The UK government's green light in February of the London-to-Birmingham high speed rail megaproject (HS2), despite its controversial escalating cost, will be “transformative” for the country’s largest contractor Balfour Beatty Group, said CEO Leo Quinn in his March 11 report of 2019 year-end results.
While he cites the US as the firm's "fastest growing market" last year, "come next year, when we add HS2, the UK backlog will actually double,” Quinn said.
BB’s sales and operating profit both rose 8% last year to $10.8 billion and $284.5 million respectively.
Construction services accounted for $8.9 billion with the largest share, $4.8 billion generated in the US. Operating profit margins in the U.K. and US were in the national “industry standard range” of 2.1% and 1.4%, he said.
Orders last year rose 13% mainly due to a 25% hike in the US market, including a 45% share in a $1.7-billion contract won last May to build the Interstate 635 LBJ East project in Texas.
Inking the Deal
But HS2 is the biggest deal on BB’s horizon.
In an equal joint venture with France’s Vinci Group, BB has won, but has yet to sign, two contracts with project owner HS2 Ltd. One covers sections of high-speed line near Birmingham and is valued at about $7.7 billion. The other is a smaller fee-based construction management award for the Oak Common station in London.
The main construction contract, set to be signed this spring, includes a “balanced approach to where risk is assigned,” said Quinn.
Working to a target price, the award includes a guaranteed, undisclosed fee that can be increased by two points for early or under budget delivery, with the contractor risking only a one-point maximum fee drop for late or over budget performance.
Quinn expects better that industry average profits on the contract, forecasting margins of 3-4%. “It’s going to rely very much on a close working relationship between the client and the contractor,” he added.
Coronavirus Risks Emerge
But one risk out of BB’s control is the Covid-19 virus, now spreading slowly through the U.K.
All of the contractor's sites remain in action with no shortages. However, Quinn reported potential delays on its $247-million contract to install a 1-GW power link between England and France through the Channel tunnel. T
Testing engineers from the project's Italian cable supplier are being held back in Italy by strict movement restrictions imposed by the Rome government, while pylons from China destined for a separate BB power project also are being delayed.
Quinn also disclosed that Balfour Beatty is convening twice-weekly executive-level meetings related to virus risks to its estimated 336 project sites and 14,000 domestic employees, according to UK industry publication Building, which says it is the major UK contractor to publicly state it might have to close UK project sites if the outbreak worsens there.
"If we feel we have to close a site, we will," he said. "We’re monitoring the situation very carefully.”
Quinn noted that the firm is reviewing liability issues if sites were closed, workers sent home or jobs delayed by problems with construction material imports into the country.
Whiile Building reports that China and Italy are the leading exporters to the UK, Quinn said Balfour Beatty depends largely on domestically-based supply chains in Britain and in the US.