Costain returns to profit despite £17m water-contract provision

Costain has returned to profit despite registering a £17m provision to rectify work at a water-treatment facility.

The contractor posted a £32.8m pre-tax profit for the year ending 31 December 2022, reversing the £13.3m loss made the previous year. Costain’s revenue was also up, at £1.42bn compared with £1.14bn the year before.

Chief executive Alex Vaughan said the return to profit was largely thanks to Costain “broadening the services that we provide to customers”. As well as working as a contractor, the firm is expanding its work as a consultancy in the defence and energy sectors.

Costain said the growth was driven by “increased volumes in complex-programme delivery”, the impact of inflation, and increased revenue, particularly in the energy and defence sectors.

The loss in 2021 was mainly caused by a £43.4m settlement with National Grid over a contract it had terminated in Peterborough and Huntingdon – with Vaughan saying at the time that he was “very confident [the] legacy issues are solved”.

But the firm still made a £17m provision in its latest accounts to cover “rectification works” at an unnamed water-treatment facility for which Costain was the contractor. The firm has paid £4.8m of the £17m provision to date.

Costain said the remediation work should be completed in 2024, but warned that the final design solution “has not been finalised”, and that it has had to make a number of assumptions over the cost estimate. That means the “ultimate cost” of the provision could be up to 30 per cent larger than the current provision suggests, the company admitted.

Vaughan told Construction News that Costain had been “working with our customer and our insurers and the supplier” to get the issue resolved, and that the cost of the rectification would be “recovered through insurance”.

“So, effectively, it’s been amicably resolved by all the parties working together to get it closed out,” he said.

Costain has also been restructuring parts of its business over the past year to “deliver operational efficiencies”. The contractor registered a £5m provision for that over the course of the year.

Vaughan said the aim of the programme was to make the firm “much more productive, efficient and effective”. Part of that project has involved working with clients to assess their forward business plans and to find opportunities for digital programmes that could improve efficiencies for both parties, he explained.

The optimisation programme should help Costain to improve its adjusted operating margin in the coming years, Vaughan said. In 2024, he is expecting the firm to make a margin of 3.5 per cent, which should rise to 4.5 per cent the following year – leaving Costain on track for its long-term plan of making a 5 per cent margin.

Following the government’s announcements about HS2 last week, which pushed back work on phase 2a and the building of Euston station, Vaughan said he was “mindful of the macroeconomic environment” and the challenges created by inflation for government and other clients.

But he also emphasised his firm’s renewed focus on defence and energy, and predicted much more investment in the water, defence and energy sectors.

“It’s important not to just focus on one project, but actually to step back and look at the whole infrastructure ecosystem, and look at the significant investment that’s been made in that area,” he said.

Looking ahead to tomorrow’s budget, Vaughan said he would like to see continuity on the “clear commitments” made to infrastructure investment in the government’s autumn statement last year.

“What we don’t want is any surprises,” he said. “What business likes is certainty. Therefore, what I would hope to see is just continuity and consistency with what’s been said previously.”

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