Balfour Beatty’s latest profits warning the result of poor bids and late payments.

Mighty Balfour Beatty was struck down this week by problems familiar to many subcontractors. The contractor put out yet another profits warning of a further shortfall of £35M at the Engineering Services division of its Construction Services company which operates as a Tier 2 business. Losses were largely caused by bids that were priced too low in the recession and non or disputed payment of bills by the Tier 1 contractors it has been working with.

Nick Pollard

Going forward the division in London will work only for Balfour Beatty group companies, where it can be part of an integrated team and can add value to the overall project.

"Over optimism has been made worse because customers have their own difficulties so we are in dispute over work some people don’t want to pay us for."

“We need to select the customers, projects and terms on which we trade more carefully, said Construction Services chief executive Nick Pollard. “In London we will only work as an integrated supplier alongside other group companies where we can use our capabilities in BIM, offsite manufacture and design to add value for customers.”

The profit shortfall at group level will be made up in part by further PPP disposals meaning profits at the group at year end will be in line with expectation.

The business has been selling off its PPP assets and has put Parsons Brinckerhoff up for sale to make up for previous profit shortfalls announced over the last year starting with £50M in spring 2013 and in May this year another £30M. That sequence of bad news led to chief executive Andrew McNaughton losing his job.

Engineering Services was the main problem child in May with a £20M contribution to the cut in profit forecast. Its misery has been compounded since then with another £35M of losses, £30 million of which relates to a small number of existing contracts, predominantly in the London area. The other £5M flows from the decision to bid more carefully resulting in less work being won than anticipated.

The major losses came to light after Pollard went in to manage the business in May after managing director Phil McGuire stepped down.

“There was clearly some weak leadership and governance issues around the controls in the division. Over optimism has been made worse because customers have their own difficulties so we are in dispute over work some people don’t want to pay us for,” Pollard said.

Pollard has strengthened the management team at Engineering Services with a number of new appointments, has focused on selectivity in bidding and managing the risk on contracts “with rigour and vigour”.

“We are concentrating on getting the basics right in bidding and standing up where appropriate to fight for what is owed,” Pollard said. “Difficult positions take time to resolve. Profits that should have fallen into this year now won’t and we had to recognise that risk and share it with the market. But we will be pursuing our case for appropriate, fair settlement.”

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