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Galliford focuses on lower-risk contracts after construction hit
September 13, 2017 / 3:58 PM / 9 days ago

Galliford focuses on lower-risk contracts after construction hit

(Reuters) - Galliford Try (GFRD.L) is focusing on winning contracts that lower risks for builders after writedowns on large, fixed-price infrastructure projects contributed to 57 percent drop in its profits, the British construction firm said on Wednesday.

British builders have been hit by huge writedowns and multiple profit warnings over the past decade as rising wages and unexpected costs on fixed-price contracts with paper-thin margins have left companies losing money.

Galliford’s chief executive said it was no longer chasing such large, fixed-price contracts and was instead bidding for public sector work with so-called framework agreements in areas such as water, motorways, defense and airports.

“We’re concentrating ... on frameworks, where it’s a more collaborative approach to negotiate the price ... and you work with the (public institution) to build the right price, instead of just coming up with a set of drawings and bidding the lowest price,” Galliford Chief Executive Peter Truscott told Reuters.

In February, Galliford booked a 98 million pound writedown. Sources have told Reuters that 55 million of that was linked to the Aberdeen Western Peripheral Route in Scotland, which also involves crisis-hit Carillion.

Hurt by the writedown, Galliford on Wednesday reported a 57 percent drop in pretax profit to 58.7 million pounds ($78 million) for the year ended June 30.

Framework agreements are being used more and more to break up major infrastructure projects, such as Britain’s new HS2 railway, into smaller chunks of work. This reduces the chances builders will suffer from escalating costs and also allows for prices to be negotiated for each separate section.

Framework agreements also means higher margins and less competition for the providers that are shortlisted.

FIXED-PRICE WOES

In the lean years after the financial crisis that started a decade ago, British building firms bid for long-running, fixed-price contracts to keep work coming in. But those contracts have subsequently caused problems for most in the industry.

Carillion (CLLN.L), which helps maintain British railways and roads, said in July that payment problems on four construction contracts nearing or reaching completion had forced it take a provision of 845 million pounds ($1.1 billion).

The company, which has since promised to take future construction work on a highly selective basis and through lower-risk procurement routes, is due to report results and the outcome of a business review later this month.

A number of other builders have also been taking a more selective approach to new work since 2015.

Balfour Beatty (BALF.L) said in August that its UK division was being “more selective in the work that it bids, through increased bid margin thresholds, improved risk frameworks”.

Morgan Sindall (MGNS.L) said in July it had also been more selective on jobs.

Analysts said Galliford’s decision to shun fixed-price contracts was likely to reduce the amount of work it could bid for, but it was a better risk management strategy.

“It makes sense that Galliford are walking away from the large, fixed-price contracts. It’s starting to be a trend within the industry,” Jefferies analyst Anthony Codling said.

Galliford Finance Director Graham Prothero said the company now had only eight to 10 “iffy” fixed-price contracts on its construction books, with framework agreements or newer contracts accounting for three-quarters of its orders.

Galliford chief Truscott also said it was “business as usual” with Carillion on their Scottish road project.

A Carillion spokesman declined to comment.

“As far as working (together) on new projects is concerned, we’re not doing those large price infrastructure projects anymore so we’re not likely to be partnering with that sort of company anyway, regardless of whether its Carillion or anybody else,” Truscott said.

Reporting by Esha Vaish in Bengaluru; editing by David Clarke

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