Balfour Beatty announces £70m shortfall after KPMG review

 

Balfour Beatty has wiped £70m off the expected profits of its UK construction arm for 2014 after an extensive review by accountants KPMG.

The firm recently enjoyed some good news in winning a place as the sole contractor of a £1.5bn civil engineering contract framework however today it was forced into announcing the latest of several profit warnings in the last two years.

In a statement the board said the money comprised of £20m relating to the difference between the reported contract positions as at August 2014 ‘and £50m relating to an assessment of contract forecasts and subsequent deterioration in project performance up to the end of December 2014’.

Leo Quinn, group chief executive commented: ‘I was never in doubt that there was a great deal of work to be done to restore the Group to strength. 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.’

The review came after the firm was rocked by profit warnings and the loss of key staff last year.

Key findings presented to the board last night include the following concerns as the ‘ root causes of poor operational performance’.

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.

As a result KPMG recommended that more rigour be used in tender assessments through a more standardised approach and better guidance. It also called for earlier and ongoing risk management assessment and additional independent oversight.

KPMG accountants suggested project managers needed to have greater financial and commercial accountability for project performance. An increased focus on identifying, understanding and reporting risks inherent in projects and the implications on financial performance on a timely basis, under wider enhancements in project reporting was also called for.

The report did show reveal that the directors’ valuation of the existing Investments Portfolio increased to £1,300m and that outside of UK Construction, no net material change in underlying trading.

 
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