Severfield-Rowen has announced a £20.1 million hit to its profits, including a £10m cost overrun on the Cheesegrater due to “significantly greater” technical challenges than originally estimated.
It follows an extensive review of 70 contracts, representing 90 per cent of the overall contracts by value and mainly focused on the large complex schemes.
Talks with the banks have also led to proposals for a £50m equity fundraising, and agreement by lenders to waive certain financial covenants in the existing banking facilities.
The contract review found that the technical challenges of the site works on the Cheesegrater “are significantly greater than originally estimated and will require longer timescales and greater resources to complete”.
It has lead to a comprehensive reassessment of the works and a detailed review of all other forecast costs still to be incurred, the steelworks firm said.
It added: “The result has been to change an expected profit on the overall life of the contract into a loss, with the group incurring an incremental charge to the profit and loss account of £9.9 million in the 12 month period ended 31 December 2012.”
However, a British Land spokesperson said work has not been delayed on the project and is on track.
Severfield’s contract review also identified £2.9m in cost overruns on a further three contracts, along with the value on a further five contracts “reassessed and reduced” by £7.3m.
The remaining 61 contracts are “performing in accordance with the board’s expectations”.
The review has also identified “a requirement for stronger contracting processes and discipline notably in execution and risk assessment, particularly in relation to its more complex contracts.” The company said this will be implemented and undertaken “as expeditiously as possible”.
Severfield-Rowen said the review has also “confirmed the rationale” for the previously announced reorganisation and integration of its two largest businesses, Severfield-Rowen Structures and Watson Steel Structures, along with its erection business, Steelcraft.
The firm said the merged businesses creates a less complex and more efficient management structure, under Severfield-Watson Structures Ltd, which became effective on 1 January 2013.
More than half of the anticipated overhead savings of £2m, previously announced on 5 November 2012, have now been realised and the programme will be largely complete by 30 June 2013.
Full year results and the terms of the equity fundraising and the group’s amended banking facilities are expected by 28 February 2013.
Chairman John Dodds said he is encouraged by “many of the conclusions drawn” from the review, despite the disappointment of the financial impact on the group. He stressed the vast majority of the group’s contracts are progressing satisfactorily, with both Atlas Ward and Fisher Engineering performing particularly well.
“We believe that the group can return operating margins to between 5 per cent and 6 per cent over time and I am confident that the longer term fundamentals of the group remain strong.”
A proportion of the related cashflows occurred within the 12 month period ended 31 December 2012, with a further £8m of cash outflow anticipated in 2013.
The group has also lowered its expectations for 2013 and 2014.