Reliance on “Design for Manufacture and Assembly” on three loss-making UK construction projects was a contributor to a £57.5m pre-tax loss (£53.1m post-tax) in Laing O’Rourke’s Europe Hub, according to its results to 31 March 2015.
The group made a £12.4m pre-tax profit (£20.1m post-tax) in 2014/15 overall, down from £52m in pre-tax profit last year thanks to its Australian operations, which returned a pre-tax profit of £91.7m.
But the Europe Hub, which also includes the Middle East and Canada, also experienced a drop in revenue, which stood at £2.4bn compared to £2.6bn in the year to March 2014. Revenue overall fell to £3.85bn from £4.41bn last year.
The company acknowledged that three DfMA contracts were adversely affected by "input cost inflation and delays in delivery using new construction methods. Significant lessons have bene learned form these projects, which were all secured during the recession."
Project elements delivered using DfMA techniques include floor panels for the Leadenhall Building and platforms for the Manchester Metrolink
In its online Annual Review, Paul Sheffield, managing director of the Europe Hub, said the DfMA approach had compounded the negative impact of post-recession price rises and supply-chain bottlenecks which had affected projects generally.
"Labour, materials and subcontractor costs escalated at a rate which outstripped inflation, resulting in buying gain assumptions failing to materialise. This was compounded by the accelerated deployment of our Design for Manufacture and Assembly approach."
Paul Sheffield, managing director of the Europe Hub, Laing O’Rourke
In a statement, he said that labour, materials and subcontractor costs had “escalated at a rate which outstripped inflation, resulting in the buying gain assumptions made during the tender stage failing to materialise”.
“The issue was further compounded by the accelerated deployment of our Design for Manufacture and Assembly approach, which placed additional strain on our project delivery resources and critical path activities due to the shorter build programmes, as we brought new products and processes to market.”
The review also states that "the 2014/15 reporting period has seen productivity improvements across our manufacturing facilities”, suggesting that the factory itself worked well but Laing O’Rourke’s problems lay in integrating the offsite manufacturing programme with the site programme.
Group chief executive Anna Stewart called the results “disappointing” and predicted more challenging times ahead. “We expect the 2015/16 period to be equally challenging with margin improvements yielding enhanced financial performance in the 2016/17 year. Unfortunately, we are a three-year cycle business so will emerge from recession later than most other sectors.”
But she also pointed to some upsides: “Cash generation and management continues to be strong, with net cash of £370m, while at the same time we are recognised as one of the industry’s fairest employers and best payers.”
The results also reveal that the group is pressing ahead with further investments in DfMA. The statement from chairman Ray O’Rourke confirmed that it is progressing its plans to build a new facility for modular housing next to its existing production line at the Explore Industrial Park.
The new Advanced Manufacturing Facility has already been supported by a £22.1m grant from the Department for Business Innovation and Skills, and £1.6m from the EU.
O’Rourke said that the “new facility will use intelligent design, precision engineering and fully automated processes to deliver modular solutions that will revolutionise house building in the UK”.
The Europe Hub has undergone a number of management changes since the recession. Former chief executive Roger Robinson stepped down in March 2014, to be replaced by ex-Kier chief executive Paul Shepherd, who joined in July 2014. Europe Hub finance director Paul Collins also left the business in September 2014.
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