Balfour Beatty has warned profits at its UK construction arm will take a £70m hit after a review of its business by KPMG found it had made “optimistic assumptions” about the cost and risk of contracts.
The widespread review of the construction group’s business was initiated in September after it made its fifth profit warning in a year.
A £200m share buy-back scheme has been cancelled, and its dividend is also up for review as a result of the findings.
Group chief executive Leo Quinn said the findings were a key step in drawing a line under the period of uncertainty.
"The updated valuation of the investments portfolio, together with its income stream, clearly demonstrates its ongoing ability to deliver significant value. 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.”
KPMG made found three key areas where Balfour was failing:
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.
It summarised: “The group considers insufficient visibility on project deterioration was compounded by an overly complex reorganisation programme that led to high levels of employee turnover at a time of extremely challenging market conditions.”
It made four suggestions to address the issues: more rigour in tender assessments; improve accountability for project performance; accuracy and timeliness of forecasting and the improvement of group policies.