Fierce competition in the Scottish construction industry means a growing number of firms operating on "razor thin" margins - and a real risk that quality and safety standards could start to suffer as a result.

These were the conclusions from a new survey of the sector published today by the Scottish Building Federation, which shows that the majority of Scottish building firms are operating on margins of no more than 3% as the economic downturn continues to hit the construction industry hard.

Scottish Building Federation Chief Executive Michael Levack warned that margins risk being eroded further over the coming months as competition for contracts becomes even fiercer.

Two thirds of firms responding to the latest Scottish Construction Monitor, a quarterly survey of the Scottish Building Federation's membership of more than 700 Scottish building firms, indicated that latest contracts were typically secured on the basis of a margin of 3% or less.

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More than one firm in three is typically operating on a margin of 2% or less, while more than one in seven has seen its margins cut to 1% or below.

The survey also suggests that confidence within the industry remains weak, showing an overall negative confidence rating of -32 with more than 60% of those responding either slightly less confident or much less confident about the prospects facing their business over the next 12 months compared to the previous 12 months.

Michael Levack said: "These new figures confirm what those working within the industry have known for a long time. Even in better economic times, pricing of contracts is keen and margins are typically tight.

"But these figures suggest that, in the current climate, a growing number of firms are being forced to work to razor thin margins in order to be able to win new contracts."

Mr Levack said the competitive pressure on many SMEs at the moment is immense. In the public sector there are upwards of ten firms being invited to tender for each new contract.

"Indeed, I've heard certain cases of recent local authority tender lists which have run to more than twenty companies, which is frankly ridiculous.

"In such a fiercely competitive environment, one of my greatest fears is that responsible construction companies risk being undercut by less scrupulous firms who can offer lower prices by cutting corners on quality and safety," he said.

(GK/JM)