Engineering group Waterman is trading at “the lower end” of expectations and may have to write off up to £4m of bad debts, it said in a trading update on Monday.

The firm said it would also make further staff cuts by June in response to worsening markets.

It declined to reveal numbers but chief executive Nick Taylor said average staff levels in the year to 30 June 2009 would be 5% down on 2008.

The consensus forecast for the year is for a pre-tax profit of £5m on turnover of £128m.

The group said that trading conditions were “extremely difficult and challenging” in Russia, Ireland and the UAE, and that it was owed money by a number of clients.

Taylor said: “A large part of the potential £4m of bad debt will be from the UAE. Fortunately for us, we purposefully didn’t establish a large operation in Dubai because we didn’t think it would be a long-term market.”

A company statement added: “While for the most part, cash collection across the group has been good, we have seen a small number of instances of projects being suspended and clients suffering financial difficulties.”

Last week the Association for Consultancy and Engineering called on business secretary Peter Mandelson to help members recoup an estimated £400m of bad debt in the UAE.