The profit warning saw Connaught’s share price plunge by a third and sent shivers through the sector with rival Mears forced to make a statement about its business prospects.

Connaught is the first contractor to assess the impact of the spending slowdown on its business after the round of project cuts and emergency Budget.

Connaught said it had identified 31 contracts within its social housing division where a proportion of the value relating to capital expenditure has been deferred.

The contractor estimated this will knock expected revenue by around £80m and profit before interest and tax by £13m in the current financial year.

In a statement the firm said: “If this were to continue we anticipate a reduction of revenue by £120m and EBITA by £16m for financial year 2011.”

The sum equates to around a quarter of the social housing division’s annual profits and turnover.

At the half year results, published in February, Connaught group sales stood at £355m.

At that time chief executive Mark Tincknell said Connaught would be exiting underperforming areas as contracts expire.

He said then that revenues in social housing were expected to fall by £25m in 2010 and £40m in 2011.

The latest warning shows that the problems at the social housing division are being compounded by spending cuts.

Tinkernell said that as a result Connaught expected a one-off impact to its cash conversion rate, reducing to around 40% this financial year.

The news sent share prices sliding. Rival Mears was forced to make a statement late on Friday after its shares fell 8% in reaction to Connaught’s profit warning.

Mears said that it had not experienced such delays as a result of the Emergency Budget, and current trading remained in line with management expectations.

The firm added that its continued to deliver strong trading across all divisions with an order book at £2.5bn.

Connaught also maintained that the medium-term outlook for the business remained strong.

The firm is in the middle of a cost reduction programme that is expected to save at least £25m for financial year 2012.

Connaught said it had a record bid pipeline of £5.3bn reflecting the trend towards larger, longer-term contracts as its customers sought to address  budgetary restrictions.