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Problem contracts rear their ugly heads... again

Problem contracts are two words sure to keep those in construction awake at night.

And they’re two words synonymous with the construction industry in the aftermath of the recession.

In a time where work was harder to come by, the economic downturn saw contractors sign up and negotiate contracts that would end up coming back to bite them for years afterwards.

It is hard to find a contractor that in some form hadn’t had one of these problem contracts darkening the balance sheets. 

Some are no longer in business as a result.

But today, with workloads increasing and profitability reappearing, you would expect the scale of bad jobs to be significantly reducing. But many firms are still suffering from such contracts. 

In December, Laing O’Rourke revealed losses of £245.6m, with a £93m write-down on a problem contract in Canada blamed as the main contributor. As Ray O’Rourke told CN, “good jobs get better, and less-than-good jobs get worse. That’s a feature of our industry”.

Two months later, Interserve revealed its losses had ballooned to £94m largely as a result of its ill-fated Glasgow Recycling and Renewable Energy project.

Today it was Galliford Try’s turn as the company revealed it had set aside £98m to cover the costs of two major legacy contracts in its construction business, with fixed-price contracts the primary factor behind the losses.

As I write, the company’s share price is down by more than ten per cent. 

And today’s news that Costain’s problem Manchester waste PFI job is to be cancelled is another reminder of issues that firms can face. 

For the company that has gone from strength to strength in the last couple of years, the Manchester waste PFI has been a constant blot on its balance sheet. 

But as we know, the real test is making sure you learn from your mistakes. 

And the firms mentioned above all say they have learnt important lessons. 

Costain exited the waste management sector as a result of the PFI losses, while Galliford Try has said it will now steer clear of any more fixed-price infrastructure contracts.

In an overcrowded, highly competitive market, high-risk and low-margin sector, problem contracts are inevitable.

With such small margins, these hits are amplified on the firm’s end-of-year balance sheet.

But until some of these issues are addressed, and contractors start securing sensible margins, problem contracts will continue to plague the industry and Galliford Try won’t be the last contractor to be hit hard in the pocket.

Also in the news

Construction News revealed that the body in charge of procuring the £4bn restoration of parliament has written to bidders asking for consent to extend bidding past the general election.

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