Shares in the Alternative Investment Market-listed business plummeted from 65p to 43.5p in the wake of the announcement, wiping 33% off the company's value.
In a stock market statement, the company said a combination of higher-than-expected development costs and weak trading in November and December 1998 would seriously affect its profitability in the year to 31 July 1999.
James R Knowles embarked on an ambitious expansion programme following the June 1998 float that raised £3.5m.
New offices opened in Spain, France, Germany, Ireland, Shanghai, Abu Dhabi and Brunei.
In the UK ,the firm has set up a new partnering and procurement services arm and an adjudication business to take on non-contentious work in an effort to move away from its traditional cost consultancy business.
Finance director Patrick Lineen conceded the firm's expansion plans had been overambitious. "In retrospect, we were probably too bullish, seeking to grow too fast on too many fronts." The company said it was hit by weak trading in Scotland and the South-east.
Trading in the Far East also lagged behind last year.
"While current year profits will be impacted by the factors outlined, the directors remain confident about the future," the company's statement said.
Knowles earmarked a 29% jump in pre-tax profit before exceptionals to £1.8m in the year to 31 July 1998. Turnover stood at £22.3m.
Sir Michael Latham is a non-executive director of the business.