‘Choosing Costain’

Costain Group PLC Annual Report 2009

‘Choosing Costain’

Costain is an international engineering and construction group with a reputation for technical excellence founded on more than 140 years of experience. The Costain name has been at the forefront of many world-famous projects including the Thames Barrier, the Dubai Dry Dock and the Channel Tunnel. In this Annual Report, we highlight the 2009 performance and financial results from our operations and provide a summary of our Corporate Responsibility programme which is at the core of the Company’s culture.We have also detailed the next stage of our strategy – ‘Choosing Costain’ – which sets out the plan for the further development of the Costain Group.

www.costain.com

Our Annual Report 2009 is available in both printed form and on the new Investors section of the Costain website at www.costain.com. Effective communication with our shareholders is vital to our wellbeing and we would welcome feedback on either or both versions of the Annual Report.

Costain Group PLC Annual Report 2009 / www.costain.com 01

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Contents This section underlines why Costain is a leading brand and why people are ‘Choosing Costain’.

02 About Costain02 A leading brand04 ‘Choosing Costain’

04 No card, no job06 Premier league08 Commitment to the community11 Solving the waste issue12 Keeping the lights on

14 Corporate Responsibility14 Responsibility at the core16 Delivering responsibly

18 Health and Safety20 Our People22 In the Community24 Environmental26 Marketplace

28 Business & Operational review29 Our performance in 200930 Chairman’s statement32 Chief Executive’s review35 Our values and Our markets36 Business & Operational review

36 Environment37 Infrastructure38 Community38 Energy & Process39 Land Development

40 Principal risks43 Key Performance Indicators44 Financial review

46 Governance46 Board of Directors49 Corporate Governance statement (including

Internal controls and Risk management)57 Directors’ report63 Directors’ remuneration report70 Statement of Directors’ responsibilities71 Independent Auditors’ Report to the members

of Costain Group PLC

72 Financial statements72 Consolidated income statement73 Consolidated statement of

comprehensive income and expense74 Consolidated statement of financial position75 Company statement of financial position76 Consolidated and Company statements

of changes in equity77 Consolidated cash flow statement78 Company cash flow statement79 Notes to the financial statements112 Five-year financial summaryIBC Financial calendar and other

shareholder information

This section highlights our approach to Corporate Responsibility and explains why we see it as very important to our business. We highlight our Corporate Responsibility framework, how our performance is assessed and the progress we have made during the year.

This section demonstrates how we delivered our strategy in 2009. We explain how our business is organised, how it has developed over the year, and provide details of our financial performance. We also review our priorities, Principal risks and Key Performance Indicators.

This section explains our Corporate Governance and decision-making processes. We describe the Board of Directors and its Committees, and our accountability and audit procedures.

This section contains the detailed financial statements and other information that our stakeholders find useful, including detailed notes, the financial calendar and shareholder services.

A leading brand

02 Costain Group PLC Annual Report 2009 / www.costain.com

In 2009, the Costain name was confirmed as one of the leading brands in Britain. Two of the UK’s most respected industry magazines, Construction News and New Civil Engineer, voted Costain the best contractor and the Company was also featured as one of the nation’s Top 100 ‘Most Admired’ companies in a Management Today magazine survey.

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No card, no job.Costain’s total commitment to Health and Safety is one of the major reasons why the Company continues to be ‘the contractor of choice’ for many of the country’s major organisations. Health and Safety is the number one priority in our business and Costain is committed to operating a fully competent workforce on all its sites and offices. We have continued to lead the way in Health and Safety by underlining our high standards across the board through the introduction of a ‘No card, no job’ policy for 2010. All staff, whether employed by Costain or by our supply chain partners, must be able to demonstrate competence in appropriate management, supervisory or technical skills and Health and Safety matters. The card system provides the mechanism for verifying competence and, as such, all members of our workforce are required to hold the appropriate card.

www.costain.com

‘Choosing Costain’‘Choosing Costain’


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Some of Britain’s most talented business people choose Costain because of the Company’s reputation, together with its training and development programmes which are vital if tomorrow’s leaders are to be groomed for success. In 2009, seven of the Group’s top young executives travelled the country presenting to colleagues on the future direction of Costain. This initiative underlined Costain’s pool of talent and the Company’s commitment to developing its people resource.

Pictured (left to right) are:

Andrew BullAndrew joined Costain as a graduate engineer in 1994 on the Cardiff Bay Barrage. Through company training schemes, he secured Chartered status in five years. Career highlights include working with 4Delivery-Southern Water on a programme of award-winning innovative treatment plants. Most recently Project Commercial Director on the Brighton and Hove waste water treatment works project.

Claire CarrClaire Carr is a Chartered Civil Engineer who joined Costain in 2003 and has worked predominantly within the rail sector. Her career with Costain began at the St Pancras Station Redevelopment, where as a Deputy Delivery Manager, she was listed in the ‘Top 35 Managers under 35’ by The Times newspaper. She is currently the Project Delivery Manager for the Farringdon Station Redevelopment.

Isabel ComanIsabel Coman is a Project Manager with Costain. She is currently leading the bid for the first main Crossrail packages of work, which form a major section of the underground tunnels through central London, for Costain and its joint venture partners. She was ‘Costain Manager of the Year 2009’ for her work as Project Manager on the complex King’s Cross Eastern Range contract.www.costain.com

Premier league.

‘Choosing Costain’


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Ritchie BurcombeRitchie joined Costain in 2000. He has significant experience in the highways, marine, rail and water sectors. In addition, Ritchie has a high level of technical capability and is currently responsible for the delivery of the St Germans pumping station project, a highly complex civil engineering project of national significance in East Anglia. Ritchie is a Fellow of the Institution of Civil Engineers.

Rob PhillipsRob joined Costain in 1997. He progressed through the Costain Graduate programme working within the highways sector. He was appointed as the Project Manager and then Director for the Dartford Improvement Scheme in 2006. He then played a major part in Costain’s successful move into highways maintenance. He is currently Project Director, leading the construction of the Evaporator D project for Sellafield Ltd.

Catherine WarbrickCatherine joined Costain in 2006. In January 2009, Catherine was appointed as Corporate Responsibility (CR) Manager for the Costain Group, responsible for driving and delivering the Group’s CR strategy. Career highlights include Costain receiving a Silver banding in Business in the Community’s CR Index. Before joining Costain, Catherine gained more than six years’ experience in environmental management.

Frank MillarFrank Millar is a Chartered Engineer and joined Costain in 2005 as the Operations Director for the Oil, Gas & Process division. Frank has worked extensively on enhancing project delivery within the division, notably by strengthening project management capability.


Costain joined Business in the Community (BITC) in 2007, to strengthen our commitment to Corporate Responsibility (CR). BITC is the largest and one of the oldest national business-led coalitions dedicated to CR, working with organisations to inspire, engage, support and challenge companies on responsible business. With a membership of over 850 companies, BITC chooses to partner with members who recognise the relationship between responsible business practice and the role this

plays in creating wealth, building confidence and addressing social and environmental need. HRH The Prince of Wales, President of BITC, is pictured with Charles Sweeney, Managing Director – Energy & Process, Costain, at The Prince’s Seeing is Believing Report Back event 2010. The Prince’s Seeing is Believing is BITC’s most effective programme for engaging business in society, inviting senior business leaders to see for themselves how business can play a role in tackling Britain’s most pressing social issues.

www.costain.com

Commitment to the community.



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Solving the waste issue.Following challenging European Union directive targets to reduce the amounts of hazardous and non-hazardous waste being sent to landfill, the UK has to find a different solution to its waste disposal problem. Costain has been chosen as the design and construction contractor for the Greater Manchester Waste Disposal Authority’s (GMWDA’s) PFI Waste and Recycling Contract, which is the largest municipal waste contract in western Europe. The project, which is valued at £397 million, will treat 1.2 million tonnes of municipal waste that GMWDA handles annually and serve a resident population of over two million people providing waste disposal services to approximately 958,000 households in the north west and handling approximately five per cent of the UK’s national municipal waste.

Pictured (left to right) are: Peter Heginbotham, Chairman of Viridor Laing (Greater Manchester) Ltd – the joint venture responsible for the Greater Manchester Waste PFI Contract – with John Boyd, Costain Project Director.

www.costain.com



Keeping the lights on.Britain faces stark choices if the nation is going to avert a major energy crisis in the decades to come. As some of the country’s existing generating capacity is retired, there is a requirement for investment in a balanced portfolio of energy sources to meet the UK’s future demand and hence secure future prosperity. The Costain Group is working with various utilities to deliver energy solutions based on renewables, new nuclear and clean coal technology, including Carbon Capture and Storage (CCS). Costain is also delivering gas storage assets, vital to combat the price volatility seen in recent years.

www.costain.com



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Responsibility at the core

“Our Corporate Responsibility (CR) programme is core to the Company in terms of culture, operations and overall performance. In this Annual Report, we have included a detailed summary of our CR progress in addition to the Business & Operational review and financial results. It is our firm belief that we cannot build strong foundations for a future Costain without ensuring all our CR components are in place and functioning at a high level.

“We have measured our CR success using third party assessment. Business in the Community (BITC) is a highly respected body and one which tackles the issues of creating wealth, building confidence and addressing social and environmental need. We believe these areas are very important to all corporate concerns and we focus on improvements in each to enable us to improve further our standing as a member of the community and a pursuer of business excellence.

“The Costain Group is well placed to supply solutions to many of the problems which face society such as waste in our environment. These solutions will benefit many and also further enhance Costain as a successful business.”

David Allvey Chairman

Andrew Wyllie Chief Executive


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Boris Johnson, Mayor of London, with Stephen Wells, Costain Group Strategy and Business Development Director (left) at the Confederation of British Industry (CBI) London Summer Lunch 2009.


Delivering responsibly

Responsibility lies at the very heart of our Company values.In our 2008 Annual Report, we highlighted our Corporate Responsibility (CR) strategy and emphasised our belief that it is intrinsic to business success.

In this Annual Report, we provide a summary of our 2009 performance, demonstrating how we continue to embrace CR and highlighting the real business benefits we have delivered.

Costain has been a member of Business in the Community (BITC), since 2007. BITC works with companies who make a commitment to:

• Inspire, innovate and lead by sharing learning about and experience of responsible business

• Impact on key social issues through collaborative action in areas of greatest need

• Integrate, manage and measure responsible business practice

BITC’s approach to responsible business provides a clear framework to address new challenges, improve business performance and benefit society.

Our approachOur commitment to CR means delivering projects and services that meet our customers’ and society’s needs while managing the social and environmental impacts of our business. We recognise that by working with our customers, supply chain, employees and other stakeholders we can make a greater contribution.

The Board is responsible and the Executive Board of Costain is accountable for all aspects of CR, including setting policy and strategy. The CR committee, chaired by Stephen Wells, Executive Board Director, is responsible for steering our approach and reporting to the Executive Board.

CR is integral to our risk management processes. The identification of the positive and negative impacts on society and the environment, and the level of influence we have on the wider market, inform our strategy.

Using the BITC framework and through stakeholder engagement we have identified key areas of responsibility:

• Health and Safety• Our People• In the Community• Environmental• MarketplaceDelivering real business benefits by operating responsibly we have:

• Improved our safety performance by 45% over the last seven years

• Promoted 109 people in the business due to continued investment in their development and recognition of their potential in 2009

• Continued to respect and support local communities, achieving a Group average Considerate Constructors Scheme score of 34.7 (out of 40), 9% above the overall scheme average in 2009

• Increased the percentage of total waste generated that we divert from landfill to 67% in 2009

For more information...www.costain.com/responsibility


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Key responsibilitiesThese are the five areas of responsibility which are key to the future success of the Group. In the following pages we provide the summary of our commitment, approach and performance.

Benchmarking our performanceWe benchmark ourselves against our peers and other companies in the wider marketplace, by participating in BITC’s Corporate Responsibility (CR) Index assessment. The CR Index illustrates how companies integrate responsible business at a strategic and operational level.

In 2009, we received the results of our 2008 CR Index assessment. We achieved further improvement in our CR rating and are currently banded as Silver with a score of 88%, a 4.4% increase on our 2007 assessment. This places us 5% above the Index average and 15% above the average for our sector. In June 2010, we will receive the results of our fourth CR Index assessment, which will be made available on our website www.costain.com/responsibility.

94.094.091.091.088.0

62.0

2006

Our performance improved by 26% from 2006 to 2008.

