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The trouble with b building

AGENDA

Is building inherently risky or are most of its woes down to poor decision-making, compounded by insufficient internal checks on deals? David Rogers looks at how the headline-makers have responded to the calamity besetting the sector

JUST WHEN contractors are starting to get their acts together, making the right noises about framework deals, long-term revenue streams and derisking the business, another results season comes along.

Another chance to see whether firms really are clearing the dross from the cupboards and whether problems from the past are just that - in the past.

But as the season closes for another six months it is clear that things for a number of companies have not worked out to plan. Firms large and small have turned in disappointing results for a variety of reasons.

Carillion got clobbered with so much goodwill following the sale of its former M&E arm Crown House to O'Rourke that it slumped into the red.

Amec, too, was once again incapable of producing a clean set of results, turning in a mediocre performance.The company announced record pretax profits of £118 million but, once goodwill and exceptionals were factored in, this record figure tumbled all the way back down to £66 million.And all on a turnover of £4.8 billion.Of the top tier contractors, only Balfour Beatty, a building success story of recent years, came up with the goods.

Elsewhere, other big names suffered in 2004 and all came unstuck in one sector: building.

Mowlem plunged to a £15 million loss after new boss Simon Vivian unearthed a series of problems at its building division.

Alfred McAlpine, for so long a City favourite with impressive 5 per cent margins at its capital projects business, warned that two unnamed construction jobs - one building, one civil engineering - would cost it £14.5 million.And just last week Gleeson, disappointing the City again after blips with house building in 2002 and engineering in 2003, said it was pulling out of the building market completely after it went £6.7 million into the red, admitting that its building division had lost £16.6 million in the six months.

Some are beginning to worry that the spate of problems is once again starting to hit the industry's reputation for reliability among Government and other clients and its standing as an industry that can successfully deliver results without provisionals and losses.

Costain chief executive Stuart Doughty said the problems at his peers affected everybody in construction - in much the same way that last year one contractor's success in PFI was immediately rendered useless by another profits warning at Jarvis.

As an example of the negative City sentiment towards PFI, which some firms have privately blamed on the losses at Jarvis, both Carillion and Balfour Beatty recently made the same point about the market.

Carillion said it had called a halt to selling PFI equity stakes after finally being convinced the City had woken up to the potential of its investments portfolio. Balfour Beatty made the same point from the opposite side of the fence. It said it would sell stakes in concessions if the value of its deals were not reflected in its share price.

So the point made by Mr Doughty, a man not to suffer fools gladly, is a fair one.He is 62 this year and has a wealth of experience, having worked for Laing, Alfred McAlpine and Tarmac, where he came into contact - and combat - with Alastair Morton, the co-chairman of Eurotunnel, the client on the Channel Tunnel.

Mr Doughty raised the issue because clearly he had been asked about it and was worried about sentiment in the City turning unfavourably against those who had decided to stay in building. For the record, Costain's building division turned over £225 million last year.The firm famously nearly went bust back in the '90s and Mr Doughty, since taking over four years ago, has steered a steady course back to calmer, although certainly less glamorous waters.

When he arrived he insisted on personally running the rule over all contracts worth £20 million or more. And contracts valued between £2 million and £20 million are looked at by the board.The more a company seems close to going under, the more determined it becomes never to contemplate that fate again.

Mowlem under Mr Vivian has now set up a similar procedure to make sure it doesn't suffer the same kind of problems that saw profits of £45 million in 2003 shredded to a £15 million loss.Mr Vivian blamed the losses on a series of building contracts signed by previous managers.

And when talking about the £12 million charge its Australian business took on jobs in Sydney, he lamented a lack of rigour at group headquarters back in the UK.He said: 'They took too much work. London should have said no.'

Clearly building is not without risk. At Alfred McAlpine's results meeting recently director Matt Swan admitted: 'We are not in a risk-free business.'

Ironically, it was a contractor based on the other side of the world which set in train the red alerts so many firms have issued this spring.

Multiplex, the Australian contractor listed on the Sydney Stock Exchange but making the UK such a big market that it was forced in January to scotch rumours it would relist on the London equivalent, said it was writing back profits on its Wembley project to a break-even position.

The firm said it was £45 million in the red on its contract to rebuild the stadium.Take away the £25 million or so it is budgeting to recover in the High Court from steelwork firm Cleveland Bridge and that still leaves it down by £20 million.

The stock market in Australia reacted badly to the news, mainly because the firm had hauled a group of analysts around the site a few months earlier and told them it was on track to make money on the job. So, when it scrubbed any profit on Wembley, the shares duly bombed.

This was more a trust issue, rather than specifically a building issue, and the market was telling its management to come clean about problems much earlier.Nonetheless the market had been misled on a building contract.

Gleeson's decision to pull out of building - it is selling it to its management - was, some observed, Laing-light, in that another firm was turning its back on its building roots and concentrating on other sectors. Gleeson will remain in construction, of course, just not what it sees the riskiest part.

Executive chairman Dermot Gleeson said: 'It furthers our strategic objective of reducing our exposure to high construction risk.'

In other words, for a medium-sized business like Gleeson it is not worth chucking good money after bad.And off it had to go.

But Mr Gleeson's statement didn't finish there. He added: 'That said, the new management team at Gleeson Building is quite exceptionally impressive and I believe that under their leadership Gleeson Building is likely to become one of the industry's leading performers.'

This sounds a bit like saying: 'This is such a good company we decided to sell it.'

And isn't Mr Gleeson, who doubles up as a BBC governor, also saying the old management, who agreed to the contracts that cost the division over £16 million in the first half, were not much cop?

Explaining the strategy, the firm trotted out the usual reasons for the sale, pointing out the division grew too fast and took on complicated projects with most of the problems occurring at the M&E stage.

Which begs the question: since when has a building project not included M&E work? And if it grew too fast, why wasn't it stopped? Did somebody not spot this earlier?

So, is the reason for the all this woe to do with the nature of building itself or a mixture of bad management, bad decisions and insufficient checks and balances? As ever, a bit of everything.

Mowlem's Simon Vivian clearly feels the checks to cut down on the risk were not strong enough - that's why he has created a group risk management team that he will chair.

Speaking about its two problem contracts, Alfred McAlpine's Matt Swan could have been speaking for the rest of the industry when he admitted:

'Clearly we got it wrong.'