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City Site PFI risks expose mixed fortunes

FINANCE

FOR ALL their success in maintaining order books, some of the major contractors are making heavy weather of extracting decent results from their workload.

This week's grim figures from Sir Robert McAlpine, showing a pre-tax loss of £26.2 million after booking losses of £72.3 million on a PFI contract in Dudley, is a reminder that the bonanza in healthrelated PFI work can also carry heavy risks for contractors.

Likewise, the £26 million loss reported by Multiplex's construction division, after making further provisions on its Wembley stadium contract, has highlighted the perils of working on flagship projects to a tight timetable.

Multiplex says it has introduced new risk control measures and its experience at Wembley must carry some lessons for contractors bidding for work on the London Olympics.

But it is notable that the bigger Londonquoted UK contractors seem to be largely avoiding these heavy loss-makers, either by tighter risk management or by steering clear ? particularly since the disasters that befell John Laing's construction arm ? of the prestige projects.

Rok property solutions, whose interim results last week showed it had lifted margins slightly to 3.1 per cent, says it is moving out of the larger, higher-risk contracts it inherited with acquisitions.

Yet all contractors are now facing cost pressures that could jeopardise their financial performance. First-half figures from Balfour Beatty last week showed profits at its building arm fell from £14 million to £8 million due to raw material price rises between contracts being signed and the work being done. This is a classic hazard for contractors towards the top of the cycle, although the breadth of Balfour's operations meant it still increased profits on its £2.3 billion turnover.

The electrical contractor T Clarke also said it faced pressure on margins when it reported slightly improved results last week. But against a background of an upturn in the London commercial new build and fit-out market, it seems confident it can increase margins in 2006.