Recovery through return to “sensible” business management and solid engineering, says UK Construction chief executive Nick Pollard.

In September Balfour Beatty reported a new £75M black hole in profits at its Construction Services UK business, just months after a £35M profit shortfall for the division in July and £30M in May. In the last 20 months the group has written down profits totalling some £190M, most of which were to have flowed from the troubled Construction Services division.

"It is a business we believe in and carries sensible margins when it is sensibly run and we are now sensibly running it." Nick Pollard

Nick Pollard was brought in as Chief Executive Officer of the UK Construction Services business and charged with sorting out the problems in July 2013. He has been busy since finding out what has led to the difficulties across the three divisions - Major Projects, Regional and the Engineering Services - and identifying what needs to happen next. 

Interview by Antony Oliver

It has been a difficult 2014 for the business - are you through the storm?

We have still got to finish off the contracts that provided us with the storm and some of those jobs are now almost finished while others must continue to their natural conclusions. We are working our way through the rump of the problems. In the Major Projects and Regional businesses I have been pleased with the progress they are making and not unhappy with Engineering Services - but we are earlier in the process there. We have cut back trading for next year and I look forward to a much better 2015 than 2014.

With hindsight were the problems market related or self-inflicted

There is no such thing in life a having things done to you – there is always an opportunity to say no. But were the market conditions a factor? Yes. And you will probably see similar situations in other companies. Irrespective of that, problems started during the recession with an apparent desire to keep growing and the mistake was a lack of recognition that at some point prices in the market rebound. 

- In July Balfour Beatty announced a withdrawal from housing in the south west, closure of the Exeter offices and that Engineering Services was pulling out of trading in London with Tier 1’s.  

- Regional construction and civil engineering managing director Mark Cutler left the business in September after just eight months.

- The four regional construction MD's now report directly to Pollard.

- KPMG was brought in to inspect the books in September.

- Sale of the Parsons Brinckerhoff business to WSP brought an £830M windfall, handsome profit on the £380M paid for the business and handy breathing space.

- New group chief executive Leo Quinn joins the business in January 2015.

What drove those mistakes?

Problems were being driven by a lack of wisdom in some – but not all – of the business teams and a lack of governance that failed to properly identify that. Not necessarily deliberately or maliciously but just over-optimistically. As far as I can see it was this blend of over-optimism and a desire to keep trading and avoid job losses in the depths of recession. That is very normal in construction – but also there was a lack of wisdom in perceiving where the bottom of the recession was – and that was difficult to call and maybe, it now seems, we were perhaps not alone in that.

You have been in post since mid-2013 – have you identified what needs to change to stabilise the business? 

We have become very clear in the management around mistakes that we made in the past, about the practices that will prevent those mistakes in the future and about the practices that help us to stay on track with commitments that we make to our customers our suppliers and to our people.

So what is the longer term plan?

The board’s direction of travel is to simplify the group and get back to the core engineering capabilities. This is definitely about leveraging our intellectual property in construction, civil engineering and building across our markets and making the most of opportunities as economies gently return. The fact that the business makes some wrong decisions and that perhaps some of its leaders lost their way doesn’t mean we can’t still turn out fantastic projects as we do.

But what is the immediate challenge?  

It is a cross-eyed game at the moment. We have one eye fixed on cleansing the difficult jobs from the system, recognising failings yet also recovering our just desserts. The other eye must be firmly focused on the future, where we are going, the markets that we think are going to come most strongly to the fore and how we should best position ourselves to collaborate with customers, to listen and work closely with suppliers and listen to our people so as to deliver great work.

Leo Quinn joins as the new group chief executive in January. Will all the past problems be behind you by then?

We are being clear – getting the business back on to a solid footing takes time. We have made some good progress towards that over the last 12 months. We set out the plan for the road ahead almost a year ago and we have made some really good ground in that time. But there is still a lot to do to institute those changes fully. So Leo takes on a work in progress and it will take some time for that work to come through onto site and release its margins – so you don’t see the desserts for some time.

"Any tier 2 subcontractor will tell you that relationships with tier 1 are most difficult when the tier 1s are themselves in trouble."

So for all the problems you remain confident that he will find the UK construction business still has a strong future?

Absolutely no two ways about it. On the one hand you have got the major projects infrastructure business where we have just delivered the last lap of the M25 in joint venture with Skanska, superb facilities at Sellafield and Heathrow’s T2B – all of that clever engineering is right at the top end and I would pit them against anyone in the world and back them to win. Then you have the regional business which is a much bigger business and the middle market – schools small roads and sewers and retail – it’s a bigger volume, more diverse and geographically spread so requires different routines to manage. It is a business we believe in and carries sensible margins when it is sensibly run and we are now sensibly running it. I am now increasingly confident because that is where we perceive the bulk of the UK market to be coming back. It’s the market that typical flows from the recovery.

You have made a strong point about ensuring that you recover your just desserts. Has that been a problem?

It is a comment really directed towards the engineering services division. As we have said in one of our previous trading statements, we needed to be sure that we recovered our due contractual entitlements from tier 1 contractors for whom we were working and who clearly were having some trouble themselves. Any tier 2 subcontractor will tell you that relationships with tier 1s are most difficult when the tier 1s are themselves in trouble. And by the way, do-as-you-would-be-done- by - it also gives us cause to look at how we deal with our supply chain.

"It is a cross-eyed game at the moment. We have one eye fixed on cleansing the difficult jobs from the system, recognising failings yet also recovering our just desserts. The other eye must be firmly focused on the future"

Was the sale of Parsons Brinckerhoff inevitable even without the trading problems? 

That sector is changing in shape dramatically and to be a global player you need big bucks. Our board had to make some choices around priorities and what kind of business we were going to be – and we were not primarily going to be a professional services business. The price that was secured far outweighed that which many thought would be achieved and vindicates the board decision.

How do you ensure that the staff maintain morale through the business recovery process? 

It  is undoubtedly unpleasant for people to see the brand that they have cherished and worked hard for - and continue to work hard for - being slated and having to admit that it got something wrong.  One of the strengths of Balfour Beatty that I have found over the last year is the remorseless honesty and integrity which does make the group tell the truth. And that is what have done – be very upfront with our people inside and outside the business. The things that the company values are still the same. It might be painful living those values but is the consequence of not trying to sweep things under the carpet. 

"The things that the company values are still the same. It might be painful living those values but is the consequence of not trying to sweep things under the carpet."

What is KPMG’s role in your business recovery?

Balfour Beatty asked KPMG to conduct this review to give additional reassurance to the board that the UK construction business is doing what we should. I am extremely confident that their work will be very thorough.

Where do you see the big wins next year?

Roads, rail and education from schools to student accommodation will be important. Plus housing but only in selected schemes and some spin offs from our utilities work. But power is the really important sector to us – everything from wind farms to decommissioning and of course new build nuclear.

There is a huge emphasis by clients towards collaboration, efficiency and innovation. Are we ready? 

On the macro picture I am hoping that the industry has learned in the recession that there is a far better way to do business other than the old ”traditional” adversarial way. It is in that space of collaborating with customers early in a scheme when you can add value for them and at the same time participate in the rewards to make decent margins - in return for the IP that you bring to the table not the risk that you take. In fact working together to remove unnecessary risk. That is where the smart money is – and that means choosing the customers who want to do that kind of business.