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Fri April 10 2020

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Costain rocked by arbitration reversal

12 Dec 19 Half of Costain’s 2019 profits have been wiped out by a legal dispute that has gone against the company.

The Jack Williams Gateway Bridge on Costain's Gilwern-Brynmawr section of the A465
The Jack Williams Gateway Bridge on Costain's Gilwern-Brynmawr section of the A465

Costain, which styles itself as ‘the smart infrastructure solutions company’, has been in dispute with the Welsh government over its A465 Heads of the Valleys road building contract.

Earlier this year the Welsh government escalated a specific matter under the dispute resolution mechanism in the A465 contract which Costain signed in 2015. The dispute centred on responsibility for design information and it was decided in Costain's favour in the initial adjudication proceedings.

The specific matter has now been determined at arbitration. The arbitration award effectively splits the responsibility for the design information between both parties.

Costain said that this partially reverses the decision of the initial adjudication and is contrary to the legal advice it had received.

The financial cost of this reversal is that 2019 underlying operating profit is now expected to be in the range of £17m-£19m and not the £38m-£42m range it had previously been indicating.

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The year-end net cash position will now be about £20m, with the net cash position being impacted by approximately £40m of cash currently withheld on the A465 Contract.

“We continue to fulfil our obligations under the A465 contract, with completion scheduled in H1 2021,” Costain said today.

Costain is widening 8km of the A465 between Gilwern and Brynmawr. It started in 2015 and was originally meant to finish in 2018. Its £150m contract has overrun by about £100m. It is working alongside live traffic within a constrained site through the steep sided, environmentally sensitive Clydach Gorge, which has altogether been harder than Costain had anticipated.

Chief executive Alex Vaughan said: "Clearly the situation regarding the A465 contract is disappointing. Elsewhere, the business is performing in line with expectations. We have secured a number of new contracts to maintain our healthy order book. We have also made good progress with our Leading Edge strategy, accelerating the deployment of higher margin services to our blue chip client base. We are confident this strategy will enhance our offer to clients, deliver higher margins and generate long term shareholder value."

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