83.6

2007 2008 Target 2009 Target 2010

BITC CR Index performance (%)

Listening to our stakeholdersWe have a wide range of stakeholders including customers, joint venture partners, supply chain partners, employees, investors, regulators, Government, community and environmental groups and other interested parties.

Highlighted throughout this Report are a number of platforms, through which we consult with our stakeholders. We use this wide-ranging consultation as part of our strategic planning.

From the responses to our first survey, we understand that 100% of respondents agree with our CR approach, 91% believe that we are demonstrating a good level of performance and 64% a good level in reporting. This feedback is essential and contributes to the development of our strategy. In response, we have increased the level of reporting in our Annual Report and on our website. In 2010, we will focus on improving the response rate to our survey.

To feed back any comments you have on our approach, please visit our website and complete a short on-line survey at: www.costain.com/responsibility or email us at [email protected].

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mitment,ce.


Health and Safety Our approachWe have a robust Safety, Health and Environmental (SHE) Management System, accredited to BS OHSAS 18001. We strive to meet and exceed all Health and Safety legislation, codes of practice and guidelines and are dedicated to promoting best practice across the business. We will achieve our commitment by:

• Demonstrating leadership and commitment to Health and Safety• Engaging with our stakeholders• Ensuring the competency of our workforce• Measuring and continually improving our performance through

identifying and targeting key Health and Safety challenges

PerformanceRoSPA AwardsOur strong Health and Safety culture and performance has again been highlighted this year by the receipt of 71 Royal Society for the Prevention of Accidents (RoSPA) Awards:

• Major Award – RoSPA International Dilmun Environmental Award, commended

• Order of Distinction• President’s Award• 7 x Gold Medal Awards• 57 x Gold Awards• 3 x Silver Awards• 1 x Bronze Award

Accident Frequency Rate2009 has seen a reduction and improvement in our Accident Frequency Rate (AFR) from 0.17 to 0.16. The Group AFR has significantly reduced by 45% over the last seven years.

2003 2004 2005 2006 2007 2008 2009

0.10

0.05

0.15

0.20

0.25

0.30

Annual Accident Frequency Rate (AFR)(no. of reportable accidents per 100,000 work hours)

Our AFR has reduced by 45% in the last seven years.

Trendline

AFR

Our commitmentHealth and Safety is the number one priority in our business. We continue to focus on promoting a positive safety culture, aiming to ensure that our employees, customers, suppliers and the public are safe and environmentally aware.


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We will continue to work towards the elimination of all accidents and incidents. Demonstrating leadership in Health and Safety is central to our culture. In 2010, members of the Executive Board will undertake quarterly safety health-checks and inspections on all projects, taking the opportunity to emphasise that Health and Safety is our number one priority.

Safety, Health and Environmental trainingWe have continued to invest significantly in training our employees, delivering over 3,000 days of Health and Safety training in 2009.

A major emphasis on competency will be another focus for 2010. We will ensure that all those engaged on behalf of the Group, have the correct skills and competency to deliver operations safely. To publicise this focus a standard notice board, detailing the competency of appointed individuals, will be required on all sites.

Behavioural safetyOur focus on behavioural safety, promoting a positive safety culture throughout the Group, continues. In 2008, we provided training to our Executive Board and senior management in the principles of behavioural safety. We have extended this in 2009, training over 544 employees and members of our supply chain to date.

Supply chain Our supply chain is fundamental to the safe delivery of all our projects. We continue to engage actively with our supply chain, through our Partners for Progress initiative, our SHE awareness days and supply chain audits. Working with our supply chain partners we have, to date, audited over 93% of our ‘Top 100’ supply chain partners, strengthening relationships, sharing innovation, best practice and promoting a positive safety culture.

Recognising the success of our supply chain initiatives, we will continue to engage with our stakeholders through our SHE awareness days and by expanding our Partners for Progress groups across our sectors.

Health and wellbeingDuring 2009, we continued to offer voluntary wellbeing medicals to employees. Furthermore, in order to promote a fit and healthy workforce on our sites, we introduced a mandatory medical regime for our safety critical workers which requires a pre-employment medical followed by further medicals at specified regular intervals depending on age.

Following a review of the medicals conducted during 2009, we will be running campaigns to raise awareness of musculoskeletal disorders and noise induced hearing loss during 2010.

‘Blue Hat’ scheme In 2009, we introduced a scheme aimed at front line supervisors. We continually look at ways of improving what we do with a view to adopting a ‘zero tolerance’ standard with regard to accidents and incidents. Focusing on supervisors, who manage people at work on a daily basis, we have strengthened our policies and procedures. We are placing greater emphasis on training, knowledge and aptitude, which are all evaluated at a new supervisors’ induction, whereupon successful completion, the supervisors are issued a ‘Blue Hat’.

Awareness days In 2008, we introduced Costain Safety, Health and Environmental awareness days. The events brought together Costain senior management, customer representatives and members of our supply chain to discuss forthcoming Group and industry initiatives, changes to legislation, and our aspirations for Safety, Health and Environment. The day achieved such positive feedback that we continued the initiative in 2009, holding a further five events across the country.



Our People Over 1,150 employees attended Group road shows held across the country in October 2009. Andrew Wyllie, Chief Executive, and members of the Executive Board presented on the business strategy and future aspirations, giving the audience an opportunity to ask questions and give direct feed back to the Board.

Effective leadershipOur leaders promote the Group values by being open and honest, honouring commitment, guiding and inspiring their teams and encouraging two-way dialogue and feed back.

We continue to recognise and develop employees identified as potential future business leaders.

Our leadership programmes include the:

• High Potential Programme (HPP) – an intensive programme of coaching and personal development including business projects, designed to prepare the candidates to achieve their potential as future Directors in Costain.

• 2020 Board – a development scheme for identified employees who have demonstrated the potential to become future members of the Executive Board in ten years time.

We will be running a further HPP programme and a new 2020 Board in 2010.

Performance and talent management We identify and motivate our talented people and ensure they are recognised and rewarded for their contribution to Costain. In 2008/9, we introduced an enhanced performance management system to ensure that Costain attracts, retains, motivates and develops the talented people it needs both now and in the future.

In addition to annual performance reviews, we have launched a mid-year Career Development Review (CDR) for employees, enabling the Company to ascertain competency, performance, mobility, ability and aspirations.

The CDR process incorporates a competency scheme in addition to a unique approach to talent management that requires everyone to participate in succession planning and agree an individual’s ‘potential to progress’. In 2009, we saw 109 individuals promoted within the business.

Analysis of the data generated by the CDR process, both at local management level and strategically, will focus our talent management, manpower planning and training delivery processes in 2010. We will continue to develop the process further by introducing key technical competencies to the system.

Our approachWe will achieve our commitment by demonstrating:

• Our culture and work ethic • Strong, proactive and visible leadership• Performance and talent management • Skills development• Recognition and reward

Performance Culture and work ethicOur culture and work ethic is driven by our Company values (see page 35) promoting behaviours such as integrity, tolerance, teamwork and inclusion.

As a result of our success, we have experienced significant growth in staff numbers over the last four years. Costain has invested heavily in improving manpower planning and delivering training and management development to encourage our talented people to build their careers within Costain. In 2009, we welcomed 346 new employees to the Group. In addition, we are pleased to note that our voluntary staff turnover rate has reduced by over 10% in the last four years to 2.9%.

We continue to promote transferable skills and give individuals the opportunity to experience different roles within the business. In 2009, we saw 254 employees move between sectors and disciplines within the Group.

Our commitmentOur goal is to attract, retain and develop the best people for the Costain Group by providing a challenging and stimulating working environment, where people enjoy their jobs, fulfil their potential and are recognised for their efforts.



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Skills developmentWe encourage people to take ownership of their career and to continuously develop their skills, broaden their knowledge and widen their experience within the business. We are committed to delivering training that enhances performance.

2008 saw the Construction Awards Alliance approve our National Vocational Qualification (NVQ) centre for the management of NVQs. Currently, over 100 candidates are registered on our management NVQ centre.

Building on the success of our first National Skills Academy for Construction in 2008, we have expanded this programme to include our Brighton and Hove waste water treatment works project.

In 2010, we will continue to implement our National Skills Academy model across our sites, as appropriate, and will pilot an internal Skills Academy model, focusing on supply chain engagement.

Diversity and inclusionWe ensure that all people activities continue to be inclusive and that we provide fair access to and participation in training, promotions, recognition and reward, behavioural and technical competencies.

We currently employ 2,254 people in the UK, 7% are from BAME (Black, Asian and Minority Ethnic) groups, a 3% increase since we started to monitor in July 2006. Twenty-two and a half percent of our people are women, a 3% increase on 2006.

Recognition and rewardWe enhance motivation and personal contribution towards the Company’s aims through the recognition of good performance and ensuring our leaders manage both good and poor performance.

Record nominations were received for our third ‘Celebrating Success’ Awards held in February 2009. The Awards recognised the outstanding contributions of individuals within the Company in the areas of:

• Contribution to safety • Trainee of the year• Team of the year• Manager of the year• Unsung hero of the year• Contribution to the community• Business development/customer satisfaction• Supply chain partner of the year• Innovation of the year

An annual event, our fourth ‘Celebrating Success’ Awards, took place in February 2010. Once again the Awards attracted record nominations, 1,096 in total.

5

10

15

20

25

Diversity profile (%)

Since 2006, we have employed more women and BAME employees.

Women

BAME

July 2006 July 2007 July 2008 July 2009

Academy of excellence The Costain Project Management Academy won the Construction News Quality Training Award in 2009. The object of the Academy is to build a model of project management excellence, benchmarked against world-class standards. Since 2008, 55 project management delegates have participated in the Academy and a further 25 will join in 2010.

Apprentices and trainees Across the industry there is a lack of younger talent developing into essential roles, with the necessary technical expertise required to deliver projects to the standards our customers expect. To address this, in 2009, Costain expanded its apprenticeship programme from four to 18 technician apprentices across the Group, who are being supported to achieve their BTEC and NVQ qualifications.


In the Community

Considerate Constructors SchemeAs an associate member of the Considerate Constructors Scheme, we are committed to minimising the impact our operations have on the community. We continue to receive consistently high scores on our projects, achieving an average score of 34.7 out of 40 in 2009 (the average total score of all sites registered with the Scheme is around 31 points). In addition, our performance was also recognised by the receipt of 3 Gold Awards, 3 Silver Awards and 10 Bronze Awards.

Community projectsReflecting the Company’s ongoing commitment to supporting young people, Costain has signed up to the Backing Young Britain campaign. A Government campaign encouraging companies to provide more opportunities for young people aged 16-24 who are seeking jobs, work experience or to develop their skills:

• In 2009, Costain organised over 56 school work experience placements through our www.buildingawareness.com programme, a 35% increase on 2008

• Costain currently sponsors 75 students at various stages of their university careers. Encouragingly, of the 21 sponsored university students who graduated in 2009, 95% joined Costain

Our sites continue to contribute to the communities in which they operate through active involvement in local community projects, examples include:

95

6969

3636

1313

3232

2003

6 2121

Charitable donations (£000)

2004 2005 2006 2007 2008 2009

We gave over £95,000 to charitable causes in 2009.

34.7

34.234.233.833.8

33.033.0

2005

33.233.2

2006 2007 2008 2009

Considerate Constructors Scheme performance (Group average scores)

We continue to achieve consistently high standards on our projects.

Our approachWe have dedicated Community Relations Managers within the Group, who work to develop links with the local community, schools, businesses and other stakeholders.

PerformanceCharitable donationsIn 2009, we raised and donated £95,293 to charitable causes, including:

• £12,164 donated to WaterAid• £6,000 donated to CRASH through our company

Christmas Card campaign• £9,000 donated to Kent Air Ambulance Trust

In 2010, we will undertake a review of our charitable giving policies and enhance procedures to support employees contributing to charities and the local community, for example: the introduction of an employee volunteering policy, where employees can apply for up to two days’ paid leave to undertake voluntary projects.

Our commitmentOur impact on the local communities and environment in which we work is extremely important. Whilst we strive to minimise the negative aspects, such as noise and disruption, we want to make a greater positive impact through our contribution to the local economy and involvement in local school and community group projects.


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‘Cooking up Success’A pair of cooks landed a lucrative £75,000 contract to feed the 250 builders of our Church Village Bypass scheme. Akita Duggan and Paula O’Donovan entereda competition ‘Cooking up Success’ and beat 150 other applicants to claim the first prize. The competition was organised by Costain, the customer Rhondda Cynon Taf County Borough Council, business support agency Venture Wales, and the University of Wales, Cardiff. Akita and Paula are based in the Church Village site office and have established their own business in the fully-fitted catering unit.

