CREATIVE ACCOUNTING CREATES PROFITS

ecause of the length of construction contracts and the variation involved, contracting is particularly susceptible to creative accounting.

Company accounts may be public property, but how they are put together is known only to a few. As a result, company figures may be a long way from telling the whole truth about a contractor's financial performance.

Donald said: 'There is considerable scope for interpretation by corporates over exactly what profit is recognised. Even when an accounting policy is revealed, it may only be used in one division, and even within that division it may be applied inconsistently.

'The degree of flexibility is amazing. For this reason no-one should consider a company's figures to be judge and jury of that company's performance.'

All of which makes valuing a contractor extremely difficult. So difficult, says Donald, as to render a hostile takeover bid practically impossible. 'Companies would be concerned not to buy a contractor which had inside it an accident waiting to happen. The risks involved in a hostile takeover would outweigh the rewards.'

This is not say that contractors' results are useless. Rather that observers should be wary of inferring too much, especially from a single year's results. Operating profits quoted

pre-interest:

Amec, Balfour Beatty, Costain, Laing (except 1993), Mowlem, Gleeson, Tarmac, Trafalgar House, Wimpey.

Operating profit quoted including interest:

Higgs & Hill, Alfred McAlpine, Taylor Woodrow.

Operating profit quoted pre-central overhead allocation:

Mowlem, Alfred McAlpine, Tarmac.

Operating profit quoted

pre-exceptional costs:

Balfour Beatty, Costain, Trafalgar House.

Operating profits quoted inc

of profit from associates:

Amec, Balfour Beatty.

Wimpey profits include minor associate losses in 1990 and 1991. Analysis of Trafalgar House has been based on the performance of engineering and construction divisions, including associates.

Other discrepancies:

Operating profit for Gleeson includes an undisclosed contribution from its housebuilding operation.

Discrete contracting data for Wimpey is unavailable for the years 1985-1989 due to the aggregation of housebuilding with contracting.
THE YEAR OF Restructuring?

According to Joe Dwyer of Wimpey, 1995 could mark the beginning of serious rationalisation of the industry, by takeover and merger or strategic alliance.

According to brokers, restructuring is the only way the UK industry can adapt to new markets dominated by multi-national construction giants.

The radical assessment comes amid strong takeover speculation. Rumours have been rife after Trafalgar House's bid for Northern Electric, and following Costain's announcement that it had talks with a possible buyer.

The analysts say contractors will need stronger balance sheets and closer international partnerships if they are to cope with slow growth and thinner margins in construction.

NatWest warned: 'At the moment, large continental firms are much better placed to bid for large scale PFI projects. UK construction must restructure if it is to compete for such schemes.'

Five top contractors have been identified as possible participants in the changes: Mowlem, Birse, Costain, Galliford and Alfred McAlpine.