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Galliford Try profits hit by mispriced major projects

13 Sep 17 Galliford Try’s annual results show profits down 57% due to losses on its two biggest construction projects that history has shown it mispriced.

Galliford Try lost millions on the Queensferry Bridge
Galliford Try lost millions on the Queensferry Bridge

For the year ended 30th June 2017 Galliford Try posted pre-tax profit of £58.7m, down from £135m the previous year, on revenue up 6% to £2,820m (2016: £2,670m).

Profit was hit by one-off charges of £98.3m, which includes £87.9m in respect of two infrastructure joint ventures in Scotland: the £790m Queensferry Crossing and the £550m Aberdeen Western Peripheral Route (AWPR).

Both projects were contracted on fixed-price terms – Queensferry Crossing in 2011 and AWPR in 2014. The Queensferry Crossing has now opened; the AWPR, which has done the more damage to Galliford Try’s books, is scheduled to complete in mid-2018. 

Galliford Try's partners on the AWPR are Balfour Beatty and Carillion, who have also suffered heavy construction losses recently. Sharing the pain on the new Forth bridge are ACS (Hochtief, Dragados) and American Bridge.

Galliford Try’s construction division made an operating loss of £88.8m for the year on revenue of £1,526.9m. Even excluding the one-off costs associated with writing off major contract losses, the division still failed to break even, making a pre-exceptional operating loss of £900,000.

Chief executive Peter Truscott said: “We have put into place rigorous processes to ensure a more disciplined approach towards project selection. Today, we are focusing on lower-risk public and regulated sectors and two-stage negotiated work, rather than large infrastructure projects on fixed-price, all-risk contracts which these legacy projects were.”

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He added: “The construction market remains largely positive, as the UK continues to require substantial investment in its social and economic infrastructure. As a result, the order book in our Construction business remains strong and we have already secured a significant proportion of work for the financial year, and much of the following year 2019. Our focus is on contract quality and risk management, and we will continue to be rigorous in our project selection, with revenue expected to remain broadly stable year-on-year as a result. Our newer work has been operating under these parameters and performance to date has been encouraging and is supportive of our target margins. As our legacy positions close out we expect margins to improve as we work towards our 2021 target of at least 2.0%.”

Fortunately for Galliford Try, its house-building division saved the day. Linden Homes made an operating profit of £170.3m (2016: £147.2m) on revenue up 11% to £937.4m (2016: £840.8m).

Galliford Try is not the first major contractor to come a cropper from escalating costs on fixed-price contracts agreed several years ago. It joins the ranks of Balfour Beatty, Carillion, Laing O’Rourke, Interserve, Bouygues UK, Vinci UK and ISG, who have all reported heavy losses in UK construction in recent times.

Many lower down the supply chain are braced for a chill wind as the cash starts to run out.

“We’re on the verge of the next massive downturn in construction,” a scaffolding contractor tells us. “In fact outside of the artificially buoyed up house-building market it has already started. My company has basked in two years of sector leading net profit margins (30%+) but I’m already making plans for these to be slashed next year. The shit is on the way to the fan again and those who are slow to realise and adapt will be in trouble by this time next year.”

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