Optimistic assumptions’ blamed for Balfour Beatty’s financial woes

Economic consultant KPMG has delivered its report into Balfour Beatty’s underperforming UK division, and has diagnosed a number of failings in the way the contractor’s management went about bidding for and running contracts.  

At the tendering stage, the report says, teams tried to win work by "tendering at very low margins with optimistic assumptions and inadequate provisions for risk". This reduced the firm’s contingency and increased the chance of losses.  

KPMG also said there were problems with the way Balfour managed legal contracts, including "poor contract administration and optimistic assumptions on contract penalties". According to the report, there was "insufficient visibility, control and understanding of actual programme forecasting versus reported contract performance". 

The consultant added that Balfour’s efforts to reorganise itself had exacerbated its problems, as these were "overly complex" and led to "high levels of employee turnover at a time of extremely challenging market conditions". In the past two years, the company has lost two chief executives, as well as its chairman and finance director.  

The report also said that its findings had led the contractor’s board to reduce its forecasted profit for 2014 by a further $106m. It said $30m of this shortfall related to the difference between Balfour’s and KPMG’s assessment of the value of existing contracts and $76m related to poor project performance. 

The group will announce its full year results in March.  

The company yesterday called an emergency board meeting at which it was decided to cancel an expected $300m share buyback. Today it said it planned to review its dividend policy in the light of KPMG’s findings.  

Leo Quinn, Balfour’s newly appointed chief executive, said: "The report is an important step in drawing a line under a period of uncertainty for our customers, and enabling us to focus fully on delivering value. 

"Balfour Beatty is a large organisation that had become too complex and too devolved for adequate line of sight and financial control. The key is that these issues can be put right and we now have clear action plans in hand." 

Quinn will launch a cost-cutting drive in his first months in office. Despite continuing takeover speculation, he stressed the "huge synergies" of having the group’s investment arm and construction group side by side. 

Balfour have recently recruited Philip Harrison as chief finance officer on $600k a year. 

Read the full KPMG review here.