Montpellier issued a profit warning to the stock exchange this week. The statement said it would be reporting a "significant operating loss" in its full-year results in September. It added that a business recovery plan would be announced in the interims.
It is understood that the problems have been caused by pricing difficulties on about six contracts signed in the past three years, largely by its Allenbuild and YJL subsidiaries.
In January the company warned that these subsidiaries were working on a number of problem contracts, but a later review by the management found that there were more difficulties than originally thought. Some of the contracts are known to be in the residential sector.
It was accepted that these contracts were priced incorrectly
Source close to the review
The review was carried out after the management board was revamped earlier this year, when Paul Sellars, the group managing director, stood down and Roy Harrison, a non-executive director, became chairman. A source close to the review said: "It was considered that the initial acceptance of these contracts was priced incorrectly at the outset."
A Montpellier spokesperson said: "The new board did a full review of the group's contracts and realised that additional provisions needed to be made in the current year. While the extent of the problems is greater than originally anticipated, evidence is showing that current trading is in line with expectations."
One industry observer said that Montpellier may have "taken its eye off the ball", after focusing quite heavily on its investment division in recent years.
However, a source close to the group suggested that the contract problems could be largely sorted out before the end of the financial year. The source added: "The board has decided to take a knock on the chin this year."
The profit warning had an instant impact in the City, and the share price fell 34.5% over the course of the week to close at 23.25p.