Balfour Beatty’s turnaround appears to be on track as the construction giant today reported a return to profit.
The UK’s biggest contractor posted statutory group pre-tax profit of £8m off the back of £8.5bn revenue.
But beyond the headlines, what did we learn from the group’s results?
Balfour’s plan for better margins
Balfour is aiming for “industry-standard” margins of between 2 and 3 per cent in its UK construction business by the end of 2018.
The focus is on “bidding for contracts with increased margins and more favourable contract terms”, it said today.
Balfour added that its regional business was targeting fewer, larger contracts and “continues to reduce its exposure to contracts under £5m”.
From 2019 it is aiming to command a “premium” beyond the 2-3 per cent margin target.
Boss Leo Quinn told Construction News: “We have the scale to have these market-leading returns.”
Problem legacy contracts being tackled
When Mr Quinn joined Balfour Beatty, he identified 89 projects that were bringing the company’s profitability down.
That number has shrunk, with 2018 earmarked as the year these contracts can be well and truly put behind the firm.
But progress is as much about learning lessons as it is about clearing the decks, and Mr Quinn’s team have definitely got a few revision notes.
“Where we have ended up with bad projects, we were invariably working in a geography we haven’t worked in, or in an application that isn’t core to the company, or [where] we don’t have the required skillset to deliver on time and on budget,” he said.
This has bred a new bidding review process that has paid dividends with the firm almost doubling its bidding win ratio.
Balfour’s consultant inner circle
To create stronger relationships with its supply chain, Balfour has created a framework of design consultants it will channel most of its spend through in the future.
We know that Mott MacDonald and Atkins are part of the lucky few in the Balfour Beatty inner circle.
While Mr Quinn wouldn’t go into details of the others, he said “smaller than a handful” of the “usual suspects” were on the list.
With an order book of £12.7bn, the framework is a good one to be on.
US efforts paying off
The US is Balfour’s biggest construction market as it bags around half of its revenue from the country.
The firm is continuing to perform strongly in the US with revenue in 2016 jumping 11 per cent to £3.4bn.
Balfour also moved back into the black in the country as underlying operating profit came in at £33m, compared to a £22m loss in 2015.
The company remains positive about its future US prospects, boosted by President Trump’s promised $1tn of infrastructure investment.
Brushing off Brexit
Balfour is continuing to shake off any immediate impact from the UK’s vote to leave the EU.
But like the rest of the construction industry, the firm remains concerned about how it will be affected by the potential impact on EU workers employed here.
It has flagged that Brexit’s potential to hit the free movement of people is likely to “exacerbate” the skills shortage within construction “at a time when demand for skilled workers will increase given the pipeline of projects due to start in the coming years”.
Balfour said today: “The group is working constructively with industry bodies and the UK government to identify and manage any direct challenges caused by the UK’s exit from the EU.”
Pot for future industrial disease costs
On the advice of an independent actuarial report commissioned by the firm last year, Balfour has decided £14m should be put aside as provision held for liabilities in respect to industrial-related disease.
The liabilities will mostly cover asbestos-related claims for events pre-1972 for work not insured by the Financial Services Compensation Scheme.
“We all know that respiratory diseases in construction are a challenge. It is more caution than anything else,” said Mr Quinn.
Claudio Ranieri, you never call, you never write….
When Construction News spoke to Mr Quinn last year, Claudio Ranieri’s Leicester City were riding high at the top of the Premier League table.
Mr Quinn talked about his desire to get Mr Ranieri in to talk to Balfour Beatty’s management team once Leicester won the league.
Well Construction News can reveal that Mr Quinn did indeed write to the then Leicester boss. Alas, he received no answer from everyone’s favourite tinkerman.
Leicester might once again be on the crest of a wave but not before Mr Ranieri was unceremoniously dumped.
Gone, but not forgotten, Mr Quinn is still apparently keen to get Claudio in.