DBA Director, Scott Macphail, on Road Bonds and their impact on construction’s recovery

Road Bonds are well-intentioned and have a purpose, but their levels are now starting to pose a threat to the place of construction SMEs in the recovery, argues Scott Macphail.

Every party in every commercial transaction has a perfect right to take reasonable precautions against risk, but for normal business intercourse to function efficiently the emphasis must be on the word “reasonable”.

And while a sustained infrastructure push is generally accepted as being one of the best catalysts of economic recovery after the kind of shutdown we have just experienced, some of the parties involved in facilitating new development are in serious danger of being seen to veer towards the unreasonable.

I am thinking particularly of Road Bonds, the colloquial name for a sum of money or a security which must be lodged with the local roads authority before work can start on a housing development for which a road is to be provided.

These bonds provide a guarantee that the road will be completed, and they are a reasonable protection against developers or contractors failing to deliver on their commitments. They ensure that, even in extreme circumstances, the road will be built to the necessary specifications.

But there is increasing concern across the construction sector in Scotland that the amounts requested – no, rather demanded, since no challenge to the figures is allowed – are growing out of all proportion to the value of the work being carried out.

This is not so much of an issue for large developers and Tier 1 contractors, since they tend to have the top A rating from NHBC, the insurance body set up by housebuilders, which will fund their required bonds. This rating also gives councils reasonable assurance that works will be completed as specified.

But it is a long and arduous process for a smaller company to achieve the top rating. Starting at D, it can take four to five years to progress to C, and potentially 15 years to reach the top grade of an A categorisation.

Over the course of this journey, ambitious but smaller scale concerns have to put their own arrangements in place, typically finding half the bond costs from their own resources and financing the balance, a process which can leave them funding interest payments for years.

The sums required by local authorities can now be in the order of two to three times the value of the work being undertaken. While this may appear arbitrary, the rates appear to be based on the councils’ own direct labour rates, rather than much more competitive market rates.

Another troubling aspect of this issue is that inspection fees are proportionate to this, so higher bond costs equate to higher inspection costs – though it would be wholly unreasonable to suggest that there is a direct correlation.

Council officials would argue, with justification, that they have a duty to protect the public purse and that they have, in the past, been badly burnt by the failure or poor practice of contractors and have been left to pick up significant tabs for remedial works.

But this fails to accept that the construction industry has changed out of all recognition in the past decade in terms of accountability and best practice, and also that it is inequitable to penalise present players in the sector for the sins of their predecessors.

The real danger is that excessive bond fees could materially affect the viability of smaller projects, which could not only constrict expansion for SMEs but push some of them out of business altogether, with the consequent effects on local economies and employment.

This cannot be what authorities really want.

While accepting that Road Bonds exist for valid reasons, there is a strong case to be made for a more realistic view of how the legislation is interpreted and a realignment of bond fees with the actual costs of the projects being undertaken.

There is an even stronger argument for the present three arrangements for partial release of the bonds to be substantially expanded, with many more stages allowed for and the release of the bulk of the monies before local authority adoption, a process which can drag on for years. This reduction in retained bond level should be representative of the proportionate risk remaining to completion.

Ultimately, though, there needs to be a recognition of the importance of SME construction sector firms to the recovery on which we are only just embarking, and if ever there was a time for encouraging, rather than stifling, ambition, this is it.

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