Losses on MoD contracts at Faslane Naval Base see contractor fall £27m into the red during first half of 2015

Problem jobs for the Ministry of Defence dragged Morgan Sindall to a pre-tax loss of £27.2m for the first half of the year.

Setbacks on two contracts at Faslane dragged down the construction giant’s results, although group revenue rose 15% to £1.1bn for the six months of 2015, compared to £998m the previous year.

Morgan Sindall made a £39.4m exceptional charge for losses on the Faslane contracts, £4.4m higher than the £35m hit the contractor indicated it would incur for the period in May. Both jobs were taken on with Morgan Sindall’s acquisition of Amec in 2007.

One of the contracts related 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 statement added: “Commercial resolution ‘in principle’ has been achieved on the contract for the design and construction of living accommodation and infrastructure during the period. Based upon this and the board’s best current assessment of the likely outcome on the other contract, an exceptional item has been charged, which is non-cash in nature.”

Discounting exceptional costs, Morgan Sindall made an adjusted pre-tax profit of £13.3m for the period.

Operating profit for the construction and infrastructure division fell by 95% in the year from £5.9m to £0.3m due to a poor performance in London and South construction activities.

The division’s revenue grew 10% to £623m with construction accounting for 56% of revenue at £348m, up 30% on 2014. Infrastructure revenue was 1% down to £275m.

Escalating costs and programme slippage contributed to increased costs in London, altough the company accepts that lower margins also hindered profits. The trading statement said: “Generally lower returns were expected for at least the first half as the lower margin construction contracts procured during the more difficult pricing environment of 2012-2013 were being worked through to delivery and completion.”

Morgan Sindall chief executive John Morgan said: “We’ve seen a strong performance from Fit Out in the first half and Urban Regeneration continues to deliver good growth as a result of our focused and long-term investment in the development portfolio.

“Construction & Infrastructure continues to be impacted by the poor performance of its older and lower margin construction contracts in London and the South and, whilst these are working through to completion, this is happening at a slower rate than previously anticipated which will hold back the divisional performance in the second half of the year.

“However, it is expected that Fit Out will produce a further strong performance in the second half, with Urban Regeneration and Affordable Housing both making good progress.

“Consequently, the Group remains on track to deliver results for the full year in line with the Board’s expectations and the outlook for 2016 and beyond remains unchanged.”