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Tue October 19 2021

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Morgan Sindall falls victim to cost inflation

24 Oct 14 Morgan Sindall has issued a profits warning to shareholders after contracts priced more than a year ago have since incurred cost inflation.

Chief executive John Morgan
Chief executive John Morgan

Not only has the rising price of building materials eroded profits, Morgan Sindall has also suffered from slippage on certain contracts and seen a fire destroy its site at the University of Nottingham.

In a trading statement today the board said that it “now expects the full year result will be below previous expectations set at the time of the half year results announced on 5 August 2014”.

The construction division is now expected to deliver operating margins of just 0.3% to 0.5% for the full year, down from 1% in 2013.

The company said that its Affordable Housing, Urban Regeneration, Fit Out and Infrastructure activities have performed well over the past four months but some construction contracts in London and the south had experienced delays and increased estimated costs to complete.

“Delivery pressures in London and the south's construction activities have adversely impacted performance with programme slippage and increases in costs to complete projects both contributing factors,” it said.

“The deterioration in performance over the period [since 1st July 2014] relates mainly to a small number of fixed price construction contracts which are due to complete within the next six months and were procured over a year ago.

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“Additional resources have been required to complete these contracts which, when added to inflationary pressures since contract win, have increased forecast costs to complete.   Also, where programme overruns are now anticipated, forecast contractual penalties have further increased the potential contract costs.”

Then there was that fire in Nottingham last month. (See previous report here.)

Morgan Sindall had started on a £15.8m contract to build the GlaxoSmithKline Carbon Neutral Laboratory of Sustainable Chemistry in autumn 2013 and was due for completion in early 2015. “The loss of expected contribution from the time of the fire up to completion has further impacted divisional performance,” the board said today. 

Chief executive John Morgan said: "We are obviously disappointed that a small number of construction contracts in London and the south have been impacted by timetable slippage and increased estimated costs to complete.  This is a short-term and localised issue which is receiving the highest level of management attention and which should be worked through over the next six months.

“The rest of the business is performing well, particularly Fit Out, and we expect an improved performance from Urban Regeneration in the year, supporting our long-term strategy of investment in regeneration. We firmly believe that the medium and long term opportunities and prospects for the group remain very attractive, as demonstrated by the higher quality order book and pipeline."

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