Construction News

Sun October 25 2020

Related Information

Costain posts £92m half-year loss

14 Sep While many companies are blaming their losses on the coronavirus crisis, at Costain it is old-fashioned construction and engineering frailties that are to blame.

Alex Vaughn, who took over as chief executive from Andrew Wyllie in May 2019
Alex Vaughn, who took over as chief executive from Andrew Wyllie in May 2019

Problems with a National Grid project in the east midlands and a road building job in Wales caused Costain to make a pre-tax loss of £92.3m for the first six months of 2020.

At an operating level, the loss was £90.4m, on revenue of £548.7m.

Losses taken on the National Grid contract to build gas turbine compressors in Peterborough and Huntingdon totalled £49.3m in the six months to 30th June 2020. Losses on the A465 Heads of the Valleys road contract were £45.4m for the period.

As previously reported, Costain reached agreement was reached with National Grid to cease work on the contract in June.  The termination agreement incorporates a legal process over the next 18 months to agree up to £80m of identified compensation events, recover costs to date and eliminate a potential liability to National Grid for completing the works.

Costain has £49.3m of work undertaken but not yet paid, to be recovered through the resolution process, it hopes.

In Wales, work is continuing to complete the A465 contract, on the fringe of the Brecon Beacons National Park, which was entered into in 2015.  The initial contract price was £159.5m. Today, total costs are currently put at £336m. The works have included the construction of more than 10,000 metres of retaining walls and installation of more than 14,000 soil nails.

After problems with one specific retaining wall, Costain sought to claim the costs from the client. The client, the Welsh government, thought it was Costain’s fault.

Related Information

The client escalated a specific matter under the dispute resolution mechanism in the contract, relating to the responsibility for design information for a specific retaining wall and whether it qualified as a compensation event.  This issue was decided in Costain’s favour by way of previous adjudication awards.  However, in arbitration, the arbitrator found that responsibility for the design information rested with Costain and so the additional costs associated with the building of the retaining wall was not a compensation event under the contract. The arbitration award is non-appealable and has implications for the responsibility for design information under the whole contract and therefore Costain's ability to recover costs.

As a result of the issues on the A465 and National Grid contracts, there have been changes at Costain. It is no longer bidding for energy EPC contracts and any contract proposal now has to go through a five-stage gated approval process prior to signing anything.

Costain’s revenue for the first half of 2020 was down 23% to £459.9m, reflecting the impact of Covid-19. Thanks to a £100m rights issue, it had a net cash balance at 30th June 2020 of £140.9m (H1 2019: £40.8m), comprising £117.8m of cash, £85.1m share of cash in joint operations, and £62.0m of drawn debt.

Chief executive Alex Vaughan said: "We are now back on site across all of our operations with strict safety measures in place to protect our teams and the communities we work in. I would like to pay tribute to our people who have done everything they can to look after one another and to do the right thing by our clients, communities, society and to protect our business during this pandemic.

"We are clearly disappointed with the recent arbitration outcome in relation to the A465 contract which, together with the mutual termination of the Peterborough & Huntingdon contract, has resulted in significant revenue adjustments for these long-standing projects. We have in place clear actions to resolve the financial position on these contracts and importantly we have taken decisive action to prevent such issues from reoccurring.

"The equity raise in May has already helped us to capitalise on the immediate opportunities in our infrastructure markets as we successfully secured over £2bn of contracts in the first half, many of which incorporate our consultancy and digital capabilities in line with our strategic focus. There remains a strong pipeline of further opportunities which we are actively targeting.

"Looking ahead, assuming no further sustained Covid-19 lockdowns, we are confident of delivering growth in profits and margins next year. Although we are mindful of the macro-economic uncertainties ahead, Costain is in a strong position with secured long-term programmes and a positive market backdrop, in particular the UK Government's drive to progress investment in infrastructure so that it is better, greener and faster in support of the nation's economic recovery."

Got a story? Email news@theconstructionindex.co.uk

MPU

Click here to view more construction news »