Balfour Beatty forecasts £70m profit shortfall

Leo Quinn
Leo Quinn

Balfour Beatty has revealed that it expects profits for 2014 to be £70 million lower at its construction business due to problems with contracts.

A review into the firm’s construction business by accountants KPMG found that it had been bidding with “optimistic assumptions”.

The report also said it had not been managing contracts effectively.

Balfour Beatty has also cancelled its planned £200m share-buy back programme and set out a turnaround plan to cut costs and improve project reporting.

It follows a string of profit warnings last year and the resignation of its chief executive.

The company has already made a provision of £135m related to its UK building business.

It said the directors would “assess the overall level of contract risk provisions in the UK construction business in the light of the operational issues identified and will announce the outcome at the full year results in March”.

The KPMG report criticised its bidding processes, saying it tendered for contracts at very low margins with optimistic assumptions around cost, and failed to manage contracts effectively.

The report also said Balfour Beatty was hit by high levels of employee turnover because of an “overly complex reorganisation programme” during a time of extremely challenging market conditions.

Chief executive Leo Quinn, who was appointed at the beginning of the year, said: “The summary report on UK Construction is an important step in drawing a line under a period of uncertainty for our customers, and enabling us to focus fully on delivering value.

“I was never in doubt that there was a great deal of work to be done to restore the Group to strength. Balfour Beatty is a large organisation which had become too complex and too devolved for adequate line of sight and financial control. The key is that these issues can be put right and we now have clear action plans in hand. Significant opportunity exists across the Group to drive reduced costs, improved profits and strong cash generation to the full benefit of our shareholders.

“The updated valuation of the Investments Portfolio, together with its income stream, clearly demonstrates its ongoing ability to deliver significant value. Within Balfour Beatty’s business model, it also provides a strategic anchor both with key customers and to the Group’s growth prospects, earnings and balance sheet.

“Working changes into the culture of the Group will take time and discipline, but everything I have seen so far reinforces my first impressions about the depth of engineering capability in Balfour Beatty, and the expertise, commitment and passion of our people. Our goal now is to ensure that the value delivered to our customers by what is an exceptional workforce, translates into best-in-class performance and returns.”

Meanwhile Henry Boot and T Clarke have both released positive trading statements today.

Boot said profit for the year to December 31 2014 is expected to be “comfortably ahead” of expectations.

The firm said 2015 had also started well particularly in plant, construction and its jointly owned house builder businesses.

Boot will confirm full-year results on March 26.

T Clarke also confirmed it was trading in line with expectations despite a “challenging” year closing out contracts let on low margins during the recession.

The building services specialist has boosted its forward order book to £300m thanks to the London construction boom.

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