‘Friends of Felixstowe’When work commenced on the Felixstowe South Reconfiguration Phase One contract, a deep water quay extension at the Port of Felixstowe – the UK’s largest container port – Costain embarked upon a community engagement programme.

Not only did the Costain project team strive to minimise disruptions to the port operations planned during the construction, they also pro-actively engaged with the various stakeholder groups within the local community which may have been affected by the works. “The project team established a clear line of communication with those whom the works may have impacted upon. This included meeting local people through door-to-door visits prior to the commencement of the project, hosting presentation evenings and site visits to explain the works, and regular informative newsletters to keep us updated on the progress,” said Susan Robinson, Town Clerk for Felixstowe, pictured far right alongside David Alefs, Costain Project Director (second from right) and Colin Tod of the Felixstowe Museum (third from right). “Costain were keen to help preserve any items of historical importance and were more than happy to salvage items of interest, such as the old railway buffers which have been installed in the museum grounds” states Mr Tod. “The museum did also have concerns about the piling works taking place at the port due to our proximity to the works, but Costain’s project team have kept us informed throughout the duration of the project.”

Victor Brand, Orwell Housing Association Caretaker of Adastral Close, pictured far left with Chloe Purcell, Corporate Affairs Officer for Costain’s customer, Hutchison Ports (UK) Limited, stated: “We chose to approach Costain as the local community did have concerns over the noise and vibrations that would be caused by the piling works. Costain not only detailed what the works involved and kept us informed on the restricted timings of the works, but they also allowed us to utilise their impressive capability as a top contractor to clear a disused area of concrete between the port and the residents’ homes. This area is now going to be improved through the planting of trees, which will have a positive impact on our local community.”

Education Award for CostainOur A40 Penblewin to Slebech Park Improvement project was awarded, along with the Regeneration and Economic Development department at Pembrokeshire County Council, a Careers Wales West Valued Partner Award for their commitment to work with local students and teachers.

“Both Pembrokeshire County Council and Costain have shown unwavering support to our clients in recent years. It is so important that we have partnerships with local organisations like these so that we can continue to provide local people and businesses with careers information, advice and guidance to provide brighter future

“Their commitment has meant that many more lives have been enriched, whether it is the experience of running your own business to learning more about a new industry and what’s happening in your community. We are proud to call them our partners, which is why we have named them our Careers Wales West Valued Partners 2009.” (Ray Collier, Chief Executive of Careers Wales West)

Local VIP’s visit Newbury projectThe Parkway project in Newbury, with Costain as main contractor, played host to West Berkshire councillors in November 2009.

David Woodhouse, Costain Project Director, gave a presentation about the logistics of the retail-led mixed use redevelopment project and the way in which Costain was dealing with the problems of ground water and diversion of services. The councillors were shown drawings together with artist’s impressions of the structures that were being erected and a series of aerial photos that showed the progress to date.

The councillors also heard about details of the work and co-operation Costain was undertaking with local schools in the area. Costain also invited one of the outstanding work experience students along – Sophie Cath, from St Bartholomew’s School – to give a first-hand account of her recent stay with the project that has prompted her to seek a career in civil engineering.

After the presentation, the councillors were taken on a tour of the site. The councillors expressed their gratitude for the tour which had given them a better understanding of the size and complexity of the work involved and thanked Costain for their efforts in minimising disruption to Newbury town centre.

Costain bikersIn October, Costain bikers remembered Britain’s fallen troops in a charity bike ride.

A group of Energy & Process colleagues joined thousands of other motorcyclists in this year’s Ride To The Wall (RTTW)– a ride to the National Memorial Arboretum near Lichfield, Staffordshire. The National Memorial features the names of more than 16,000 service men and women killed on duty or by terrorist action since the end of World War II engraved on its walls.



Environmental Our approachOur Environmental Management System (EMS) is accredited to the international standard of environmental management ISO 14001:2004. The Group Environmental Policy Statement outlines our intention to ensure we manage all our work and its impacts effectively, prevent pollution and continuously improve the operation and environmental management of our activities.

Performance WasteThe Group has pledged its support to the Waste & Resources Action Programme (WRAP) ‘Halving Waste to Landfill’ commitment. We have been successful in demonstrating year-on-year improvement in the amount of waste we divert from landfill. In 2009, we increased our diversion rate by 9%, diverting 67% of the total waste we generated from landfill.

Through our internal waste minimisation campaign ‘SAVE IT’ we will continue to focus on both reducing the waste we generate and increasing the waste we divert from landfill, setting a target to achieve 70% diversion in 2010.

Climate changeTowards the end of 2008, we successfully calculated the Group’s carbon footprint. Throughout the year, we have concentrated on establishing an accurate baseline, from which we have set targets to minimise our impact on climate change. The scope of our footprint includes carbon dioxide emissions from energy use, business mileage, air travel and bulk fuel purchased. Unfortunately, we are unable to demonstrate an improvement from 2008 to 2009 but we attribute this to improved accuracy in data collection.

Last year we diverted 67% of our waste from landfill.

77006633 67

5847

2007

5522

2008 2009 2010

Waste diverted from landfill (%)

TargetActual

2008

5,000

10,000

15,000

20,000

25,000

30,000

Group carbon dioxide emissions (Tonnes CO2)

2009

Air travelBulk fuelBusiness mileageEnergy use

We plan to reduce our emissions by 35% by 2020.

Our commitmentWe protect the local and global environment through effective management of our impacts, minimising our negative impacts and maximising opportunities to enhance the local environment in which we work.


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One area where we can report a reduction is business mileage. Following the identification of high mileage drivers in 2008, we introduced a number of measures to reduce the annual mileage driven by our employees. These measures included the provision of conference calling, web calling and video conferencing facilities and an emphasis on the use of public transport. A scheme has also been introduced for drivers and passengers to encourage car sharing. These measures have enabled Costain to reduce its average business mileage per claimable business mileage driver by 18% in 2009. In reviewing our business mileage performance indicator, we have re-stated our 2008 business mileage reduction from 12% to 6%.

Continuing our support for HRH The Prince of Wales Mayday Network, a collaborative movement of businesses committed to taking action on climate change, we will continue to measure, report and take action to reduce our carbon footprint.

In 2010, we are looking to achieve a 5% reduction in our measured 2008 CO2 emissions from energy usage and business travel. We have also set ourselves a longer-term target of 35% total reduction by 2020 from our 2008 baseline.

Initially, we are continuing to focus on reducing our overall emissions through the implementation of a number of measures. Concurrently, we are investigating the purchase of energy from a ‘green tariff’ to ensure the energy that we consume comes from renewable sources.

Pollution preventionWe are committed to minimising our impact on the environment and reducing our environmental incidents year-on-year. We actively encourage the reporting of all incidents and near misses to ensure that incidents are resolved appropriately and lessons are learnt for the future. Over the past three years, we have received no prosecutions, cautions or notices and there have been no environmental incidents that resulted in irreversible impact on the environment. In the last year, we have seen a reduction in major environmental incidents of 33%.

Training and awarenessTo ensure our people and supply chain partners are aware of current legislative requirements, best practice and how they can contribute to improving our environmental performance, we delivered environmental training to a total of 353 employees in 2009.

We have produced a four-day environmental training package which we intend to deliver to key staff across the business in 2010. This training has been developed to engage the workforce and increase awareness of the challenges and opportunities in environmental management on the schemes we deliver.

A programme of improvementsThe A40 Penblewin to Slebech Park Improvement is an Early Contractor Involvement Project for the Welsh Assembly Government, which will reduce localised congestion and noise impacts whilst improving safety for road users. The five kilometre highway passes through a National Park with the major new bridge structure being built across the Eastern Cleddau River, a designated Special Area of Conservation due to its importance for supporting a range of fish species, otters and bats. The Costain team has been working successfully with stakeholders to ensure that construction impacts on water quality and habitats are minimised. As part of the design, a number of underpasses and enlarged culverts will allow bats and other wildlife to cross beneath the scheme safely. Fencing will guide badgers, otters and other wildlife away from the road and into the safe crossings.

Reducing carbon emissionsCostain is currently delivering the refurbishment and redevelopment of the Sheffield Children & Adolescent Mental Health Unit. The scheme will reduce carbon emissions by 28% and reduce costs for the unit by 33%. This has been achieved through the specification of high thermal insulation, natural ventilation and lighting, high efficiency electrical fittings and the provision of onsite renewable energy in the form of ground source heat pumps and photo voltaic panels. The scheme is making a positive contribution to the wider targets of the NHS to reduce its CO2 emissions by 26% (from a 1990 baseline) by 2020, whilst still providing the community with a building that is secure and able to completely sustain and rehabilitate local children.



Marketplace Our approachWe achieve success by treating customers and suppliers fairly, with respect and integrity, governed by our ethical business conduct and supply chain management policies.

PerformanceDelivering for our customers and supply chainOur aim is to provide the best quality service to our customers. We are constantly striving to improve our performance. We actively seek feedback from our customers, undertaking regular customer satisfaction surveys across our sectors. In 2009, we averaged a customer satisfaction score of 81%, compared to 80.3% in 2008.

Our supply chain is critical to delivering quality projects. Effective engagement and two-way feedback is essential to ensure that we perform as one team. We undertake regular performance reviews with our supply chain, discussing issues such as supervision, competency, communication and teamwork, cost, quality and innovation, and safety and environmental performance.

2008

80.5

81.0

81.5

82.0

2009 Target 2010

Customer satisfaction score (%)

34.77575

5949

2007

52

2008 2009 Target 2010

Top 100 supply chain performance (%)

Our supply chain performance has increased from 49% to 59% since 2007.

Our commitmentWe recognise the importance of working in conjunction with our customers, partners and suppliers. Together, we have the potential to make a greater positive impact on our communities and the environment. We encourage open, honest and respectful communication and the development and maintenance of long-lasting and mutually beneficial relationships.


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In 2009, the performance of our ‘Top 100’ supply chain partners averaged 59%. We have set a target to achieve 75% in 2010.

Improving performance and quality and delivering innovation to our customers through early involvement, without compromising any of the excellent Safety, Health and Environmental achievements delivered to date, is a 2010 Group target.

Understanding our customers and supply chainTo ensure that we deliver for our customers and stakeholders we need to understand their drivers and priorities and the wider sustainability influences that affect business today.

Throughout 2009, we organised a selection of industry events, attended by representatives from academia, regulators, the Confederation of British Industry and senior politicians. The aim of the events was to facilitate discussion and debate between decision makers on the issues that are important to UK PLC in the 21st century.

In 2010, we will facilitate a further six events focusing on: Energy and Power; Rail; Research & Development, Innovation and Technology; Safety, Health and Environment; Waste; and Operations and Maintenance of the UK’s assets.

Strengthening relationshipsIn March 2009, we held our second supply chain conference at the University of Warwick, attended by senior representatives of our ‘Top 100’ supply chain partners. We pledged to develop relationships and improve communications by appointing a senior management sponsor to each of our ‘Top 100’ supply chain partners.

Our key focus for 2010 will be to build on the relationships forged in 2009. 2010 will have many challenges which we will tackle and risk manage through engaging with our supply chain.

Each of our ‘Top 100’ supply chain partners is allocated a relationship manager and a senior sponsor at director level to oversee the partnership. We actively target two business-to-business meetings a year with the ‘Top 100’, to review performance, share best practice and drive improvement.

Responsible procurementIn 2009, Costain signed up to the Mayor of London’s Green Procurement Code in recognition of the need to reduce the environmental impact of our supply chain and to source services and materials responsibly.

To reduce the impact of the products and services we procure, we are further developing our Responsible Procurement Policy and associated strategy in 2010, ensuring the way we conduct ourselves in the wider marketplace is environmentally sound, ethical and inclusive.

Supply chain conferenceIn March 2009, our supply chain partners gathered to hear about the future of working with Costain at our supply chain conference. Over 138 supply chain representatives were joined by 48 of Costain senior management to discuss the theme ‘Securing our Future’. The conference offered a chance for suppliers to find out about Costain’s pipeline and for Costain to explain its Supply Chain Management (SCM) strategy in detail. Among the presenters were: Andrew Wyllie, Chief Executive, Alan Kay, Chief Operating Officer, and Patrick Bruce, Commercial Director as well as supply chain partners VVB and Bachy Soletanche.

