Jarvis is facing pressure from Network Rail to slash its profit margins on rail maintenance by more than 50%, writes Mark Leftly.
Network Rail is looking to make the cuts to help reduce its debt, which has led to an operating deficit of about £1.5bn.

In consultation with rail regulator the Strategic Rail Authority, Network Rail is looking to keep contractors' profit margins at 3-4%. Jarvis has had an average margin of 9.5% over the past five years.

An insider at the contractor said it had made that margin because by cutting costs on maintenance work. The source said: "This is not a clever way to reduce cost. Essentially it would deter people from investing and improving the network."

Analysts believe that Jarvis – and companies such as Amey and Amec that are believed to make a margin of more than 4% – should not be punished for making efficiency savings.

Mark Howson, an analyst at ABN Amro, said that Network Rail should concentrate on cutting the cost of maintenance by simplifying its procedures.

This is not a clever way to reduce cost. It will deter people from investing in and improving the network

Jarvis source

Adrian Lyons, director-general of the Railway Forum, a contractors' lobby group, added: "If there has to be pressure on contractors to reduce margins, then there must be a clear reduction in risk."

A spokesperson for Network Rail confirmed that a reduction in profit would be exchanged for a reduction in risk It is believed that Network Rail might push for the move by Easter.

A problem is likely to emerge over the allocation of risk, especially on older networks that are more likely to experience faults.