The price recovered to 8p but some analysts remained concerned about the group's long-term health, warning that its share price was likely to remain in the doldrums.
Birse said in a statement that it was involved in legal action over the write-off, the second troublesome contract this year, which will appear as an exceptional item in the annual results to the end of next April.
The write-off comes after an announcement in July of a significant asset loss on the Rhymney Valley relief road project in Caerphilly, which is still in arbitration.
The write-offs are a blow to Birse, whose performance has much improved in the past year. It had a 91% rise in pre-tax profit to £4.2m for the year ending April 2000 on turnover that rose from £357m to £370m.
Chief executive Peter Watson said he was disappointed about the contracts but said he regarded them as a "tidying up" of problems he inherited on joining the business last year.
Watson said: "The day-to-day business of the group is not obstructed by those old projects. We were expecting to bring in the value of the project but the future of the business isn't dependent on that. Fundamentally, I'm very pleased with the condition of the underlying business." Watson emphasised that the two disputes were not indicative of how the firm operated.
He said: "We remain confident that the factors giving rise to this type of dispute are not a feature of business now being secured." Watson said turnover had risen by 25% on this time last year, and that the market had been expecting a £6m pre-tax profit for the next full-year results. However the interim results, due early next year, will include the cost of the the Rhymney Valley write-off.
Birse was awarded a £500 000 payment in July after expecting £8.1m from the long-running dispute with Caerphilly council. Watson said he did not expect the case to be concluded for another 16 months. The project was completed in 1992 but court proceedings began four years later over payments.
Some City analysts, however, remain sceptical about prospects at the Birse Group. One said that it should consider going private in view of the problems that it faced and the poor performance of its shares.
Watson, a former management consultant, joined the group in 1999 and earlier this year reorganised it into three divisions: civil engineering, building and process engineering.