Costain tackles energy debate with the CBI Stephen Wells, Group Strategy and Business Development Director (centre) addressed, as a panel member, the Confederation of British Industry’s (CBI) Energy Conference, which debated whether the country has the right mix of energy supplies for the years ahead. Martin Lawrence, Managing Director of Energy Sourcing & Customer Supply, EDF Energy (right) was also one of the main speakers on the day.

The CBI organised conference, which was supported by Costain, and sponsored by EDF Energy and The Crown Estate, attracted around 150 energy specialists, power generating companies, funders, regulators, the construction sector and media. They listened as speakers from Government, power companies, plus the financial and energy sectors, gave their opinions on the ideal balance of energy sources. In his comments from the platform, Stephen stressed the need to get construction of new nuclear power stations underway.



In the pages that follow, we have highlighted our performance, both operational and financial, across all our divisions. We have also produced a special on-line Annual Report 2009 which is available on the new Investors section of the Costain website at www.costain.com.

Business & Operational review

28 Business & Operational review29 Our performance in 200930 Chairman’s statement32 Chief Executive’s review35 Our values and Our markets36 Business & Operational review

36 Environment37 Infrastructure38 Community38 Energy & Process39 Land Development

40 Principal risks43 Key Performance Indicators44 Financial review

46 Governance46 Board of Directors49 Corporate Governance statement (including

Internal controls and Risk management)57 Directors’ report63 Directors’ remuneration report70 Statement of Directors’ responsibilities71 Independent Auditors’ Report to the members

of Costain Group PLC

72 Financial statements72 Consolidated income statement73 Consolidated statement of

comprehensive income and expense74 Consolidated statement of financial position75 Company statement of financial position76 Consolidated and Company statements

of changes in equity77 Consolidated cash flow statement78 Company cash flow statement79 Notes to the financial statements112 Five-year financial summaryIBC Financial calendar and other

shareholder information


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Costain announces a strong operational performance, a record year-end order book and an increased dividend for the year. Further progress has been delivered by focusing on blue-chip customers with committed long-term investment programmes.

The Group is also implementing the next stage of its strategy – ‘Choosing Costain’.

• Revenue of £1,061.1 million (£996.0 million) exceeds £1 billion for first time in 16 years

• Profit from operations increased by 14% to £20.8 million (2008: £18.3 million)

• Profit before tax of £18.1 million (2008: £23.1 million) • Strong net cash position of £120.5 million

(2008: £146.6 million)– average month-end cash balance of £125.3 million

during the year (2008: £117.4 million)• Record year-end forward order book, up 30%

at £2.6 billion (2008: £2.0 billion)– repeat order customers account for 84%– includes circa £900 million of secured work for 2010

• In addition, preferred bidder positions at year-end of over £400 million

– increased to over £600 million since year-end• Banking and bonding facilities recently extended

to 2013 and increased by 20% to £345 million• IAS 19 pension scheme deficit of £75.4 million,

net of deferred tax, a similar level to the half-year (2008: £36.1 million)

– defined benefit pension scheme closed to future accrual during the year

• Recommended final dividend of 0.55 pence, increasing total payout for the year by 10% to 0.825 pence (2008: 0.75 pence)

‘Choosing Costain’• Implementing the next stage of our strategy –

‘Choosing Costain’ • A commitment to delivering a full-service offering, from

front-end engineering consultancy and design, through construction to back-end care and maintenance operations

• Focussing on the Infrastructure, Environment, and Energy & Process markets where we will place emphasis on those blue-chip customers with repeat order commitments who are looking for solutions for each phase of the ‘life cycle’ of their assets

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Our performance in 2009

Year ended 31 December 2009 2008Revenue* £1,061.1m £996.0mProfit from operations £20.8m £18.3mProfit before tax £18.1m £23.1mNet cash £120.5m £146.6mEarnings per share 2.3p 2.9p

Full year dividend 0.825p 0.75p

* Including share of joint ventures & associates.


Chairman’s statement

who have committed long-term investment programmes and who are increasingly looking to work with a select group of preferred specialist service providers. These relationships, which generate a higher volume of repeat business, provide an increased level of long-term earnings visibility.

Costain is now in a strong position to take advantage of new opportunities arising from the ongoing structural changes in the sector and we are going to expand further Costain’s market position across the design and engineering, construction, and operations and maintenance spectrum.

We have therefore invested time and effort over the last few months to develop our successful current strategy and are pleased to unveil ‘Choosing Costain’ which, whilst very much an evolution of ‘Being Number One’, is designed to enhance and change the spread of business and earnings profile of Costain over the medium-term.

Our refined strategy is designed to ensure that Costain is the preferred choice of major blue-chip customers looking for an increasingly integrated service. Andrew Wyllie, in his Chief Executive’s review, sets out how ‘Choosing Costain’ is already being implemented.

ResultsRevenue for the year was £1,061.1 million (2008: £996.0 million). Profit from operations was £20.8 million (2008: £18.3 million), an increase of 14%.

Net financing expense amounted to £2.7 million (2008: income £4.8 million) which incorporated net interest income of £2.1 million (2008: £5.8 million) and a pension scheme related net interest cost of £4.8 million (2008: £1.0 million).

Profit before tax was £18.1 million (2008: £23.1 million), which, as anticipated, reflects the impact of reduced interest rates and the increased IAS 19 pension interest charge. Basic earnings per share was, therefore, 2.3 pence (2008: 2.9 pence).

The Group has no significant borrowings and net cash balances at the year-end totalled £120.5 million (2008: £146.6 million), including the Group’s share of cash held by construction joint venture arrangements of £36.0 million (2008: £34.2 million). The average month-end net cash balance during the year was £125.3 million (2008: £117.4 million).

Overview & StrategyI am delighted to report a strong Group performance in 2009. Indeed, in view of the very difficult economic environment, this was an excellent result.

The successful implementation of our ‘Being Number One’ strategy has underpinned the Group’s progress over the last three years. It has also provided much needed resilience in these challenging times. We again finished the year with higher revenues, increased operating profits, a strong cash position, and we have enhanced our banking and bonding facilities, a record year-end order book and a growing reputation for delivery. This is a major achievement and one that stands us in good stead for the future.

Our strategy has been about a lot more than year-on-year performance. ‘Being Number One’ has enabled Costain to leverage the changing dynamics of the contracting sector and build a portfolio of blue-chip client relationships with customers



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EnvironmentThe Environment division comprises Costain’s operations in the water, waste and marine sectors. The Group is one of the leading asset management contractors in the water sector.

InfrastructureCostain’s Infrastructure division includes our operations in the highways, rail and airport markets. Costain now has a leading position in the maintenance of the UK’s motorway and trunk road network.

Energy & ProcessThis division includes our operations in hydrocarbons and chemicals, nuclear and power. Costain is currently operating on five nuclear facilities in the UK.

CommunityThe Community division, which is being scaled down, includes our activities in the health, education and retail sectors.

Land DevelopmentThis division is responsible for the Alcaidesa land and marina development activity, a 50% joint venture with a subsidiary of Santander Bank.

DividendThe Board is recommending the payment of a final dividend for the year of 0.55 pence per share. If approved at the forthcoming Annual General Meeting, the dividend will be paid on 21 May 2010 to shareholders on the register as at 23 April 2010. This would bring the total for the full year to 0.825 pence per share (2008: 0.75 pence), an increase of 10% over the prior year.

PensionAs at 31 December 2009, the deficit in the UK Pension Scheme recorded in the Group’s balance sheet in accordance with IAS 19 was £75.4 million, net of deferred tax (31 December 2008: £36.1 million).

During the year, the pension scheme asset value has increased as a result of a recovery in the global equity markets. However, this has been more than offset by an increase in liabilities due to an increase in inflationary expectations and a reduction in the liability discount rate.

The most recently completed actuarial valuation of the scheme was performed by the scheme actuary as at 31 March 2007. The current monthly Group contribution of £0.9 million towards funding the scheme’s deficit will continue until the next formal actuarial valuation of the scheme, as at 31 March 2010, is finalised.

As an important step in managing the pension obligation and reducing volatility, the defined benefit pension scheme was closed to future accrual from 30 September 2009. Costain now only offers a defined contribution scheme for employees.

Proposed Share Consolidation At the forthcoming Annual General Meeting of the Group, shareholders will be asked to approve a proposed share consolidation on the basis of one ordinary share in the Company with a nominal value of 50 pence each for every ten ordinary shares with a nominal value of 5 pence held on 6 May 2010.

The purpose of the share consolidation is, amongst other things, to reduce the volatility in the Group’s share price, thereby enabling a more consistent valuation of the Group. Further details in respect of the proposed share consolidation will be set out in the Group’s notice of Annual General Meeting. If approved by shareholders, it is expected that the share consolidation will become effective on 7 May 2010.

Board ChangesThe following Board changes were announced during the year.

Mr Saad Shehata, a Non-Executive Director and nominee of Mohammed Abdulmohsin Al-Kharafi & Sons WLL (‘Kharafi’) retired from the Board with effect from 23 June 2009. Mr Samer Younis, also a nominee of Kharafi, was appointed to the Board as a Non-Executive Director with effect from the same date.

Mr Mohd Hussein bin Abdul Hamid resigned from the Group Board with effect from 4 December 2009, following his retirement from the UEM Group of Companies (‘UEM’).

We thank both Saad and Hussein for their efforts and commitment to Costain over the years.

PeopleOn behalf of the whole Board, I would like to express our gratitude to all our colleagues at Costain. The excellent performance during the year is the result of the efforts of everyone at the Group and we recognise their hard work and dedication across the business.

Summary & OutlookThis was an excellent overall operational performance. Once again, the Group has demonstrated its resilience in a difficult economic environment. We are confident that our position in markets underpinned by strategic capital expenditure, regulatory commitment or essential maintenance requirements will continue to stand us in good stead.

With a record year-end order book, a significant amount of work already secured for 2010, a net cash balance of over £120 million and customers committed to long-term capital investment programmes, Costain is looking to the future with confidence. That confidence is reflected in the Board’s recommendation to increase by 10% the total dividend for the year.

Building on our success, we are now implementing the next stage of our strategy, ‘Choosing Costain’, which will ensure that the Group enhances its position as one of the leading players in the industry.

David Allvey Chairman10 March 2010

Our reporting framework

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Chief Executive’s review

During the year, we achieved further significant progress, consolidating our position as one of the UK’s premier engineering and construction businesses.

In what was a challenging economic environment, we are pleased to report a growth in profit from operations, an increase in revenues, a significant increase in the order book, a strong net cash position and a recommendation to increase the dividend for the year.

Costain is recognised as a major industry player. In 2009, the business received numerous awards including Major Contractor of the Year from New Civil Engineer magazine for an unprecedented second successive year and the Supreme Award from Construction News magazine.

The Group’s operations continued to benefit from the deliberate focus on targeted blue-chip customers whose major spending plans are underpinned by strategic national priorities in chosen sectors. Costain has a proven scale and capability to deliver complex solutions to major customers and as a result has entered 2010 with a strong order book and pipeline of opportunities.

Later in my review, I will set out in detail how we are building on our strong market position, how we will take advantage of the opportunities arising from what we expect to be a period of difficult economic conditions and, finally, how we are preparing for sustained economic recovery in the medium-term.

First, to the year under review.

2009: Delivering another strong performanceThe Group has continued to make good progress during the year, particularly against the backcloth of economic recession, with a number of key achievements. Of particular note:

• Revenue (including share of joint ventures and associates) exceeded £1 billion for the first time in 16 years

• Operating profits increased by 14%• The order book at the year-end stood at £2.6 billion, up 30%,

and underpins our long-term visibility• We saw increased operating profits and revenue across our core

Infrastructure, Environment and Energy & Process divisions • Our strong net cash position was maintained at over £120 million• The Board has recommended an increased final dividend

We have also taken robust action with our Community division, which we continue to scale down, and the Spanish Land Development operation which are not providing the required level of returns. Further details are set out in the Business & Operational review.

Growth in core operationsWe have increased profits, revenues and the order books across all three of our core divisions: Environment, Infrastructure and Energy & Process.

The Environment division incorporates our activities in the water, waste and marine sectors. The division’s order book increased by 66% to £1.3 billion as a result of securing a number of major long-term contract wins. With significant legislation and regulation in these markets, we expect a high level of investment to continue in these sectors over the coming years.

In the Infrastructure division, which incorporates our activities in the highways, rail and airports sectors, we continued to increase our highways maintenance activity which accounts for the majority of the Group’s growing maintenance related activities which, in turn, now represents 13% of the Group’s total order book. The division has a substantial pipeline of future work opportunities, including the Crossrail project in London.

