow funding allocations for housing, schools and hospitals to suffer because of a determination to press ahead with particular infrastructure projects funded purely through the public purse, the poll shows they would be seriously out of step with what the public wants to see their money spent on,” he says.
But spending outside infrastructure has not been entirely neglected. Sanctuary Scotland Housing Association is looking for eight contractors for a £200m, four-year framework, while Aberdeenshire Council’s four-year capital works framework is worth £220m.
South Lanarkshire Council has already awarded deals under an £850m primary schools modernisation programme, which will see all 124 primary schools in the area rebuilt by 2016.
Yet infrastructure still promises strong investment in the longer term. Scottish Power foresees £3bn in works over 10 years. With the government keen to find 30 per cent of its energy from renewable sources by 2020, Scottish contractors are hoping forward-thinking and natural resources can help to lead the country into a more stable decade.
Barr construction: Scots stadium stars
Barr Construction was last month named as preferred bidder for Aberdeen Football Club’s proposed new stadium at Loirston Loch.
The contract cements its position as an expert in stadium building, having won work on more than 50 UK stadia including building the main structure of the basketball arena for the 2012 Olympic Games.
Barr’s construction director Paul Griffen said the Scottish market was struggling and that the company was looking to its traditional and core areas of strength to keep going.
“I still feel the market is challenging in Scotland, with the expectation that we would see signs of recovery not being realised,” he said.
“Our supply chain continues to struggle. In one particular project in Glasgow we have had three subcontractors go to the wall and currently we are having to support the fourth with procuring materials in order that we can finish this project.”
Barr dates back to the 19th century as W & J Barr & Sons, a local builder and joiner based in Ayrshire. The company expanded into civil engineering in the late 1960s but has since recorded success in stadia, retail work with Tesco, Sainsbury’s and Waitrose and industrial work
Mr Griffen said: “Over the past two years we have seen some of the major contractors competing at our level with competition within the £10-30m bracket especially fierce.
“We are concentrating on our core strengths including our retail framework, stadia and leisure projects and recently our successful introduction into the renewables market.”
Contractors going bust
Office for National Statistics figures show that 85 construction companies in Scotland were liquidated in the second quarter of 2011, up from 56 in the first quarter.
Cumbernauld-based Strathclyde Homes was placed in the hands of receivers last month, having once boasted a £45m turnover. Scottish civil engineering contractor McKean & Company (Glasgow), with a £40m turnover, also went into liquidation in June.
The FMB’s Mr Barn says: “There are a lot of larger, family-owned companies who are at greater risk; companies with around 20-80 staff who need regular, consistent supply of work and can work as a supplier for a main contractor or on their own.
“Major contractors will ride out the storm in Scotland and the smaller firms have ways of surviving by moving into new areas but every week we are seeing family-owned firms going and cumulatively it means a lot of jobs lost.”
However, the Civil Engineering Contractors Association Scotland workload trends survey for 2011 Q2 found that workloads reported by Scottish firms increased for the first time in two years, although 88 per cent said costs had also increased.
Director Alan Watt said there were mixed signals in the market including the end of big road schemes on the M74 and M80 and no timescales for the Borders Railway or Raith Interchange.
But upcoming projects including the 2014 Commonwealth Games and the likelihood of progress on the £400m Aberdeen Western Periphary Route gave cause for hope.
He added: “Perhaps the most serious concern for Scotland’s contractors, apart from extremely tight margins, is the lack of small to medium sized jobs coming out due to public sector spending cuts.
“Many of these projects are at an advanced stage of preparation and we are lobbying hard to get them released progressively to maintain skills and jobs until the economy picks up otherwise the Scottish civils sector will contract further.”