Risk & Economy » Audit » Balfour Beatty takes hit as it looks to follow KPMG turnaround plan

Balfour Beatty takes hit as it looks to follow KPMG turnaround plan

KPMG's review of Balfour Beatty sees the construction business

PROFITS HAVE BEEN further dented at Balfour Beatty, after the completion of a review by KPMG into its troubled UK construction business.

The Big Four firm has revealed more issues in how the UK business was assessing its contract forecasts, which will see its profits reduced by £70m. KPMG was drafted in last year after Balfour Beatty shocked the markets by revealing a £75m shortfall in its construction division.

The review has found a £20m difference in the UK construction business’ reported contract positions at August 2014, and KPMG’s assessment at the same date; and £50m relating to an assessment of contract forecasts and subsequent deterioration in project performance up to the end of December 2014.

Root causes of the division’s poor performance were found to be fundamental, in terms of managing its workload:

  • Bidding – tendering at low margins, allied with optimistic assumptions about cost, programme and procurement savings; with risks inadequately provided for;
  • 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; and
  • Accuracy of cost and programme forecasting – insufficient visibility, control and understanding on actual versus reported contract performance.

Insufficient visibility on project determination was “compounded” by overly complex reorganisation at the business, which led to high staff turnover at a time of challenging market conditions.

KPMG has, in turn, made three recommendations to strengthen the division. Firstly, it has called for more rigour in the tender process, including more oversight and improved operational inpiuts.

Secondly, project managers must have greater financial and commercial accountability, with KPIs set to gauge project performance.

Lastly, forecasting accuracy and timelines must improve. This should include identifying, understanding and reporting risks inherent in projects and the implications on financial performance.

While group chief executive Leo Quinn describes the review’s completion as “drawing a line” under its recent and major problems, he admits that there is much more to be done in the turnaround of the business.

“Balfour Beatty is a large organisation which had become too complex and too devolved for adequate line of sight and financial control,” said Quinn in a statement to the stock exchange. “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.

“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.”

Implementation of KPMG’s recommendations are being made “with immediate priority”. A first step in this process will be simplifying and removing layers, with its major projects construction business reporting directly into Quinn.

A drive to reduce overhead costs and improve cashflow has also begun. Standard reporting will be pushed across the group to increase transparency. A proposed £200m share buyback plan has been shelved. The group is re-engaging with its pensions trustees on its pending pension deficit payment.

Balfour Beatty’s CFO Duncan Magrath quit in November 2014, with Hogg Robinson’s Philip Harrison named new CFO earlier this week.

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