The Energy & Process division, which undertakes work in the hydrocarbons and chemicals, nuclear processing and power sectors, had an excellent year. We secured further work on the major Evaporator D nuclear decommissioning project at Sellafield. There is a growing recognition of the need to invest in UK energy infrastructure and, as a consequence, we see potential for further growth in this sector.for further growth in this sector.

Our Land Development activity in Spain, which is a joint ventureOur Land Development activity in Spain, which is a joint venturewith a subsidiary of Santander Bank, continued to be subject towith a subsidiary of Santander Bank, continued to be subject tovery difficult market conditions and, as anticipated, no land transactions were completed. Meanwhile, construction of the marina, near Gibraltar, is nearing completion and, with the first berth sales having been secured, the facility will be operational by mid-2010.mid-2010.

Andrew Wyllie Chief Executive


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The Community division, which encompasses our activities in the health, education and retail sectors, has been intentionally scaled down as we continue to allocate resources to more attractive opportunities. In line with our policy of trading our PFI equity portfolio to reinvest in bidding for new projects, we disposed of two equity stakes in the year.

A more detailed review of each operating division is contained within the Business & Operational review.

Order book: up 30% at £2.6 billionA 30% increase in the quality order book during a difficult year, is a major achievement. In addition, we ended the year with preferred bidder positions in excess of £400 million.

The order book includes £1.6 billion of new orders comprising a range of major contract wins across the business. Of particular note was the contract for the Greater Manchester Waste Disposal Authority (GMWDA), AMP5 contracts for Severn Trent and United Utilities, the Evaporator D nuclear project, and a further Highways Agency five-year Management Agent Contract (MAC) contract.

Given our strategic focus on blue-chip customers with long-term or multi-project investment programmes, our repeat order level has remained well over 80%. We were also delighted to secure a number of major new customers during the year including Severn Trent.

The order book includes circa £900 million of work to be carried out in 2010, which is ahead of the equivalent figure at the start of last year. The larger, longer-term contracts being awarded to us by our customers provide significantly enhanced visibility of future revenues.

Since the year-end, we have continued to secure major new contracts and preferred bidder positions, including Welsh Water AMP5 and, in various joint ventures, the A8 highways project in Northern Ireland, the Royal Oak tunnel portal for Crossrail, appointment to the £2.0 billion Highways Agency Major Project Framework and the MAC 14 five-year highways maintenance contract. As a consequence, the order book has been maintained at £2.6 billion and our preferred bidder position has increased to over £600 million. Market conditions are expected to remain challenging but, as a result of our strategy, we have a good pipeline of opportunities and our bidding teams remain fully occupied.

Strong financesThe Group is in a healthy financial position.

We maintained a strong net cash position, which at the end of the year was £120.5 million. The average month end cash balance increased to £125.3 million, up from an average of £117.4 million in 2008. The Group has no significant borrowings.

Our banking and bonding facilities have recently been extended to 2013, and increased by 20% to £345 million. We, therefore, have the necessary headroom available to capitalise on market opportunities as they arise and achieve our longer-term strategic objectives.

Safety, Health and EnvironmentCostain places the highest priority on the effective management of Safety, Health and Environment. The Group has a policy requiring all staff and supply chain partners to possess an appropriate safety competency card and members of the Board demonstrated leadership in this respect by obtaining their Construction Skills Certification Scheme (CSCS) card.

Further improvement in performance was achieved in the year, with the Group Accident Frequency Rate (AFR) reducing from 0.17 to 0.16, which continues to compare favourably with our major contractor peer group. We remain fully committed to continue to achieve improvements in this performance in the future.

PeopleOur people are core to the development and success of Costain and we have some of the best people in the industry. We are investing across the organisation to ensure that we continue to have the skills and resources necessary to deliver exceptional business performance. This investment in training and development, with a focus on providing opportunities and advancement, means that Costain is increasingly recognised as an ‘employer of choice’.

A key initiative in 2009, was the introduction of a new on-line ‘Performance review and Career Development review’ process which is already providing better and more comprehensive management information for managing the business.

Building on success: ‘Choosing Costain’ The Group’s ‘Being Number One’ strategy, successfully implemented since 2006, has established Costain as one of the UK’s leading engineering and construction businesses.

The Group’s success has provided it with a platform that, alongside the ongoing and rapid changes taking place in the Group’s marketplace, presents Costain with the opportunity to further consolidate its position and to target the delivery of an even more ambitious development strategy.

Therefore, we are now implementing our ‘Choosing Costain’ strategy, which provides a blueprint for the Group’s next stage of development in line with the significant changes in the industry that Costain expects to take place over the next decade. The way in which we work and our commitment to increasingly deliver a full-service offering, from front-end engineering consultancy and design, through construction to back-end care and maintenance. This will reinforce Costain as the number one choice. It will help to ensure that our customers, partners, people, suppliers and investors will continue to make the informed choice to work successfully with Costain.

‘Choosing Costain’, whilst evolutionary in nature, is a strategy based on established success and provides an ambitious vision for the further development of the Costain Group.

‘Choosing Costain’Our vision is to be one of the UK’s top solutions providers, with the scale and resources to meet successfully the increasingly complex and challenging needs of major customers.

Costain will continue to focus its efforts on customers with major multi-billion pound strategic investment programmes which, irrespective of economic environments, are core to the UK’s sustainable ‘life support systems’ and are therefore deemed essential.

HRH The Princess Royal (left) meets Steve Merrin, Costain Project Manager at the opening of Johnson Community Hospital, Spalding.


Over the next decade, we believe that those programmes will be primarily in three growth markets:-

Infrastructure – particularly highways, rail and airports Environment – particularly water and wasteEnergy & Process – particularly nuclear, power, and

hydrocarbons & chemicals

In these markets we will place emphasis on those large blue-chip customers with repeat order commitments who are looking for solutions for each phase of the ‘life-cycle’ of their assets.

These large customers are imposing increasingly strict criteria in selecting their preferred contractors. In particular, customers are looking for contractors capable of providing the full ‘life-cycle’ of services. This process is in turn creating significant barriers to entry. In order to succeed, it is essential that Costain has the scale and ability to deploy the resources required by such customers.

Consequently, Costain will look to build on its current strengths – and broaden and improve the quality of earnings streams – by accelerating the development of an integrated front-end engineering consultancy and back-end care and maintenance operations to sit either side of our proven strength in construction:

Consulting – one of the fastest growing areas of the Costain business

Construction – strong market position with world class expertise in delivering major complex projects

Care – operations and maintenance, already 13% of our Group order book

The ‘Choosing Costain’ strategy provides significant opportunityfor growth by developing our capability across the full ‘life-cycle’ of products for our customers. In addition, we can deliver an over-arching solution through a concession or private finance approach.

Resources will always be targeted on those opportunities that provide the greatest potential return at an acceptable risk profile.

The primary geographic focus of the business in the medium-term will be the UK although international opportunities will be pursued in line with this customer focused strategy, particularly in the Energy & Process related activities.

It is anticipated that the growth aspirations and ambition for the business will be achieved by organic growth and by suitable acquisitions in line with strategy.

Why choose Costain?Costain’s competitive advantage has been built on its ability to understand the complex business needs of its large customers and to develop cost effective, innovative and technically robust solutions to those business requirements. We then mobilise the necessary technical, consultancy, process, human and financial resourcesto integrate and consistently deliver the resulting major projects and frameworks to time, budget and quality, thus providing real value for money.

Our solutions to customers will be delivered under the single unifying Costain brand. Co-ordination of separate business activities will be done internally to ensure that the customer is presented with an integrated service and a single senior point of contact within Costain.

We must continue to attract and retain the very best people if we are to deliver on our strategic objectives. The ‘Choosing Costain’ strategy provides a wide range of career opportunities and the scope for our people to grow. They will be suitably rewarded for delivering outstanding performance.

The way in which we work and our continuing commitment to deliver on our promises will also help ensure that our customers, partners, people, suppliers and investors will choose to work successfully with Costain in the future.

The Costain values (see page 35) represent the essence of the business and set the benchmark of performance for our people. They give direction and structure to everything we do and adherence to these values is paramount.

It is our unswerving commitment and compliance to these principles that allows us to achieve excellence in performance.

SummaryWe can be pleased with the strong business performance delivered in 2009, particularly in view of the difficult macroeconomic conditions we faced. Costain has once again demonstrated its resilience.

Looking ahead, our continued success will be built on our leading positions in markets that are underpinned by strategic capital expenditure, regulatory commitment and essential maintenance requirements.

We have come a long way in a few years. Our ‘Being Number One’ strategy has delivered significant value. It is now time to build on that success and, despite the current economic environment which we expect to continue, we are excited at the opportunities that lie ahead.

Our ‘Choosing Costain’ strategy is designed both to reinforce further the Group’s resilience in difficult times and to prepare for the opportunities we expect to materialise as economic recovery starts to take hold.

The economic environment remains challenging but, with a strong operational business and a strategy for the ongoing development of the Group, we are looking to the future with confidence.

Andrew Wyllie Chief Executive10 March 2010

Chief Executive’s reviewcontinued


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WaterOfwat’s Asset Management Programme 5 (AMP5) over the period 2010 to 2015 requires a further investment of £22 billion in capital quality enhancements and asset maintenance to the UK’s water and waste water asset base.

WasteUK and European legislation, landfill diversion targets and taxes, as well as growing environmental awareness, are all driving the need for major waste infrastructure investment. The UK municipal waste market, covered by 80 disposal Authorities, produces some 30 million tonnes of waste per annum. This requires the development of new treatment facilities worth an estimated £7 billion, delivering operating revenues of £14 billion from 2015 onwards. In addition, the UK produces a further 70 million tonnes of commercial and industrial waste each year. This is similarly subject to increasingly stringent regulation and escalating landfill costs.

Marine The marine sector is estimated to invest upwards of £0.8 billion per annum on capital and operational assets as well as coastal defence works over the next few years.

HighwaysThe Highways Agency, through its Managed Motorways Programme, is focused on using technology to maximise traffic flows and minimise congestion for their customers. The overall highways investment programme is valued at £6.5 billion through to 2014.

RailNetwork Rail, Transport for London and Crossrail are expected to invest £55 billion on both operational maintenance and capital assets through to 2017. In addition, the Government recently announced plans for a new High Speed Rail Link from London to Birmingham with a future extension to northern England and Scotland. Estimated overall cost will be circa £30 billion.

AirportsThis regulated sector covers 170 million passengers per annum who pass through airports owned by customers BAA, Global Infrastructure Partners (GIP) and Manchester Airport Group (MAG). Current capital and operating expenditure is estimated at £1 billion per annum up to 2018.

NuclearOpportunities within the UK nuclear decommissioning sector remain strong and will continue for many decades within the Nuclear Decommissioning Authority’s latest estimate to address legacy facilities set at £44.5 billion. The new nuclear build market is estimated at £60 billion. Currently three different utilities are developing proposals for up to 16 gigawatts of new nuclear power on five of the ten sites identified in the Government’s draft Nuclear National Policy Statement.

PowerIn order to create 50 gigawatts of new power generation capacity including renewable and new nuclear build by 2025, it is estimated that an investment in excess of £100 billion will be required. National Grid will be required to upgrade its network, and in excess of £10 billion will be needed to adapt for an expected increase in future demand.

Hydrocarbons and ChemicalsThe UK’s investment in this sector is estimated at £60 billion through to 2020 with expenditure expected to rise to £5 billion in 2010. Global energy demand is projected to increase by 45% by 2030, which will require investment of more than US$1 trillion per annum.

EducationIt is anticipated that there will be continued spending of £3 billion per annum on the Building Schools for the Future (BSF) programme.

Our markets

Our values

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Team Players Accountable Improving Continuously and therefore the...

Natural Choice

C O S T A I N


Business & Operational review

Environment

The Environment division, which accounts for 50% of the Group’s order book, includes Costain’s water, waste andmarine activities.

Revenue (including share of joint ventures and associates) for the year was £426.1 million (2008: £417.0 million), with an operating profit of £11.7 million (2008: £11.6 million). The division’s year-end order book was £1.3 billion (2008: £0.8 billion), an increase of over 60%.

This strong performance reflects Costain’s established position as a leader in the delivery of the UK’s environmental projects.

In water, the Group continued delivery of major AMP4 programmes of clean and waste water schemes for Yorkshire Water, Welsh Water, United Utilities, Thames Water, Bristol Water and Southern Water.

