Mouchel feels the pressure in spending crackdown

The company, which works with a host of local councils and organisations such as the Highways Agency, said the impact had been felt in "more discretionary" areas such as highways schemes and school building programmes.

Shares in Mouchel fell as much as 10 per cent at one stage as the firm predicted a "difficult" short-term outlook and launched its own cost-cutting drive.

The company, which had 11,100 staff as of July last year, refused to comment on how many jobs were under threat.

The firm's order book and bid pipeline stood at 1.9bn and 2bn respectively as of the end of May – down from 2bn and 2.3bn in February.

But Mouchel remains confident about longer-term prospects due to the pressure on the public sector to deliver services more cheaply, with several local authorities looking to outsource for the first time.

It added: "We expect opportunities to increase further once things start to settle down after the summer and as organisations move beyond short-term cost-cutting."

The firm said there were "growing prospects for broadening relationships" with councils including Milton Keynes, Middlesbrough, Bath & North East Somerset, Rochdale and Oldham.

Mouchel – whose finance director is leaving to seek "fresh challenges" – said the underlying business will perform in line with expectations this year.

Profits at its highways arm however will be dented by the loss of a parking enforcement deal for Westminster council amid a legal row.

The company was initially awarded the deal earlier this year but then lost it in a re-run tender race after Westminster mishandled the initial procurement. Mouchel is pursuing the council for damages.

Panmure Gordon analyst Andy Brown said: "Trading, as expected, remains tough and will necessitate further cost reduction but cost driven opportunities seem to be increasing, so in the medium term the group is well placed to benefit."