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Lender nerves grow as Lagan paths diverge

Tom Fitzpatrick

Another week, another bad news story for a tier one contractor.

Four of Lagan Construction Group’s arms have entered administration, including its construction, building and water divisions. The move will likely lead to hundreds of job losses.

Lagan Construction has looked at the numbers and recognised that its specialist divisions are outperforming its tier one operations. As is the norm, its situation isn’t helped by a hefty problem job, understood to be its joint venture with Ferrovial on the £500m M8 improvement package with Transport Scotland.

Chairman Michael Lagan referred in a company statement to the group having been “subject to protracted contractual disputes on some existing major projects and instability caused by one of its UK joint ventures”. 

While Mr Lagan and the group declined to speak beyond what was in his statement, the M8 has been beset by problems in recent years. I understand the relationship between Ferrovial and Lagan Construction is in disrepair. Don’t be surprised to see this one end in the courts with both parties already having to pay towards tens of millions in cost overruns.

Ferrovial has already booked more than £50m in additional costs on the job in its last two years’ accounts and as a 20 per cent stakeholder, Lagan is also liable for significant costs.

In October 2017, Ferrovial cited increased labour costs and complexities due to brownfield site work as reasons behind fresh cost overruns on the scheme. It also said higher material costs had been incurred due to design changes, a particularly notable statement given its group subsidiary Amey was the designer. 

The move to put four companies into administration follows the announcement that Breedon is in talks to buy Lagan Group, separately owned by Kevin Lagan, which operates primarily in specialist products and housing. Consolidation will continue to grow as cash-strong businesses eye opportunities. Multiple business leaders have told me in recent weeks that securing lending and bonds is becoming increasingly difficult. 

As well as lenders’ nerves being heightened by Carillion, we take an in-depth look at how insurers have reacted to Grenfell, with building envelope specialists and architects being charged ten times as much for professional indemnity insurance following the tragedy in June 2017.

Kevin and Michael Lagan demerged the Lagan Group more than a decade ago after a falling out. This week their paths diverged further.

But the perils of tier one contracting and consolidation in the supply chain continue to be the overriding themes for the construction industry in 2018. 

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