The Kier Group has incurred an unforeseen additional cost of £35m on two council waste contracts due to market conditions.
The announcement that it was having to set aside the cash came in the group’s latest trading update, which includes plans to streamline its focus to infrastructure, building and housing markets.
Currently its environmental services business, incorporated into the group following its 2013 acquisition of May Gurney, has eight years to run on a £12m a year contract with four East Sussex councils to deliver waste and recycling collections, street cleansing and beach cleaning.
It also has 10 years remaining on a recycling and waste collection contract with Cheshire West and Chester Council.
Both deals were signed in the past five years, but the company said the profitability of the contracts continues to be hit by a struggling secondary raw materials market.
“A review has been undertaken of those operations which do not meet the group’s strict financial hurdles and/or do not provide a long-term strategic fit with the group’s core businesses.
“The financial performance of the environmental services business continues to be affected by the low oil price and, consequently, the price of recyclates, despite stable operational performance at contract level.
“As a result, a provision of £35m will be taken in FY16, which provides for all future cash outflows on two environmental contracts of eight and 10 years’ duration, respectively.”
Other major announcements in the group’s trading statement include its winding down of construction operations in the Caribbean and a possible sale of its consulting business Mouchel.
Julian Tranter, Kier environmental services managing director, saiit was a “transitional time” for the company.
”The sector has changed significantly over the last 12-18 months and we are responding. From innovation to efficiency, we are developing new ways of working,” he said.
”This ranges from new approaches that help those clients facing budgetary pressures and revenue constraints to better drive efficiency whilst still maintaining a quality of service, through to more radical ways of changing traditional models of service to bring greater innovation to the sector.
”It is too early to share detail, but we hope to be able to share specifics by the end of the year, and this will inform our commercial approach moving forward. We hope that it will bring fresh opportunities for us, our existing clients and for our new clients as we bid for new municipal waste contracts.”