Poor financial control in its Crown House Engineering (CHE) business has led Carillion to announce major job cuts, exceptional costs totalling £34m for this year and senior management changes.

The company says that a thorough financial review identified a number of CHE contracts, which are likely to make losses. Carillion stated that, in line with the Group's more prudent approach to financial management, an exceptional operating charge of £25 million will be taken against these contracts in the first half of this year.

Carillion says that despite CHE's 'very strong market position', growth has not been controlled, leading to disappointing financial performance. The company has therefore decided to restructure the business to focus on larger contracts for key customers and its successful voice and data communications business.

These changes are expected to reduce annual turnover by approximately one third to around £150m and see around 900 jobs, a third of CHE's workforce, disappear. Job numbers will be reduced as existing contracts allow and CHE's 500 agency and sub-contracted staff will bear the brunt of the restructuring

Despite yesterday's news Carillion has been performing well since the demerger from Tarmac last year, particularly in the facilities management sector. The company was awarded BT's major outsourcing contract Project Jaguar (see News story) and is one of five shortlisted bidders for the BBC's 'property partnership' opportunity, in the Promedia consortium with British Telecom and Marylebone Warwick Balfour Group (see News story).

Carillion is also a member of the Integrated Accommodation Services (IAS), consortium which is to provide the new facility for GCHQ in Cheltenham. Crown House Engineering is providing mechanical, electrical, public health and fire protection services to the project in a deal worth £90m.

To manage the changes and implement new controls, the CHE senior management team has been replaced with the appointment of a new Finance Director (David Crudace), Commercial Director and Operations Director, who join the new Managing Director, Richard Lumby, appointed following the demerger. The restructuring, which starts immediately, will cost around £9m over the second half of this year.

Commenting on these measures, Carillion Chairman, Sir Neville Simms said: "It's extremely disappointing to be making this announcement at a time when the Group is otherwise performing well and in line with our expectations, and as we increasingly see the benefits coming through from our strategy of increasing the proportion of our earnings from the growth segments of Private Finance, Infrastructure Management and Services."

This news follows weekend press reports that Carillion might be on the acquisition list of Swedish construction giant Skanska. A Carillion spokesman refused to comment on market speculation but told i-FM that the company was taking pre-emptive action to deal with the situation and that there were no more 'black holes'. A new Financial Director was pursuing a rigorous and transparent approach. The spokesman said that Carillion was intent on building an independent business and was not pursuing re-listing in the way that other construction-based companies had done.

Taylor Woodrow has now been added to the list of possible Skanska bid targets. The Swedish firm has refused to comment beyond confirming that it is interested in the UK market, among others.

Richard Byatt