It was a significant year in terms of securing major contracts under the fifth five-year Asset Management Programme (AMP5) which runs from 2010 to 2015. Following outstanding delivery across all of our existing AMP4 contracts, Costain has continued to be successful in renewing and securing new AMP5 contracts. During 2009, we renewed the relationship with United Utilities for another five years and secured a £400 million ten-year framework for new AMP customer, Severn Trent. Since the year-end, we have also renewed the relationship with Welsh Water for a further five years.

During the year, Costain, in joint venture, was also awarded the £225 million Brighton and Hove waste water treatment works project for Southern Water.

This combination of major projects and framework contracts provides the Group with a significant long-term earnings stream.

In waste, continued growth and expansion was underlined in the first half of 2009 with the award of the £397 million Greater Manchester Waste Disposal Authority’s (GMWDA’s) PFI Waste and Recycling Contract, the largest waste services contract in western Europe. This was secured by leveraging Costain’s complementary skills in waste and process engineering and provides a firm platform for future growth. Costain is currently actively engaged in submission of PFI proposals for major waste facilities and further opportunities in this growing sector.

In marine, the Felixstowe South Reconfiguration Phase One is well advanced and is due to be completed in December 2010. This project, for a 730 metre deep water container quay, will also provide 32 hectares of associated container yard and port service areas. St Germans pumping station is now entering the commissioning phase, with the main building completed, representing the second largest pumping station in Europe.

During the year, the Costa Azul breakwater project in Mexico was completed.

Costain’s marine capability significantly enhances its competitive advantage in a number of key sectors, including nuclear and power.

Hornsey Water Treatment Works, part of Costain’s Thames Water AMP4 framework.

Riverside Resource Recovery Facility, Belvedere.

Felixstowe South Reconfiguration Phase One.

Water

Waste

Marine


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Bell Common Tunnel on the M25.

Looking west along the new footbridge at Farringdon Station, which was installed to help achieve an increase in Thameslink services.

The North Terminal at Gatwick Airport.

Highways

Rail

Airports

Infrastructure

The Infrastructure division accounts for 38% of the Group’s order book and includes Costain’s highways, rail and airports activities.

Revenue (including share of joint ventures and associates) was £364.8 million (2008: £208.7 million), with an operating profit of £16.9 million (2008: £14.4 million). The division’s year-end order book increased by 10% to £1.0 billion (2008: £0.9 billion).

Costain continues to build on its strong market leading position in infrastructure and this performance reflects the Group’s reputation for premium quality delivery of large-scale projects in this sector. The Group’s achievements in infrastructure demonstrate a good delivery record and also provide confidence that Costain is in an advantageous position to secure continued progress in these sectors on schemes such as Crossrail, the Highways Agency’s Managed Motorways Programme, London Underground’s station enhancement programme and new nuclear power stations to support the continued and growing investment by customers in the infrastructure markets.

The Group had another good year in the highways sector with a number of new awards. Significantly, Costain’s highways operations and maintenance joint venture is now the leading supplier to the UK’s Highways Agency and currently is responsible for maintaining approximately one third of the Agency’s UK motorway and trunk road network.

At the beginning of 2009, Costain delivered both the major M27 widening schemes at Junctions 11 to 12 and Junctions 3 to 4, ahead of schedule and budget. The Group also commenced the first of the Highways Agency’s Managed Motorways Programme projects on the M1 between Junctions 10 and 13 following on from the Early Contractor Involvement contract to develop the scheme.

In rail, Costain successfully completed the refurbishment of the Grade I listed King’s Cross Eastern Range for Network Rail and achieved all ‘key output zero’ deliverables at Farringdon Station on the ambitious Thameslink programme. The Group delivered a major part of London Underground’s ‘Cooling the Tube’ programme on the Victoria line including fans to remove some 120m3 of warm air per second.

In airports, Costain is a preferred contractor at Gatwick and is working on site at the airport’s North Terminal. The Group has secured the renewal of its successful five-year framework with the Manchester Airport Group (MAG).


Business & Operational reviewcontinued

Community

The Community division includes the Group’s reduced health, education and retail activities.

Revenue (including share of joint ventures and associates) for the year was £167.8 million (2008: £285.6 million), with an operating loss of £8.4 million (2008: loss of £5.2 million).

The substantial reduction in revenue reflects the previously announced decision to scale down the division as we continue to reallocate resources to more attractive opportunities. The increased loss reflects additional costs necessary to complete a number of projects together with restructuring costs and reduced overhead recovery as the operations are scaled down.

In line with our stated strategy of actively trading our PFI portfolio in order to invest in future opportunities, we disposed of our equity stakes in two PFI’s during the year resulting in a combined profit of £2.0 million.

In health, a number of healthcare projects were successfully completed including the remaining two of the three 3Shires PFI batch of hospitals and five new ProCure21 facilities.

In education, Costain, in joint venture partnership, achieved financial close on four further secondary schools in Bradford under the Government’s Building Schools for the Future (‘BSF’) programme. Two schools under the Lewisham BSF have been completed and delivered and the first Phase 2 school has commenced on site.

In retail, construction of the new development in Gracechurch Street is expected to be completed in the second half of 2010, and the Parkway, Newbury town centre redevelopment project is expected to be complete in 2011.

Energy & Process

Revenue (including share of joint ventures and associates) for the year was £101.2 million (2008: £83.6 million) with an operating profit of £9.3 million (2008: £5.5 million). The division’s order book increased 57% to £180 million (2008: £115 million).

The division saw further success in 2009, building on the progress made in the prior year, and continues to see major opportunities for future growth. The division comprises three core activities including hydrocarbons & chemicals, nuclear and power. During the year, final agreement was reached on the completed Pemex project in Mexico.

During the year, Costain completed the Brine & Water Plant associated with the Storengy (GDF SUEZ) Underground Gas Storage Facility at Stublach in Cheshire. At the neighbouring Holford Underground Gas Storage Facility, Costain is delivering the Gas Plant on a similar facility for E.ON.

Johnson Community Hospital, Spalding, part of Costain’s 3Shires PFI batch of hospitals.

Parkway, Newbury, the construction of the retail-led mixed use redevelopment in Newbury town centre.

University of Worcester, City Campus.

Health

Retail

Education


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Stublach Underground Gas Storage Facility, Cheshire.

Hydrocarbons & ChemicalsIn nuclear, significant progress has been made on the engineering and construction of the Evaporator D project at Sellafield, one of the UK’s largest nuclear decommissioning projects. The Group continues to build its capability in this sector and currently has in excess of 300 specialists based in Manchester.

The operation in Abu Dhabi continued to undertake a number of contracts on the Das Island oil and gas facility.

Costain’s ability to bring innovative and effective solutions to complex problems is a significant attraction to customers in the Energy & Process market. Additional key resources have been added to the team as part of our continued investment to significantly grow our activity in this area.

Land Development

Revenue for the year was £1.2 million (2008: £1.1 million) with a loss after tax of £2.6 million (2008: loss of £2.3 million). The loss in the year represents operating and interest costs and a land value write down.

As previously reported, the real estate market in Spain has been significantly impacted by the global recession. The Group’s joint venture development company, Alcaidesa, continues to secure infrastructure development planning consents on its land bank. This process adds long-term value to the land bank and will facilitate land sales to developers as the market improves.

The construction of the 600-berth yacht marina, adjacent to Gibraltar, is on target and is expected to be operational in summer 2010. We have started forward selling and letting berths and the Group is looking at opportunities to develop associated commercial activities subject to pre-lettings.

An external assessment of the book value of land held has been carried out and, as a consequence, a small write-down on one piece of land due to market conditions and planning constraints was necessary.

The Evaporator D project at Sellafield.

Nuclear


Principal risks

Economic and market cycles and volatilityThe Group’s business may be affected by the general risks associated with all companies operating in the same construction markets as the Group. These markets depend on numerous factors, many of which are beyond the Group’s control, and the exact effect of which cannot be accurately predicted. Such factors include, general economic and political activities, including the extent of any governmental regulation, taxation and interest rates.

Monthly forecasts are produced at both the project and Group levels, which include the possible impact of a number of major factors on the business. A review of risks at various levels within the business helps to ensure that the areas are identified properly and appropriate mitigation is in place. Management reviews key risks regularly.

Senior management and skilled personnelThe Group is dependent on members of its senior management team and a flexible, highly skilled and well-motivated work force and believes its future success will depend in part on its ability to attract, develop and retain highly skilled management and personnel. If the Group does not succeed in attracting, developing and retaining skilled personnel, it may not be able to grow its business as anticipated. The departure from the Group of any of the Executive Directors or certain senior employees could, in the short-term, have a material adverse effect on the Group’s business.

The Company monitors staff turnover closely, especially the reasons for leaving. Pay and conditions of employmentare reviewed regularly against the prevailing market and benchmarked against competitors to ensure that theCompany remains competitive.

Environmental, health and safety laws, regulations and standardsThe Group is subject to a broad range of laws, regulations and standards, including those relating to pollution, the health and safety of employees, protection of the public, protection of the environment and the storage and handling of hazardous substances and waste materials. These regulations and standards are becoming increasingly stringent.

It is the Group’s policy to require that all of its subsidiaries, employees, suppliers and subcontractors comply with applicable laws, regulations and standards. However, violations of such laws, regulations and standards, in particular, environmental and health and safety laws could result in restrictions on the operations of the Group’s sites, damages, fines or other sanctions, increased costs of compliance, potential reputational damage and potential loss of future contracts.

The manner in which the Group manages these risks is described in the Corporate Governance statement (including Internal controls and Risk management) on pages 49 to 56.

The Company has a senior executive with a suitably qualified team to ensure that standards and regulations are complied with. They are supported by a programme of training courses designed to keep staff fully aware of their responsibilities. Site audits are carried out monthly and appropriate action is taken against any issues identified.

Major incident exposing an inadequate safety regimeThe nature of the business conducted by the Group requires the adoption and maintenance of a rigorous Health and Safety programme. The Group works on a number of significant and high profile projects and therefore the Health and Safety performance is critical to the success of all areas of the Group’s business. The Group takes the management of both operational and occupational safety extremely seriously. Any failure in Health and Safety performance, which results in a major or significant Health and Safety incident, could be costly for the relevant business in terms of resulting potential liabilities. Furthermore, such a failure could generate significant adverse publicity and have a negative impact on the Group’s reputation and its ability to win new business. This, in turn, could adversely affect the operating, financial and share price performance.

Regular Safety, Health and Environment visits and on-site training take place to reduce the risk of human error. Any breaches in procedures are reported quickly and acted upon as appropriate. Staff are encouraged to take responsibility for safety in their work areas. Procedures are reviewed regularly and amended to take cognisance of new issues that may arise.

Pension liabilitiesThe Group operated a defined benefit pension scheme, which has been closed to new members since 1 June 2005 and was closed to future accrual on 30 September 2009.

The valuation under IAS 19 for the scheme as at 31 December 2009 valued the scheme’s assets at £455.8 million and liabilities at £560.5 million. This leaves a deficit in the scheme of £104.7 million. Costain has agreed a plan with the Trustee to reduce the deficit over a period of ten years. This plan was revised in 2009, resulting in the Group making further contributions. The plan will be reviewed when the next Actuarial valuation of the scheme as at 31 March 2010 is finalised. The annual contribution requirement of the Pension Protection Fund increases the costs borne by the Group. The value of the deficit recognised in the Group’s balance sheet pursuant to IAS 19 is dependent on certain critical assumptions including mortality rates, and pension increases, investment returns and inflation and is likely to vary from year to year. Recent and prospective changes in the regulatory environment and funding requirement principles may lead to requirements to increase funding in respect of the scheme in future years (possibly to a level in excess of that needed to achieve solvency on an IAS 19 basis). The powers of the Pensions Regulator may also impact on any plans to make returns of capital from the Group to shareholders.

For example, the Pensions Regulator has powers to levy contribution notices and financial support directions in certain circumstances in order to ensure that additional contributionsare paid into a pension scheme or that other financial support is put in place to the benefit of a pension scheme. In the event that the market value of the scheme’s assets declines in relation to its assessed liabilities, the Group may be required to increase its contributions to cover any further funding shortfalls. This could have an adverse impact on the Group’s operational results and cash flow.


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The Board reviews the options regarding what actions Costain could take to limit its long-term exposure and consults professional advisors, as necessary.

