As a result of the KPMG review and recommendations Balfour Beatty’s board expects to reduce 2014 UK construction profits by a further £70m.
New chief executive Leo Quinn, who joined in January, said the company had become “too complex and too devolved for adequate financial control”.
Mr Quinn is now launching a cultural revolution of the business. First phase of the programme for transformation involves ‘significant’ cuts to overheads and substantially improved cash flow generation. The UK structure will be simplified with the Major Projects construction business now reporting directly to the group chief executive.
Engineering, project management and customer-facing resources will be preserved and strengthened.
Priority areas are:
- strengthening the bid approval and project delivery review processes
- creating a culture of productivity and cash generation through project-level training
- upgrading leadership and aligning all incentive grades with programme targets
- establishing standard reporting to increase transparency.
Under the circumstances, the proposed £200m share buyback is cancelled – it only has £180m in the bank – and the dividend policy is under review.
Accountancy firm KPMG was commissioned on 29th September 2014 to conduct a review of the contract portfolio within Construction Services UK (CSUK) business, given its continued problems. Most of the problems KPMG found were in parts of the business already identified as troubled: Engineering Services, and London (including major projects buildings) and Southwest regions of the Regional business.
According to KPMG, the root causes of poor performance were:
- Bidding - Tendering at very low margins with optimistic assumptions around cost, programme and procurement savings, and inadequate provisions for risk.
- 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.
- Accuracy of cost and programme forecasting - Insufficient visibility, control and understanding on actual versus reported contract performance.
Problems were made worse by high staff turnover during the recession. Or as KPMG puts it: “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.”
Separately, the directors' valuation of the existing investments portfolio has been upgraded to £1,300m, up from £1,050m six months ago.
Leo Quinn said: "The summary report on UK Construction is an important step in drawing a line under a period of uncertainty for our customers, and enabling us to focus fully on delivering value.
"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. Significant opportunity exists across the group to drive reduced costs, improved profits and strong cash generation to the full benefit of our shareholders.
"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.
"Working changes into the culture of the group will take time and discipline, but everything I have seen so far reinforces my first impressions about the depth of engineering capability in Balfour Beatty, and the expertise, commitment and passion of our people. Our goal now is to ensure that the value delivered to our customers by what is an exceptional workforce, translates into best-in-class performance and returns."
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