Balfour Beatty: bad project management to put £75m dent in profits

Balfour Beatty has been forced to draft in outside help from KPMG after it issued its fifth profit warning in less than two years and the board admitted it was “surprised” at the discovery of further problems at its UK construction business.

Shares in the group, which earlier this year turned its back on a £3bn tie-up with rival Carillion, crashed 25pc at one stage on Monday, their biggest ever one day fall, after it said that profits at its UK construction arm would be hit again, this time to the tune of £75m. The admission marked the fifth occasion it has had to warn of a profits shortfall at the division since November 2012.

Sources close to Balfour, which remains without a chief executive after Andrew McNaughton’s swift departure in May, admitted the company had a lot of ground to make up to restore trust and its credibility with shareholders following the shock update.

Steve Marshall, Balfour’s executive chairman, painted a chaotic picture at the UK construction arm as he admitted to investors and analysts that the company has “been surprised itself” at continuing problems, relating largely to contracts won during the recession on thin profit margins, which have turned out to be more costly than originally forecast.

Mr Marshall, who indicated that he will step down as soon as a new chief executive and chairman have been appointed, has asked KPMG to investigate the UK construction division and to give the board “the reassurance it needs” that there will be no more nasty surprises.

“The company has had a series of surprises. And it has been surprised itself,” Mr Marshall admitted.

His comments suggested there has been a critical break-down in trust and communication between senior managers and those lower down the ranks. KPMG will report back to the board by the end of the year about what is happening on the ground in the UK construction arm.

Nick Pollard was appointed to turn around the UK construction division 14 months ago and Balfour Beatty has been pulling out of certain markets. It is bidding for fewer contracts in parts of the business and is going after bigger deals with better profit margins.

The company said the majority of the profits shortfall relates to engineering services work in London, where the total number of “problem” contracts has increased from 21 to 25.

“We have continued to experience programme slippage, resource and skills shortages, poor operational delivery and cost inflation pressures,” the group said.

Some £20m of the £75m shortfall relates to large building projects in London; £15m to regional contracts and £10m to major infrastructure projects.

The company pointed out that many of the problems had been highlighted in previous trading updates, although some analysts expressed surprise that writedowns were being made in areas such as major infrastructure projects, where Balfour has years of experience.

Balfour insisted a new chief executive is likely to be named in a matter or weeks, rather than months, in an effort to restore stability to the company.

The warning led to a series of profit downgrades. Liberum analyst, Joe Brent, slashed his forecast for full-year pre-tax profit to zero from £75m and said he expected the dividend to be cut from 8.5p a share to 5.6p a share.

Balfour is currently in the process of offloading its US consultancy business, Parsons Brinckerhoff, which was the principle cause for the collapse of merger talks with Carillion earlier this year.

Carillion had wanted to keep hold of the US division but Balfour insisted on the sale. Critics of Balfour warned that by selling Parsons Brinckerhoff, the company would be left exposed to a highly volatile construction business.