The problems at construction and engineering giant Balfour Beatty were laid bare this week as accountants KPMG published a review of the business.
The contractor said its UK construction profit will be reduced by a further £70M. This follows a succession of financial bad news stories over the past year.
Balfour Beatty has also cancelled a proposed share buyback of up to £200M, and its dividend policy will be reviewed in March at the time of its full year results.
The shortfall uncovered by KPMG comprises:
- £20M relating to the difference between reported contract positions at August 2014, and KPMG’s assessment at the same date
- £50M relating to an assessment of contract forecasts and subsequent deterioration in project performance up to the end of December 2014
The consultant identified the following root causes of poor operational performance:
- Bidding - Tendering at very low margins with optimistic assumptions of cost, programme and procurement savings,
as well as inadequate provisions for risk.
- 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 about contract penalties.
- Accuracy of cost and programme forecasting - Insufficient visibility, control and understanding of actual versus reported contract performance.
- An overly complex reorganisation programme - This led to high levels of employee turnover at a time of extremely challenging market conditions.
KPMG recommended more rigour in tender assessments; improved accountability for project performance; better accuracy and timeliness of forecasting; and measures to reinforce group policies to commercial and local financial management.
KPMG suggested the Balfour Beatty board assess the overall level of contract risk provisions in the UK construction business because of the operational issues identified.
The outcome of this will be announced at the full year results.
The consultant said that the financial troubles stemmed from problem businesses identified last year: Engineering Services; London (including Major Projects); and the South West area of the regional business.
During the review, announced on 29 September KPMG examined the contract positions of 127 projects in August 2014.
The sample included approximately 74% of engineering services projects and 58% of those classified as major projects.
New Balfour Beatty chief executive Leo Quinn came out fighting, saying the report’s publication “drew a line under a period of uncertainty for our customers”.
“I was never in doubt that there was a great deal of work to be done to restore the group to strength,” he said.
“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.”
Quinn insisted there were significant opportunities to reduce costs, improve profits and generate cash.
“The updated valuation of the investments portfolio, together with its income stream, clearly demonstrates its ongoing ability to deliver significant value,” he said.
“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.”
Former chief executive Andrew McNaughton resigned last May at the same time as the contractor lowered its forecast for this year’s group pretax profit to between £145M and £160M.
Balfour Beatty then told the City in September that its 2014 results would be affected by a fresh £75M write-down of contract values across its construction services division.