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For Interserve, construction is a risky business

For three of the UK’s biggest construction beasts, the summer of 2017 is one to forget.

Buffeted by the economic headwinds of problem contracts and, in the case of Carillion and Interserve, contending with serious share price nosedives, the past months have been tumultuous for the contracting giants.

Meanwhile Galliford Try has decided that the world of big infrastructure projects is not for them after posting a -5.9 per cent margin on its construction arm due to a £98m exceptional charge on legacy contracts.

In February, Interserve suspended its dividend after posting a £94.1m pre-tax loss caused by the spiralling costs of exiting the EfW market. The initial provision of £160m does not look to be enough, and the latest trading update came as a further blow to the listed construction players.

Interserve’s trading statement today was noticeably short on detail.

By simply stating that “costs will significantly exceed the £160m currently provided” it is little wonder that shares plummeted as investors headed to the door. The firm provides no guidance on what the future holds.

Commenting on the Interserve trading update market analyst Stephen Rawlinson said: “There are no explanations provided for the disappointing out-turn in services and construction, no mention of remedial actions being taken and no mention of the detail of the covenants.

“If the lack of detail on the past and potential future actions was unhelpful then the lack of any level of guidance adds to it in a considerable manner.”

Moving on from Interserve, Carillion’s woes are well documented. Having revealed its three UK and one Middle East problem contracts, the firm posted an £845m write-down in July and is looking to update investors later this month on the findings of an internal review conducted by EY.

With Carillion ranked at number two on the latest CN100, Interserve weighing in at four and Galliford Try at seven, issues confronted by these firms cannot be ignored. CN understands that Carillion’s trial and tribulations have been discussed within the Cabinet Office.

It begs the question, is the current procurement flawed or have UK contractors continued to fail when it comes to adequately assessing risk? And do UK contractors have the resilience to soak up further issues?

Looking back at Balfour Beatty’s woes in 2015, a review of the business by KPMG at the time identified 89 significant problem contracts that had to be brought under control through Leo Quinn’s two-year turnaround programme.

One of the startling discoveries from Balfour’s own issues was that, at the time, the contractor had no way of knowing what risk was within its profile.

Balfour did turn itself around, and now is on the other side of their “lessons learned” programme. What is obvious though is that both Balfour and others are now hedging their bets when it comes to profiling risk in any new project.

Former transport secretary and current head of the National Infrastructure Commission Lord Adonis believes that contractors earnings are finally being cut down to an adequate size.

Today, Lord Adonis has called on London to renew its bid to win funding for Crossrail 2.

A rallying cry for the construction industry, however if and when Crossrail 2 does become a reality, how many of the biggest contractors will take on the risk of building it?

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