How management failings cost Balfour Beatty £75m

30 September 2014 -

Construction giant set to close four regional offices as it seeks to fill financial black hole in UK business

Jermaine Haughton

Balfour Beatty executive chairman Steve Marshall will step down once the firm finds a new group CEO, after the company posted a £75 million profit gap in its UK construction business. Marshall – currently group interim CEO – and his senior management have come under extreme pressure from investors following the company’s fifth profit warning in less than two years, highlighting the firm’s deterioration.

With shares falling by 15% following the disclosure, Balfour Beatty put the multimillion-pound shortfall down to additional losses and write-downs across a number of contracts uncovered in recent internal reviews. The profit reduction is split across the firm’s Construction Services UK wing in the following way: £30 million within Engineering Services, £20 million within large London-area building projects, £15 million within regional construction and £10 million within Major Infrastructure Projects.

In terms of its London-based activities, for example, Balfour Beatty has had problems with a number of contracts in the capital, leading to “programme slippage, resource and skills shortages, poor operational delivery and cost inflation pressures”. With 25 problem contracts already in place in London, Balfour Beatty has ruled out bidding for any further work for the city’s Tier One contractors.

Auditor KPMG has been hired to conduct an independent review of the Construction Services UK contract portfolio, with a specific focus on commercial controls, “cost to complete”, plus contract value forecasting and reporting at project level. Marshall said KPMG would report to the board before the end of the year.

Management have also been guilty of getting distracted. Marshall played a leading role in talks towards a merger with Carillion over the summer – but was unable to pull the deal off after the two firms failed to agree over Balfour’s planned sale of engineering consultancy arm Parsons Brinckerhoff. Critics say the opportunity to merge with Carillion would have at least provided Balfour with some extra managerial nous. However, the time it sank into the talks left the firm in limbo.

Marshall has never assumed the full CEO title – and indeed, the company has not had a permanent CEO since former group chief executive Andrew McNaughton left in May, following a £30m profit warning. Speaking to Building.co.uk, Whitman Howard analyst Stephen Rawlinson called the latest alert a “bombshell” which had brought the total profit shortfall announced this year to around £150m.

“That is just in the UK,” he said, “and we are asked to believe that all is okay in the rest of the world. The new chief executive is promised very soon and we do not know what he will make of contracts outside the UK. The company grasps at straws by mentioning its priorities, the likely departure of chairman Steve Marshall once the dust has settled and that there is hard work going on to get the UK right. What might Carillion be thinking now – close shave, or another opportunity to have a pop?”

A £15m shortfall in its South-west and Wales regional construction businesses is forcing the firm to shut down offices in Bristol, Exeter, Redhill and Croydon. The Bristol and Exeter offices will be merged into one office, and relocated to an as-yet undecided location.

Balfour Beatty’s future should concern politicians and the public as much as investors and analysts. As it is knee-deep in numerous large-scale projects – ranging from new power tunnels under the streets of London to the refurbishment of the Olympic Stadium for its future purpose as the home of West Ham United – a continued slump in its finances would have a negative ripple effect across the entire UK’s construction industry. That could pose a huge economic threat given that the sector, as Insights recently reported, is in generally good health.

The company is clearly is seeking to minimise the damage, pointing out that a forthcoming sale of Parsons Brinkerhoff for more than £800m will assist in paying off its overdraft. In its statement, Balfour Beatty admitted that trimming leadership figures, among other measures, was key to regaining efficiency and keeping order books full going forward.

“We have eliminated a layer of the management structure as part of business simplification,” it said. “Importantly, the business will be transferred onto a common IT platform by the end of 2014. We continue to target an increase in the average contract size in Regional construction, with bidding activity being tightly controlled across the division.”

For more on these issues, check out this CMI Checklist guide Managing Finance.

Image of Balfour Beatty logo courtesy of Tom Curtis / Shutterstock.