An award of a £38m contract by Scotland's second largest social landlord to a local builder on the verge of collapse is under investigation by the Scottish Housing Regulator and Audit Scotland, the Sunday Herald can reveal.

Dumfries and Galloway Housing Partnership (DGHP), Scotland's second-largest social landlord, has insisted that it conducted proper due diligence on local builders Robison and Davidson (R&D) Construction, a subsidiary of R&D Holdings run by prominent local businessman John Hume. The company, which had 14 subsidiaries, went into receivership in April 2011, less than two years after the award of a major contract to renew council estates in Stranraer and Dumfries for DGHP.

The independent Scottish Housing Regulator said that it was "engaging with DGHP to gain the assurance we need around its handling of this matter, and liaising with our scrutiny partner, Audit Scotland".

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The regulator's move appears to be in response to pressure from local councillors and parliamentarians as well as to investigations by this newspaper.

The appeals were spearheaded by the non-aligned Stranraer councillor Willie Scobie, with support from local list SNP MSPs Joan McAlpine and Aileen McLeod and from and Galloway and Tory West Dumfries MSP and former Scottish Parliament presiding officer Alex Fergusson.

Next week the trades council of the Dumfries STUC will consider lodging a petition to the Scottish Parliament's petitions committee calling for a full parliamentary enquiry.

Councillor Scobie said: "By referring the matter to the housing regulator we can establish whether the company was in any way fit to take on this important contract, and if they weren't, why were they ever given it?"

"A lot of local companies are owed a lot of money and I'm hoping that an investigation could lead to them being reimbursed in some way."

As well as new information about the state of R&D's precarious financial circumstances at the time of the award, pressure to investigate the contract has been increased by the revelation that R&D's bid was more than 10% lower than the next highest, involving a "retention" of only 4.8% of the contract value.

Asked about its due diligence process, DGHP originally claimed that it had "carried out an independent financial assessment through a third party. This included the last three years' published accounts of R&D Construction Group Ltd. This was compared to other industry standards and contractors to gauge financial strength as is the case in awarding any contract."

However, pressed for the identity of the "third party" it has since appeared to retreat from the claim.

In an updated statement last night, DGHP said: "DGHP carried out most of the credit analysis in-house using information provided by a variety of sources including financial check companies and Companies House."

The housing association has previously explained its non-discovery of R&D's lack of bank cash and assets, dependency on bank loans, and inexplicably increased value of its housing and land stocks in the midst of the credit crunch, by saying it only investigated only the subsidiary and not the holding company. An administrator's statement seen by the Sunday Herald lists more than 500 individuals, public bodies and large and small companies owed a total of £8m at the time of R&D's collapse.

Along with creditors, those pressing for further scrutiny include tenants of R&D-built houses in Stranraer's Dick's Hill and Dumfries' Lochside estates, who have deluged DGHP and Dumfries and Galloway Council with complaints. Council tenants, backed up by local builders and tradesmen, have linked alleged shoddy building standards to "corner-cutting" by R&D as it struggled to stay afloat.

Dumfries and Galloway Council which invested £13m in the project, and the Scottish Government, which invested £16m, have both assigned responsibility for financial vetting to DGHP:

The Scottish Government said: "The Scottish Government Housing Supply Division does not carry out its own separate due diligence on RSL projects".

A spokesman for the Council said: "The Council had no contractual relationship with R&D Construction ... The contract was between DGHP as the developing RSL and R&D Construction ."