Update on Downer’s Utilities contract

PriviPri
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Media/ASX and NZX Release
27 February 2023
Update on Downer’s Utilities contract
On 8 December 2022, Downer announced that it had identified the historical misreporting of
revenue and work in progress in one of Downer’s maintenance contracts in its Australian Utilities
business.

Downer announced today that the privileged and confidential investigation undertaken by lawyers
retained by Downer, and forensic accountants engaged to assist the investigation, has now been
completed.

Reporting of revenue in respect of all contracts with a material work in progress balance in
Australia and New Zealand has been reviewed.

Downer is confident that the misreporting was specific to the contract and not replicated elsewhere.

The Contract

The contract is for the supply of maintenance, new connections, faults and capital works services
for a long-term Power Utilities customer applying a schedule of agreed prices for each service
type.


There are over 9000 work orders issued in any given month, the vast majority of which are
completed within the same month. Some capital related work orders, however, extend across two
or more months. The contract has an initial term remaining of 27 months and two extension options
of 3 years each.

The contract was signed in July 2019 and, following a transition phase from a preceding long-term
contract, year one of the contract commenced on 1 April 2020. The new contract was significantly
larger than the preceding contract and incorporated both new geographic service areas and new
services, including increased capital works.

The misreporting of the contract earnings since inception resulted in the contract’s underlying poor
performance, including its deteriorating performance over time, remaining unidentified. Downer is
heavily focused on the remediation of the contract and a detailed recovery plan is now being
actioned. The new contract management team, along with external business improvement
specialists, are working closely with our operations teams and customer to improve contract
performance.

Downer has agreed and documented a commercial reset of the contract with the customer and
this, coupled with operational improvements, indicates the contract is not onerous.

The Utilities management team responsible for the contract has been replaced.

Downer EDI Limited
ABN 97 003 872 848
Triniti Business Campus
39 Delhi Road
North Ryde NSW 2113
1800 DOWNER
www.downergroup.com

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How did the misreporting occur?

The misreporting of revenue has come about through the misapplication of Downer’s revenue
recognition policy, by incorrectly assuming that:

1. work orders were completed (either in full or to an assumed percentage) at each month
end, including work orders for which little work had been undertaken. The result was to
overstate the extent to which work orders had progressed, and to record revenue
prematurely, particularly for work orders that extended across two or more months; and

2. costs incurred in excess of the scheduled billable amount related to variations billable to the
customer.

Contributing factors

At the inception of the contract in 2020, contract management carried across a method of
recording revenue at month-end that had been applied to a previous contract with the same
customer. That earlier contract, however, was different in breadth of service and scale to the new
contract, and the need to apply a different methodology was not identified as necessary.

Reported earnings were close to expectations and project performance reporting did not indicate
any material issues within the contract.

Changes to the customer’s billing system and Downer’s works management systems in 2021,
effectively masked the underlying issues, and led to the mistaken belief that high Work in Progress
was largely the result of billing difficulties caused by the new systems and processes that would
ultimately be resolved with the customer and for which there was a detailed management recovery
plan.

Impact on prior year results and 1H FY23

Post-tax earnings were overstated by a total of $22.2 million between April 2020 and 30 June
2022, of which $1.7 million relates to FY2020, $8.8 million relates to FY21 and $11.7 million relates
to FY22.

Downer will restate comparative financial information to incorporate the correction in underlying
results. As part of the 1H FY2023 results announced today, the restated prior period (1H FY2022)
post-tax earnings will be reduced by $3.2 million. Note A of Downer’s Condensed Consolidated
Financial report for the Half Year ended 31 December 2022 shows these adjustments.

Post-tax earnings for the contract for the six months to 31 December 2022 was a loss of $12
million.

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Improvements to ensure the misreporting does not occur again

Downer has a comprehensive risk management, internal compliance and control system in place,
including a detailed revenue recognition policy, that aligns with AASB15, and must be followed for
each contract.

The following additional control measures have been implemented across the Group:
• The revenue recognition methodology for all new material contracts now also requires the
approval of the Tenders and Contracts Committee (TCC) prior to the commencement of the
contract. Any subsequent adjustments will also require approval by TCC prior to
implementation.

• The revenue recognition methodology and application for all new material contracts must
now undergo internal audit review within six months of contract start and then periodically
as part of the internal audit plan.



Authorised for release by Downer’s Board of Directors.


About Downer
Downer is the leading provider of integrated services in Australia and New Zealand and customers are at the
heart of everything it does. It exists to create and sustain the modern environment and its promise is to work
closely with its customers to help them succeed, using world-leading insights and solutions to design, build
and sustain assets, infrastructure and facilities. For more information visit downergroup.com.



For further information please contact:
Media: Mitchell Dale, Group Manager Corporate Affairs +61 448 362 198
Investors: Adam Halmarick, Group Head of Investor Relations +61 413 437 487