Change of Government policyCertain of the Group’s operations are dependent on the current UK Government’s policy with regard to improving public infrastructure, buildings and services, notably in the education, highways, health and nuclear sectors. The UK Government may decide in future to change its priorities and programmes, including reducing present or future investment in areas in which the Group would expect to compete for work. Any reductionin such Government investment and funding would be likely to adversely affect the Group’s future revenues and profitability in the relevant sectors.

Key factors, which may affect the Company strategy, are kept under regular review by senior management and action taken where potential workload shortfalls are identified.

Risk of incorrectly budgeting/costing long-term contractsIf the Group is unable to accurately estimate the overall risks, revenues or costs on a particular contract, then a lower than anticipated profit may be achieved or a loss incurred on such contracts. The Group generally enters into four principal types of contracts with clients: fixed price contracts; ‘cost plus’ contracts; framework contracts with clients that span a number of years and incorporate an agreed mechanism for bearing costs and sharing profits; and long-term PFI projects.

A significant proportion of the Group’s business depends for its profit on costs being controlled and projects being completed on time, such that costs are contained within the pricing structure of the relevant contract.

‘Target costs’ and ‘cost plus’ contracts provide for reimbursement of the costs required to complete a project, but generally have a lower base fee and an incentive fee based on cost and/or scheduled performance. If actual costs exceed the revenues available under such a contract or are not allowable under the provisions of the contract, Costain may not receive reimbursement for all of these costs.

Cost overruns, whether due to inefficiency, poor design (where the contractor has design responsibilities), faulty estimates, cost escalation, and/or cost overruns by subcontractors or other factors, result in lower profit or a loss on a project. A significant number of contracts are based in part on cost estimates that are subject to a number of assumptions. If estimates of the overall risks, revenues or costs prove inaccurate or circumstances change, then a lower profit or a loss on the contract may result.

To mitigate this risk, experienced and qualified staff are used to prepare bids and these are subject to internal review before submission. A clear understanding of the customers’ expectations and a sound relationship with key suppliers is the basis of this approach. During the life of a contract, regular Project Manager’s Report (PMR) meetings and end forecast meetings take place to discuss safety, progress, quality, cost, financial performance, risks, etc.

Failing to win contractsIf the Group failed to win major work from a key client or funding was not available on projects where the Group had been appointed preferred bidder, this could cause short-term revenue and profitability issues. The Group is always aware of this and seeks a balanced client base.

Contract negotiationsThe Group’s contracts may require extra or change order work as directed by the customer even if the customer has agreed in advance on the scope or price of the work to be performed. This process may result in negotiations over whether the work performed is beyond the scope of the work included in the original project plans and specifications or, if the customer agrees that the work performed qualifies as extra work, the price the customer is willing to pay for the extra work. Even when the customer agrees to pay for the extra work, the Group may be required to fund the cost of such work for a period of time until the change order is approved and funded by the customer.

The financial status of all contracts is reviewed regularly and terms and conditions checked to ensure variations can only be issued that cover a similar type of work.

Risk of missing deadlinesThe construction industry is highly schedule driven, and failure to meet schedule requirements within contracts could adversely affect the Group’s reputation and/or exposure to financial liability. Many of the Group’s contracts are subject to specific completion schedule requirements with liquidated damages charged in the event the construction schedules are not achieved. Failure to meet any such schedule requirements could damage the Group’s reputation within the industry and client base, as well as incurring significant liquidated damages. The monthly PMR review discusses progress against programme, reasons for any delay and actions that need to be taken to avoid liquidated damages.

InsuranceThe Group believes it has robust, comprehensive and adequate insurance cover but recognises that a claim could be made against it, which exceeds the limits of insurance cover or is in respect of a matter that is uninsurable or the insured incident is subject to a large deductible. In those circumstances, the Group could suffer financial loss.

Insurance deductibles and any difference in cover are considered at tender stage. Through following Costain’s best practice processes, insurable incidents should be reduced. Procedures are in place to ensure potential claims are reported quickly for assessment.

CompetitionContractors are required to compete for new work, which is won through a process of competitive tendering or bilateral negotiation. A contractor’s reputation, prior experience with the client and pricing will all have a bearing on gaining new work. The failure by the Group to compete effectively on these criteria could reduce the Group’s profitability.

Costain, by completing projects ahead of, or on programme, safely, to quality and cost, seeks to be awarded new contracts by its clients through consistently performing to a high standard. These issues are monitored monthly through the PMR and clients are asked to complete performance questionnaires so that any shortcomings can be rectified.


Principal riskscontinued

Subcontractor and supplier failureThe Group is reliant on its supply chain. If a subcontractor or supplier of goods or services failed financially or was responsible for late or inadequate delivery or poor quality of work on a project, then it could damage the Group’s reputation and/or cause it to suffer financial losses.

The list of preferred suppliers is reviewed regularly and amended where appropriate and includes more than one supplier under each major key category trade. In addition, measures are in place, both at site and at Group level, to take action in the case of a failure in the supply chain. Risk registers are updated monthly and include mitigation actions.

Loss of IT systemsThe Group is dependent on IT systems for the delivery of its business. The Group believes that its IT systems are reliable and well protected but recognises that such systems need constant updating and maintenance because their failure could cause financial loss to the Group as well as damage to its brand and reputation.

A senior executive is responsible for the IT systems and has a suitably qualified team in support. Critical areas are subject to testing and include rapid recovery as well as sound data backup procedures.

Procurement delaysCertain Government-related projects on which the Group may work may require relevant approvals from government ministers or senior civil servants. It is possible that, due to difficulties in obtaining such approvals, projects may be delayed before procurement has started, during the tender stage or during the period between the appointment of a preferred bidder and the exchange of contracts. These matters are likely to be beyond the control of the Group and any resulting delays could affect future revenue streams of the Group and have an adverse impact on the Group’s businesses, results of operations and financial condition.

Costain operates in several sectors and for a number of blue-chip companies. Future market trends are monitored by the Group Strategy and Business Development Director and where shortcomings are seen, further work is sought or we turn to other sectors.

Availability of Bonding and Banking FacilitiesThe Group’s long-term contracting business is dependent on it being able to supply performance and other bonds as necessary. This means maintaining adequate facilities from banks and surety bond providers to meet the current and projected usage requirements. In March 2010, the facilities were increased to £345 million.


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Key Performance Indicators

Key Performance IndicatorsThe Group uses a range of performance indicators across its business units. These start with a formal three-year business plan, which sets out clear strategic targets and objectives and which forms the basis of the budget for the following financial year.

The Board considers the following Financial and Non-financial Key Performance Indicators are the most effective measures for monitoring its objectives:

Non-financial Key Performance Indicators• Accident Frequency Rate (AFR)

Safety is the number one priority in the Group. We have both corporate and individual responsibility to ensure that our operations are managed in a safe, healthy and environmentally controlled manner. The common measure in the construction sector for measuring safety performance is the Accident Frequency Rate (AFR), which measures the number of lost time incidents per 100,000 of hours worked. The AFR for 2009 for the Group was 0.16 (2008: 0.17). The decrease reflects the continued attention given to all areas of safety and represents upper quartile safety performance in the construction sector.

• Staff retentionThe retention of staff is fundamental in delivering a quality service to customers. The Group undertakes a number of important initiatives to retain key staff, including closely managing their career development. Clear action plans are in place to address items such as customer satisfaction, health and safety, reward, training and development and job satisfaction. The ‘voluntary leavers’ turnover rate was 2.9% for 2009, compared to 9.9% in 2008.

• Supply Chain PerformanceThe Group has a number of key suppliers and is reliant on their performance in carrying out its business. Consequently an internal performance measurement tool is used to assess the performance of key suppliers on a regular basis against a number of indicators including Health and Safety, Programme, Commercial and Quality performance. The result of the assessment is shown as a percentage score which allows comparison against previous scores and other suppliers. The assessment and results are then used as a means to discuss with each supplier their performance and to put in place actions to improve performance or reduce the amount of work performed using that supplier if appropriate. In 2009, the average key supplier performance score was 59% which is an improvement from the 52% average in 2008. The objective is to ensure that all key suppliers have a performance of atleast 50%.

Financial Key Performance Indicators• Profit from operations

The level of profit from operations is a key measure of performance across all areas and divisions of the Group. The profit from operations for each segment of the business is reported in detail in the Business & Operational review section of the annual report. The Group’s profit from operation in 2009 increased by 14% to £20.8 million as compared to 2008.

• Profit before tax Profit before tax is a key measure for the group and incorporates the interest from cash deposits held and the IAS 19 pension interest charge. The reported profit before tax of £18.1 million in 2009 compares to £23.1 million profit reported for 2008. Whilst the profit from operations has increased the decrease in profit before tax is due to the impact of reduced interest on cash balances resulting from the sharp drop in interest rates and an increased IAS 19 pension interest charge resulting from a reduction in the expected return on the net assets of the pension scheme.

• Order book The level of secured orders on which work is to be carried out is a key measure for achieving continued profitability and growth. At the end of 2009, the order book for the Group was £2.6 billion, this represented a 30% increase on the £2.0 billion level as at 31 December 2008. The increase results from a number of significant contract awards in the year.

Net cash balance The Group has a positive net cash balance and close monitoring and measurement of cash resources is carried out as part of the performance measurement process. As at 31 December 2009, the net cash balance of the Group was £120.5 million, compared to £146.6 million as at 31 December 2008. The reduction results from timing of receipts and payments and a change in the mix of business in the Group. The average month end cash balance for the Group increased to £125.3 million compared to £117.4 million in 2008.

The Group produces for each project a Project Manager’s Report (PMR) every month that contains a number of indicators regarding the performance of the project, specifically information on:

• Health and Safety – record of any accidents or incidents and safety inspection scores

• Customer service – feedback from the customer on the Company’s performance

• Programme – measurement of actual progress against planned progress

• Financial performance – anticipated financial outcome on the project, including analysis of costs to date and to completion compared to the original budget

• Claims and variations • Cash management – measurement of the cash flows on

the project • Resource levels – measurement of the number of direct

staff and subcontract staff compared to the level budgeted • Risk management – analysis of the key risks and opportunities

on the project

The Group’s divisional and senior management teams review the PMRs each month.


Financial review

ResultsProfit before tax for the year ended 31 December 2009 was £18.1 million (2008: £23.1 million) on revenue (including the Group’s share of joint ventures and associates) of £1,061.1 million (2008: £996.0 million).

Basic earnings per share amounted to 2.3 pence (2008: 2.9 pence earnings per share).

Profit from operations for the year was £20.8 million(2008: £18.3 million) representing an increase of 14%.

Order book increased by 30% during the year to £2.6 billion (2008: £2.0 billion). The increase resulted from a number of significant contract awards in the year.

The Chairman’s statement, Chief Executive’s review and Business & Operational review provide further information on the key aspects of the Group’s results for 2009.

InterestNet finance expense amounted to £2.7 million (2008: £4.8 million finance income).

The Group has a strong positive cash balance and in 2009 earned interest income from bank deposits and other loans and receivables amounting to £2.1 million (2008: £5.8 million). The reduction in interest income is due to the sharp drop in interest rates to historically low levels in 2009. In addition, the net finance expense included the difference between the expected return on the pension scheme’s assets of £23.4 million (2008: £28.3 million) and the interest cost on the present value of the pension scheme’s liabilities of £28.2 million (2008: £29.3 million); the net difference in 2009 was, therefore, a pension scheme related interest cost of £4.8 million (2008: £1.0 million).

TaxThe Group’s effective rate of tax was 19.3% of profit before tax (2008: 21.2%). There were benefits during the year arising from the profit on sales of joint ventures and associates which have been relieved from the charge to corporation tax and a decrease in temporary timing differences, being the utilisation of brought forward tax losses and tax provisions.

DividendThe Board has recommended a final dividend for the year of 0.55 pence per share (2008: 0.5 pence per share) to bring the total for the year to 0.825 pence per share (2008: 0.75 pence per share), an increase of 10%.

As previously reported, the Group intends to make an additional cash contribution to the pension scheme equal to the amount of dividend paid to shareholders.

Subject to confirmation at the Annual General Meeting, on 6 May 2010, the dividend will be paid on 21 May 2010 to shareholders on the register at the close of business on 23 April 2010.

Shareholders’ EquityShareholders’ equity decreased in the year to a negative £3.8 million (2008: £33.6 million positive). The movements are detailed in the Consolidated statement of changes in equity in the financial statements.

The most significant change was the increase in the Group’s pension scheme deficit, detailed below.

