An international infrastructure firm expects to reduce last year’s construction profits by £70 million, following a recent audit.

Balfour Beatty yesterday announced that the review of the UK Construction business by KPMG had found a £20 million difference between the reported contract positions and KPMG’s assessment, as well as a £50 million discrepancy regarding a review of contract forecasts and the ensuing deterioration in project performance.

In August 2014, KPMG reviewed a sample of 127 projects covering approximately 74 per cent of Engineering Services and 58 per cent of Major Projects.

33 per cent of the business units covered were in London and the South East, 19 per cent in the South West, 12 per cent in the North and Midlands, and 14 per cent in Scotland.

The report identified bidding as a root cause of poor performance, including tendering at very low margins with hopeful cost assumptions, and insufficient risk provisions.

Commercial and contract management was also cited as a cause, involving poor contract administration and a presumptuous attitude towards contract penalties.

Cost and programme forecasting was also found to contribute to poor operational performance, where it was commented that there was a lack of understanding towards actual versus contract performance, compounded by an overly complicated reorganisation programme leading to high staff turnover.

Leo Quinn, Group Chief Executive since January 1st, commented that the summary report on UK Construction is an important step in drawing a line under a period of uncertainty for customers, and enabling the firm to focus more on delivering value.

“I was never in doubt that there was a great deal of work to be done to restore the Group to strength,” he said.

“The key is that these issues can be put right and we now have clear action plans in hand. Significant opportunity exists across the Group to drive reduced costs, improved profits and strong cash generation to the full benefit of our shareholders.”

In order to improve performance, Balfour Beatty intends to increase rigour in tender assessments, improve accountability for project performance, as well as forecasting with accuracy and timeliness.

In order to keep a healthy balance sheet, a proposed share buyback of up to £200 million is being cancelled, where it will be reviewed in March when the full year results are revealed.

However, it was found that outside of UK Construction, there had been no net material change in underlying trading since the trading update in the third quarter of 2014.