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MJ Gleeson has said it needs to eradicate "fundamental problems" in its handling of design-and-build work after a number of housing projects wiped 44% off its annual contracting profit.

Group managing director David Eyre said design-and-build projects – in which a contractor prices work based on an architect's sketches before carrying out the detailed design – caused major headaches for the group over the 12 months to 30 June 1999.

"Design and build is a big problem because we have to price before the design is sufficiently developed," he said. Glitches in the detailed design process included rooms needing to be larger than originally planned and problems with ground conditions.

These problems caused the fall in operating profit for the contracting and engineering division from £2.5m to £1.4m. Eyre said that Gleeson would respond to the profit fall by tightening its internal procedures and improving its analysis of tender prices.

Gleeson to ditch competition bids

Eyre also said that Gleeson would be exiting the competitive tendering market almost entirely, after revealing that contracting margins halved last year from 1.4% to 0.7%.

Eyre said that more than 50% of contracting work was already won through partnering arrangements. "We now want to get up to near 100%," he said.

But he added that the company would still take a few competitively tendered jobs. "Some of our clients are embracing partnering but some won't accept it and we can live with that. You can't expect to get repeat business if you're not demonstrating competitiveness, so you need to keep a toe in the water."

Housebuilding profit up 81%

In contrast to the contracting arm's miserable fortunes, Gleeson Homes saw operating profit rise 81% to £6.9m. This buoyed group pre-tax profit, which rose from £12.7m to £13.4m on turnover up 20% to £298.1m.

In the housing division, the average selling price was up from £105 000 to £120 000, with 603 houses sold compared with 573 the previous year. Eyre said reservations were up 100% on last year.

"The market in the South is pretty buoyant at the moment, but we have not seen anything like the level of price inflation in the North where it has been very modest indeed," Eyre said.

However, Eyre predicted that the housing market would slow down for the group's current year: "I can't see this escalation of prices continuing," he said.

The property arm lifted its income from £6.3m to £7.3m.

In contracting and civil engineering, Eyre wants to increase the company's involvement in private finance initiative schemes in a bid to push margins back up.

"I would be disappointed if we were not back up to 1.4% by next year end," he said.