Balfour Beatty probe exposes new £70m black hole

Aaron Morby 3 years ago
Share

Balfour Beatty this morning revealed a further profit shortfall of £70m at its UK construction business following KPMG’s audit.

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

Balfour blamed the further project deterioration on an overly complex reorganisation programme that led to high levels of employee turnover at a time of extremely challenging market conditions.

Leo Quinn, group chief executive, said Balfour Beatty had become too complex for adequate financial control and highlighted a significant opportunity to reduce costs and improve cash flow.

The latest construction profit warning follows £135m of provisions taken over the year and Quinn could not rule out further bad news when Balfour’s full-year results are reported in March.

Under his planned regime shake-up engineering, project management and customer-facing teams will be spared cuts and strengthened.

The major projects division will now report directly to Quinn. He added that the leadership team would be improved with incentives aligned to project programmes.

Balfour will strengthen its bid approval and project delivery review processes after these were heavily criticised by KPMG.

Quinn said Balfour Beatty would also roll out a programme of systematic project-level training to drive a culture of productivity and cash generation and introduce standard reporting to raise transparency.

Balfour’s board said £20m of the shortfall related to differences between the company’s own assessments of its contracts and those of KMPG’s.

A further £50m difference arose from a subsequent deterioration in project performance on current contracts.

“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”, said Quinn.

“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.”

He added: “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.

“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.”

Balfour said that a review of its portfolio of assets had raised the valuation to £1.3bn from around £1bn. He also revealed the group ended the year with a net cash balance of £180m.

Quinn said the board still needed to assess the overall level of contract risk provisions in the UK construction business in light of the operational issues identified and would announce the outcome at the full year results in March.

KMPG review findings

The KPMG shone a light on a catalogue of issues.

1. Bidding – Tendering at very low margins with optimistic assumptions around cost, programme and procurement savings, and inadequate provisions for risk.

2. Commercial and contract management – Insufficient local management challenge and review of contract performance, failure to recover genuine contract entitlement due to poor contract administration and optimistic assumptions on contract penalties.

3. Accuracy of cost and programme forecasting – Insufficient visibility, control and understanding on actual versus reported contract performance.

Latest news

Interserve likely to breach banking covenants

Interserve in talks with banks as rising cost of exiting energy from waste prompts another profit warning
21 hours ago

Aarsleff MD exits in management shake-up

Danish parent company to refocus UK business
17 hours ago

Betting Spy: West Ham can shock Spurs in the cup

Price is too big on visitors who could face a Tottenham second string
7 hours ago

Lagan on the hunt for new North West suppliers

Open day next week to highlight work opportunities: Register now
12 hours ago

Hinkley chief buyer joins Murphy

Laing O'Rourke procurement head Ian Holcroft joins rival contractor
2 days ago

Marshalls expands in drainage market with CPM acquisition

Building products giant buys concrete pipe specialist for £38m
21 hours ago

Lovell poaches Quintain director for London MD role

Ben Giddens joins as London regional managing director
1 day ago

Amey highways drivers wear anti-dozing collars

Contractor trials range of wearable technology to make workplaces safer
21 hours ago

Skanska schools director joins Wates

Martin Kramer joins Wates as Home Counties pre-construction director
2 days ago

Clugston to start £13m Leeds College of Building job

Phase 2 of Hunslet Campus in Leeds gets underway
1 day ago

Architect trio advance £200m Gateshead Quay plan

Plan for conference and exhibition centre to be submitted by the end of next year
2 days ago

O’Rourke firms fined £3.8m after concrete factory death

Court hears how worker was crushed by 11 tonne concrete panel

Lendlease profit rebounds despite Scottish problems

UK construction business returns to strong profit
2 days ago

McAlpine to start HMRC office at Cardiff central square

Work to start on fourth major office build at £400m city centre regen scheme
2 days ago

Prime Minister summons house builders to strategy meeting

Theresa May looks to boost construction levels
2 days ago

Muse leads £75m Dartford town regen scheme

Work to start in spring 2019 on Westgate mixed-use scheme
2 days ago

BAM submits £32m Jedburgh campus plan

Work to start in spring on borders all-through school campus
2 days ago

Trio picked for Midlands multi-storey parking plan

Bourne Parking, Blackwells and Dawnus in line for multi-storey park and ride programme
3 days ago

Multiplex staff let go as sites run down

Site office teams broken up as schemes nearing completion
3 days ago

Bouygues set for £300m Cavendish physics lab

Cambridge University awards first contract under new framework
3 days ago

Murphy to install 60km underground power cable

Contractor to smash UK record for horizontal drilling
3 days ago

McMullen lands £11m cladding package from O’Rourke

Specialist to start on site in April at Liverpool cancer hospital
3 days ago

Bellway delivers 11% rise in home completions

Bellway plans to open new division in the north as demand surges
3 days ago

Mace seeks to boost transport consultancy

Mace makes two senior appointments to drive airport and highways work
3 days ago

Lidl to build its largest UK warehouse in Peterborough

New £80m warehouse is discount giant's 6th to be announced this year
3 days ago

Concrete problems hit Hinkley Point tunnels

Material needs to be replaced after failing quality checks at nuclear plant
4 days ago

Interserve lenders call in advisers amid cash crunch fears

Interserve says work underway to give greater clarity on current trading and provisions
4 days ago

Balfour/Mott seals £115m area 10 road upkeep extension

Highways England opts to extend Area 10 assets support contract
4 days ago

Morgan Sindall nets £16m fisheries HQ

Existing Cefas buildings in Lowestoft will be refurbished before new office is built
4 days ago

Construction growth to stagnate next year

Construction faces recession if promised infrastructure spend delayed
4 days ago

Contractor services