Balfour Beatty, the international infrastructure group, has today announced a further profit shortfall of approximately £75 million in Construction Services UK in its latest trading update.

The Group also announced that it has appointed KPMG to undertake a detailed independent review of the contract portfolio within Construction Services UK. KPMG are expected to report back to the Board by the end of the year. The review will focus on commercial controls, on 'cost to complete' and contract value forecasting and reporting at project level.

Balfour Beatty said that internal reviews conducted in recent days have forecast a further profit shortfall due to additional losses and write-downs across a number of contracts, estimated at £75 million in aggregate, and reducing 2014 results.

The £75 million profit reduction is split across Construction Services UK as follows:

• £30 million within Engineering Services
• £20 million within large London area building projects
• £15 million within Regional construction
•  £10 million within Major Infrastructure Projects.

Problems include programme slippage and poor operational delivery

In Engineering Services the £30 million write-down relates mainly to previously highlighted problem contracts in London. Balfour Beatty said it has continued to experience programme slippage, resource and skills shortages, poor operational delivery and cost inflation pressures. The total number of problem contracts has also increased to 25, from the 21 previously disclosed. The firm has now withdrawn from bidding any contracts for other Tier 1 contractors in London, as well as withdrawing from bidding any new contracts in the South West region. Balfour Beatty said the business will continue to pursue contractual entitlements in relation to the problem contracts and to recover monies it believes are fairly due.

The large London area building projects were transferred into Regional construction earlier in the year. With a number of these projects approaching completion, some have experienced further programme slippage and increases in cost to complete estimates.

Office closures on cards in regional construction division

In Regional construction the firm said it has experienced continued difficulties in the South West and Wales regions and is continuing to take steps to reduce its exposure in these regions –including consultation with employees over office closures.  Balfour Beatty added that across the business it was continuing to be more selective in the work it bids, and had seen a reduction in its expected order intake and forecast margin as a result.

Work to refocus Construction Services UK includes eliminating a layer of the management structure as part of business simplification and the transfer of the business onto a common IT platform by the end of 2014.

Trading across the rest of the Group remains in line with expectations.

The Circular to Shareholders for the sale of Parsons Brinckerhoff is expected to be issued in October. It is anticipated that up to £200 million will be returned to shareholders in the form of a share buyback programme, subject to the disposal completing.

Apart from Construction Services UK, current trading and full year expectations remain broadly in line with the Board's expectations. The Group said its financial position remains robust, taking into account the expected disposal of Parsons Brinckerhoff and the inherent value within the Investments portfolio. Expectation for average net debt for the year is approximately £500 million, excluding the benefit of proceeds from the Parsons Brinckerhoff disposal.

"This latest trading statement is extremely disappointing"

Steve Marshall, Executive Chairman of Balfour Beatty said:

“This latest trading statement is extremely disappointing; the Board has appointed KPMG to undertake a thorough review across the contract portfolio within Construction Services UK. There has been inconsistent operational delivery across some parts of the UK construction business and that is unacceptable. Restoring consistency will take time and it has our full focus. The Board is committed to delivering shareholder value and we are progressing against the priorities we set out over the last few months, including the sale of Parsons Brinckerhoff and the announcement shortly of a new CEO. The Group’s other operating divisions are trading as expected and the Board continues to believe the standalone strategy will deliver value in the medium term.”

The statement said the process to appoint a new Group CEO is now at an advanced stage and that an announcement will be made in due course. Steve Marshall has indicated to the Board that, following the handover of his interim executive responsibilities to a new Group CEO and the identification of a new non-executive Chairman, he intends to step down from the Board.