Construction group hit by two old problem contracts for the Ministry of Defence at Faslane
Morgan Sindall has disclosed that it has had to make a £35m ‘exceptional charge’ due to two problem Ministry of Defence contracts.
The construction group said in a statement to investors this morning that it was making the charge having assessed the “likely outcome” of two problem contracts it acquired with the design and project services division of Amec in 2007.
The two contracts are at the Faslane Naval Base in Scotland. One contract relates to the design and construction of a floating jetty, the other to the design and construction of living accommodation and infrastructure, Morgan Sindall said.
The charge will effect Morgan Sindall’s forthcoming half-year results for the first half of 2015 to 30 June 2015.
Morgan Sindall said its overall performance was in line with the board’s epectations and expectations for the year remain unchanged, subject to today’s exceptional charge.
Morgan Sindalll said its order book as of 31 March was £2.7bn, up 2% on the end of 2014.
The firm’s construction and infrastructure division is being “held back” by the performance of some construction contracts in London and the South, with this “expected to continue and remain through at least the first half as these contracts are worked through to completion”.
Meanwhile, the group’s fit-out division and urban regeneration divisions benefitted from increased business, while its affordable housing division began to improve its margins.
Morgan Sindall’s full statement on the exceptional charge
In the Group results for the year ended 31 December 2013, an exceptional charge of £14.7m was taken to impair the receivables in relation to four old construction contracts held on the balance sheet.
The impairment was based upon legal advice and opinion on the recoverable amount at that time, taking account of progress toward recovery and the expected time, cost and associated risk of pursuing legal remedies to achieve recovery.
Of the four contracts, commercial resolution was achieved on one, whilst another was impaired to reduce the carrying value to nil. The remaining amount held on the balance sheet related to amounts due on two contracts which were transferred as part of the acquisition of the design and project services division of Amec in 2007. Both contracts have the Secretary of State for Defence as the overall employing party. One contract relates to the design and construction of a floating jetty, the other to the design and construction of living accommodation and infrastructure, both around the Faslane Naval Base in West Scotland.
The Group has now received a specific court judgement on one discrete issue in advance of a future arbitration hearing on one of these contracts, which is at variance with the legal basis underpinning the current carrying value of the corresponding receivable. The Board has considered the implications of this court judgement on that contract, its relevance also to the other contract and reviewed its available options.
As a consequence, an exceptional charge of approximately £35m will be recorded in the half year results to 30 June 2015, which reflects the Board’s best current assessment of the likely outcome on both contracts. The charge is non-cash in nature. The Board is, however, also reviewing its options to mitigate and maximise ultimate recovery levels.