Costain revamps risk control after problem jobs cause £96.1m loss

Grant Prior 2 years ago

Costain has completely overhauled its approach to contract risk monitoring after problem jobs caused a £96.1m loss for the year to December 31 2020.

Results were hit by £94.7m of charges from two long-standing contracts in relation to the Peterborough & Huntingdon gas station job and and the A465 Heads of the Valleys road road scheme.

Costain also confirmed a one-off charge of £5m in relation to closing out the ASF south highways legacy contract.

The charges led to a pre-tax loss for the year of £96.1m from a £6.6m loss last time on turnover down to £1,070m from £1,175m.

Costain said: “The Group’s contract selection, tender and contract management processes and behaviours have been enhanced over the past 18 months, resulting in lower contract risk and better cost management throughout the lifecycle of our projects.

“To enhance tender governance the Group has updated its policies for commercial expectations and risk appetite for all new contracts, including reducing the acceptable level of downside risk and increasing the minimum level of acceptable profit for all new contracts.

“The Group has also implemented a five-gated approval process prior to signing any contract, including independent risk and assurance review prior to target cost and contract conditions approval.

“In addition, the Group has implemented its ‘Operational Excellence Model’ on all new contracts and existing long-term frameworks.

“The monitoring and administration of scope of works changes to identify and escalate potential cost increases at an early stage have been enhanced, including the rigour of monthly reviews of all contracts in a standard and mandatory format, and detailed measurement of work in progress and cash collection.”

Costain put the cost of Covid to the company at £9.2m and received £2m from the government furlough scheme.

The company has set a medium-term target of 6-7% divisional margins with 55% of profits derived from our higher margin services like consultancy and digital services as it “broadens its offer from purely complex construction.”

Costain added: “Everyone at Costain is focused on ensuring all projects are delivered to plan and project risks are managed effectively. This absolute focus alongside the delivery of our strategic plan is the bedrock to delivering the improved performance we expect next year and over the years ahead.”

The company had a £4.2bn order book at year end and net cash of £102.9m.

Alex Vaughan, chief executive officer, said: “Last year was a challenging year but I am proud of how well everyone at Costain responded and the resilience shown across our business which enabled us to continue to operate effectively with strict Covid-19 safety measures in place.

“The significant charges reported at the half-year relating to two contracts are clearly disappointing, and importantly we have taken robust steps to prevent such issues from reoccurring.

“Last year, we continued to be successful in winning new contracts and preferred bidder positions worth over £2.3bn with an increasing proportion of this work incorporating our broader service offering in line with our strategy.

“The UK Government has provided a clear strategic framework for UK infrastructure investment, underpinned by long-term underwritten investment programmes to support the UK Government’s drive to level-up economic growth and to meet decarbonisation commitments.

“I am confident that Costain is in a good position to capitalise on the opportunities in front of us and to grow our profits in 2021.”

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