Construction conglomerate Montpellier has reported a loss of £20.7m after admitting that it underpriced construction contracts
Building revealed last month that the group was expected to announce a loss of at least £10m, but this is worse than expected.

Montpellier last month issued a profit warning to the stock exchange after it admitted pricing difficulties on about six contracts signed in the past three years, largely by its Allenbuild and YJL subsidiaries.

The profit warning had an instant impact in the City, where the share price fell 34.5% over the course of the week to close at 23.25p.

Montpellier said the scale of the losses had only become apparent in a recent two-month review, which it said revealed "unpalatable facts" about the organisation.

A source close to the company said that most of the loss came from the £15.1m needed to cover extra costs, particularly on two problem residential schemes, a £6.6m YJL scheme in London and £4.5m Allenbuild project in the North-east.

In a statement accompanying the results, Montpellier said it had acted swiftly to "ensure effective controls and procedures were in place to prevent a repetition of the contract problems that have been revealed".

In response to the losses, the board has embarked on a round of cost cutting. The group plans to keep a tighter rein on its subsidiaries, with tough pricing mechanisms on construction contracts.

The group retains a strong cash position

Roy Harrison, Montpellier

Montpellier is also about to strengthen its management team. A group commercial director will be appointed in the next few months.

Roy Harrison, executive chairman, said: "The board has in the past two months undertaken a comprehensive business review. We have identified all major contract exposures. Trading in the majority of our operating subsidiaries remains profitable and the group retains a strong cash position."

Harrison said that despite the losses the group would return to profitability in the second half. He said that he believed the firm would also post a profit for the full financial year ending 30 September.

The group expects work in negotiated contracts and partnerships to increase to 60% of turnover by the end of next year, compared with 30% now. It expects this to lead to more repeat work.

In January, the company warned that its subsidiaries were working on a number of problem contracts, but the later review by the management found that there were more difficulties than originally thought.

The review was carried out after the management board was revamped earlier this year. Paul Sellars, the group managing director, stood down and Roy Harrison, a non-executive director, became chairman.

The company now maintains that outstanding contract claims and expected losses have all been accounted for.