Perthshire construction company Algo have posted pre-tax losses of £3.5 million they say have been caused by “onerous” local government contracts.
But bosses at the firm said they would have recorded a profit of more than £722,000 to June 2023 when the contracts are treated as exceptional items in the annual accounts.
Algo took on two contracts to construct social housing projects in Kirkcaldy and Dundee, with Fife Council and Caledonia Housing Association respectively.
A regeneration project of 36 flats in Kirkcaldy and a new build housing development on Coldside Road were awarded in 2019.
Director Murray Alexander said Algo tried to renegotiate with Fife Council and Caldeonia without success, after building materials rocketed in cost by 40%.
Both projects resulted in a gross loss of £4.5m.
And the director warned building firms could be put-off in future from taking on “much needed” social housing projects if local authorities and associations remain inflexible.
Algo ‘honoured’ commitments at a cost
Each contract was agreed on a “fixed price” basis before the pandemic in 2019, Mr Alexander said.
But the rapid rise in building material costs, hyper-inflation and the cost of living crisis resulted in a shortfall, who still “honoured” the contracts and completed the builds.
Mr Alexander said: “The contracts were negotiated before the pandemic.
“The contracts are traditionally fixed price, allowing for 2-3% inflationary costs.
“But we were hit with at least a 40% increase in material costs over the course of the contracts.
“We tried to negotiate because of the severity of the increases, we got a ‘little’ bit from Fife Council, but nothing from Caledonia.
“Algo was able to pull on resources from elsewhere to complete these contracts.
“There is a real need for affordable, social housing to be built.
“But government rates have not caught-up with post-covid inflationary costs.
“Any company carrying out these type of contracts is having a hard time, if they are unable to renegotiate.
“We have learnt a lot. We think now ‘do we go back and do more?’ Perhaps, but it needs to be at a much more increased rate where we can actually afford to pay our subcontractors and come out the other end.”
Outlook strong
Despite the financial set-backs caused by the two “onerous” contracts, the outlook for Algo is positive, the company say.
Algo are currently constructing new warehouses for House of Bruar, at their site in Ballinluig.
And the firm is also to break ground on the Seamab school for children with complex additional needs in Crook of Devon.
The company employs around 200 staff, directly and indirectly, on its national projects.
Current open contract books are valued at around £75m.
Post year end trading has been strong, they added, with turnover for the six months to December 2023 up on the previous year at £16.5m,
This has generated gross profit margins of £2.5m and profit before tax of £1m, the firm said.
Algo has net assets of £3.7m and net current assets of £2.4m as of December 2023.
‘Difficult year’
Financial director Stewart McIntyre added: “We took the decision to honour the contracts for both the council and the housing association, even though the whole scope of the contract changed during the covid and hyper-inflation period.
“Our competitors might not have done that and some companies might not have been able to afford to do that.
“We feel we honoured our end of the bargain, but we do not feel the council and association participated in their end.
“Our trading results up to the year end of 2023 are very strong, over £1m profit pre-tax.
“We treated the contracts as onerous contracts, and our other projects are profitable. We have treated these as exceptional items in the accounts.
“But underlying profit was strong last year to June 2023, but the two contracts have dragged us down.
“We are up on last year, we are in a strong position going forward, but this has been a difficult experience.”
Fife Council was approached for comment.
A spokesperson for Caledonia Housing Association said; “It would not be appropriate for Caledonia Housing Association to comment on a third party supplier’s annual accounts.”
