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Neville Sims Transparency is key for contractors

What can be done to change the City's perception of contractors now that the debilitating effects of the longest downturn in the industry in living memory are finally being worked out?

A key feature would be to improve the transparency of reporting and investors' understanding of how the sector manages its business and accounting, particularly in terms of risk management, profit recognition and the related balance sheet issues.

Let us consider risk management first, which is something I suspect the market frequently takes a cynical view of. However, it is important to understand that we have almost unrivalled skills in risk and project management, although inevitably there will be the occasional problem contract.

A number of research bodies have suggested that construction companies could usefully adopt the concept of 'economic capital', which would vary in relation to different risks attached to different types of contracts. Such a system of risk weighting of contracts might provide a clearer link between risk and return for investors. Greater disclosure and rethinking the way information is disclosed, based perhaps on concepts borrowed from the banking industry, are suggested as a way of demystifying the financial position of contractors.

Secondly, there is profit recognition. Here the issues are similar as there will always be a considerable degree of judgement with regard to progressive profit recognition. However, the critical point is not the accounting, complex though it can be, but an improvement in the quality of contracts taken and the professionalism and consistency of the contract management to deliver the reliable, good quality earnings that our investors seek.

What is needed then, for both risk management and profit recognition, is some form of consensus approach which will produce reliable and consistent results from contractors. Without this some will be ultra prudent while others may be stretching out to meet over-ambitious targets.

And finally, what about margins, the most often criticised issue in our industry? We would like to make better margins for our skills and expertise, and will achieve this in the future as a result of a number of beneficial influences: the results of the stronger market we have today, the reducing influence of poor historic contracts, and better prospects for those involved in PFI work. But we will not be a high margin business. We should not apologise for low margins because they do not have to mean low quality earnings: a number of retailers and service industry providers are testament to that.

I am sure the industry is ever more aware of the City's wish for more visibility and higher quality earnings and I believe it will continue to work very hard to solve the issues involved, perhaps as suggested above. As we move forward we must be able to demonstrate that the contracting sector's considerably underestimated skills can produce consistently attractive returns for our shareholders. If we can't do this, I fear we will continue to remain an unloved and misunderstood sector in the eyes of the City.

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