The negative shareholders’ equity position on the balance sheet does not fundamentally impact on the financial standing of the Group. It is as a result of the defined benefit pension scheme deficit position, which is a long-term liability and does not adversely impact on the short-term financial statusof the Group.

Tony Bickerstaff Finance Director


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Going ConcernThe Directors have acknowledged the guidance ‘Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009’ published by the Financial Reporting Council in October 2009. Whilst noting the position reported in the shareholders’ equity section, the balance sheet shows that the Group has a positive current asset ratio, a substantial positive cash balance and no significant debt. The Directors have considered the Group’s financial requirements, its current order book and future opportunities and its available bonding facilities. Having reviewed the latest projections, including the application of reasonable downside sensitivities, the Directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook. Accordingly, the Group continues to adopt the going concern basis in preparing these financial statements.

Treasury The Group’s treasury and funding activities are undertaken by a centralised treasury function. Its primary activities are to manage the Group’s liquidity, funding and financial risk, principally arising from movements in interest rates and foreign currency exchange rates. The Group’s policy is to ensure that adequate liquidity and financial resources are available to support the Group’s growth development, while managing these risks. The Group’s policy is not to engage in speculative transactions. Group Treasury operates as a service centre within clearly defined objectives and controls and is subject to periodic review by internal audit.

Foreign Currency ExposureTranslation exposure: the results of the Group’s overseas activities are translated into sterling at rates approximating to the foreign exchange rates ruling at the dates of the transactions. The balance sheets of overseas subsidiaries are translated at foreign exchange rates ruling at the balance sheet date.

Transaction exposure: the Group has transactional currency exposure arising from subsidiaries’ commercial activities overseas in currencies other than the subsidiaries’ operating currencies. In such circumstances, and where appropriate, the Group requires its subsidiaries to use forward currency contracts to minimise any currency exposure unless a natural hedge exists elsewhere within the Group.

Interest Rate Risks and ExposureThe Group holds financial instruments for two main purposes: to finance its operations and, currently, only within its PFI investments, to manage the interest rate risks arising from its operations and its sources of finance. Various financial instruments (for example, trade receivables and trade payables) arise directly from the Group’s operations. With the Group’scash balances and low level of borrowings, the main exposure to interest rate fluctuations within the Group’s operations arises from surplus cash, which is generally deposited with the Group’s relationship banks. Within the investments in joint ventures and associates, interest rate movements will affect the value of swaps classified as cash flow hedges and this will impact the Group’s equity.

Tony Bickerstaff Finance Director10 March 2010

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PensionsAt 31 December 2009 the Group’s pension scheme deficit, net of deferred tax, under IAS 19 was £75.4 million (2008: £36.1 million).

During the year, the pension scheme asset value has increased as a result of a recovery in the global equity markets, however, this was offset by an increase in liabilities due to an increase in inflationary expectations and a reduction in the liability discount rate.

The most recently completed actuarial valuation of the scheme was performed by the Scheme Actuary as at 31 March 2007 and a contribution plan that was expected to eliminate the deficit over a ten year period was agreed with the Trustee of the Scheme. The next full actuarial review is scheduled to be undertaken as at 31 March 2010. It has been agreed with the Trustee of the Scheme to increase, with effect from April 2009, the monthly company contribution towards funding the Scheme’s deficit by £0.4 million to £0.9 million until the next formal actuarial valuation of the Scheme, as at 31 March 2010, is finalised. This is in addition to our ongoing commitment to match dividend payments with an equivalent cash contribution to the pension fund.

The Group’s defined benefit pension scheme was closed to future accrual from 30 September 2009. Costain now operates only a defined contribution scheme for all employees from that date.

Cash Flow and BorrowingsThe net cash position at 31 December 2009 of £120.5 million (2008: £146.6 million) included £0.3 million of borrowings (2008: £0.7 million) and cash held by jointly controlled operations of £36.0 million (2008: £34.2 million).

The reduction in the net cash position at the end of the year is a result of the timing of cash flows at the balance sheet date. The average month end cash balance during 2009 was £125.3 million (2008: £117.4 million).

The cash position is affected by monthly and contract specific cycles and in order to accommodate these cyclical flows, the Group seeks to maintain a base cash balance.

Liquidity RiskThe Group finances its operations primarily by a mixture of working capital, funds from shareholders and retained profits. The Directors regularly monitor cash usage and forecast usage to ensure that projected financing needs are supported by adequate cash reserves or bank facilities.

Contract Bonding and Banking FacilitiesThe Group’s long-term contracting business is dependent on it being able to supply performance and other bonds as necessary. This means maintaining adequate facilities from banks and surety bond providers to meet the current and projected usage requirements. In March 2010, the Group renegotiated its contract bonding and banking facilities with its relationship banks and surety companies. The facilities were increased to £345 million and extended to a maturity date of 30 September 2013.


Samer G. Younis BSc, Commander of the Knights – Italian Solidarity Star 3

Non-Executive Director (2009)

Aged 48. Vice Chairman and Managing Director of Kharafi National Group; Board Member of ABJ Engineering and Contracting Co KSCC (Kuwait), Utilities Development Company (Kuwait), Kuwait Jordanian Holding Company (Jordan), SSH Consultants (Kuwait), Global Clearing House Systems (Kuwait), Emirates Utilities Company Holding (UAE) and Heavy Engineering Industries & Shipbuilding Co (HEISCO) (Kuwait); and is a Trustee of the Arab Forum for Environment and Development.

Board of Directors

David Allvey FCA, ATII³ Chairman (2008)

Age 65. Director since 2001 and Chairman since January 2008. With a career that started in civil engineering and subsequently as a Chartered Accountant, he has held positions in major international businesses including Group Finance Director for BAT Industries plc, Barclays Bank plc and Chief Operating Officer for Zurich Financial Services. He is currently Chairman of Arena Coventry Ltd, Senior Non-Executive Director of Intertek Group PLC and William Hill PLC and a Non-Executive Director of Thomas Cook Group plc and Friends Provident Group. He is a former board member of the UK Accounting Standards Board.

Andrew Wyllie FREng, BSc, MBA, FICE, CEngChief Executive (2005)

Age 47. Non-Executive Director, Scottish Water. Formerly Managing Director of Taylor WoodrowConstruction Limited (2001-2005) and a member of the Taylor Woodrow plcExecutive Committee. Joined TaylorWoodrow in 1984 and worked on majorcontracts in Africa, the Middle East, the Far East and the UK.

Notes1 Member of Remuneration Committee2 Member of Audit Committee3 Member of Nomination Committee4 Independent Non-Executive Director5 Senior Independent Director

Saad Shehata resigned as a Non-Executive Director on 23 June 2009 and Mohd Hussein bin Abdul Hamid resigned as a Non-Executive Director on 4 December 2009.


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The Executive BoardThe Executive Board has primary authority for the day-to-day management of the Group’s operations, following policies laid down by the Board. It consists of the Executive Directors and certain senior managers and is chaired by Andrew Wyllie, Chief Executive. The other members of the Executive Board are:

Tony Bickerstaff(Finance Director)

Patrick Bruce(Group Commercial Director)

Clive Franks(Company Secretary)

Alistair Handford(PFI Director)

Martin Hunter(Group Financial Controller)

Darren James(Managing Director – Infrastructure)

David Jenkins(Managing Director – Environment) Alan Kay(Chief Operating Officer)

Charles Sweeney(Managing Director – Energy & Process)

Alex Vaughan(Managing Director – Community)

Stephen Wells(Group Strategy and Business Development Director)

Tracey Wood(HR and Legal Director)

Tony Bickerstaff FCCAFinance Director (2006)

Age 45. Formerly Finance Director of Taylor Woodrow Construction Limited (2001-2006). Joined Taylor Woodrow in 1982 and undertook a number of senior roles both in the UK and overseas including Divisional Operations Director prior to becoming Finance Director in 2001.

Michael Alexander BSc, MSc, FIChem.E, FIET, FIGM, CEng, CSci 1 2 3 4


Age 62. Chairman of TGE Marine AG; Independent Non-Executive Director of the UK Payments Council; Executive Director of Lexican Limited; European Advisory Board member Landis & Gyr. Formerly Chief Executive, British Energy PLC (2003-2005); Executive Director, MD British Gas Trading and Chief Operating Officer, Centrica PLC (1994-2003); Non-Executive Chairman Goldfish Bank Limited (2002-2003); and Non-Executive Director of the Energy Savings Trust Limited (1994-2001).

John Bryant MA (Cantab), FREng, FIM, CEng, DSc (Hon) 1 2 3 4 5


Age 66. Non-Executive Director, Welsh Water Plc and Glas Cymru Limited since 2001. Formerly Chief Executive of Corus Group Plc (1999-2000), Chief Executive, British Steel Plc (1999), Executive Director, British Steel Plc (1995-1999) and Non-Executive Director, Bank of Wales Plc (1996-2001).

James Morley BSc, FCA 1 2 3 4


Age 61. Non-Executive Director, the Innovation Group PLC, Clarkson PLC and Speedy Hire plc. Formerly Chief Operating Officer, Primary Group Limited (2006-2007), Group Finance Director, Cox Insurance Holdings Plc (2002-2005), Group Finance Director, Arjo Wiggins Appleton Plc (1999-2001), Group Executive Director Finance, Guardian Royal Exchange Plc (1990-1999), Deputy Chief Executive and Finance Director, Avis Europe Plc (1976-1989) and Non-Executive Director, the Bankers’ Investment Trust PLC (1994-2008) W S Atkins PLC (2001-2009), and Trade Indemnity Group plc (1991-1996).


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Corporate Governance statement

Throughout the year to 31 December 2009, except where indicated within this report, the Company complied with the provisions of the Combined Code on Corporate Governance June 2008 (the ‘Combined Code’). The Company is committed to the principles of corporate governance contained in the Combined Code and aims to comply with established best practice, wherever possible and where it is in the Company’s interests.

The Board and CommitteesThe Board currently comprises two executive directors and five non-executive directors of whom one is the Chairman and three are independent non-executive directors (one being the Senior Independent Director). The Board considers its independent non-executive directors to be independent in character and judgement.

No independent non-executive director has:

• been an employee of the Group within the last five years; • had within the last three years, a material business relationship

with the Group; • received remuneration other than a director’s fee; • had close family ties with any of the Group’s advisers, directors

or senior employees; • held cross-directorships or had significant links with other

directors through involvement in other companies or bodies;• represented a significant shareholder; or • served on the Board for more than nine years.

The Combined Code indicates that a Chairman of the Company should meet the independence criteria on appointment, and the current Chairman did, but thereafter the test of independence is not appropriate in relation to the Chairman.

The remaining non-executive director is nominated by major shareholder, Mohammed Abdulmohsin Al-Kharafi & Sons WLL. Until 4 December 2009, a non-executive director was nominated by York Place Limited, a subsidiary of UEM Builders Berhad, the other major shareholder. UEM Builders Berhad have not yet taken advantage of the right to nominate a successor to the non-executive director who retired on 4 December 2009.

The Company complies with the requirement under provision A3.2 of the Combined Code that at least half of the Board, excluding the chairman, should comprise non-executive directors determined by the Board to be independent, notwithstanding that this requirement is waived in respect of smaller companies such as the Company being a member of the FTSE small cap companies.

The independent non-executive directors all have terms and conditions of appointment, which are available for inspection during normal business hours at the Company’s Registered Office. An independent non-executive director’s appointment is for an initial period of three years, at the expiry of which time, the appointment is reviewed to determine whether the appointment should continue. The two major shareholders are each entitled to appoint a non-executive director for so long as those shareholders each hold 7% of the aggregate nominal value of the then issued ordinary share capital of the Company. In consequence, the Company did not comply with provision A7.2 of the Combined Code, which requires that all non-executive directors should be appointed for a specific term and be subject to re-election. The Company’s Articles of Association require that all directors, including nominee non-executive directors, should be subject to election by shareholders at the first opportunity after their appointment and to re-election thereafter at intervals of no more than three years, thus complying with provision A7.1 of the Combined Code.

Brief biographies of the executive and non-executive directors appear on pages 46 and 47. The biographies illustrate that the non-executive directors have a range of business and financial experience that is important and relevant to the management of the Company.

The Group is controlled through its Board. The Board’s main roles are to create value for shareholders, to provide entrepreneurial leadership of the Group, to approve the Group’s strategic objectives and to ensure that the necessary financial and other resources are made available to enable the Group to meet those objectives.

Details of Board members’ attendance at Board meetings, Audit Committee meetings, Remuneration Committee meetings and Nomination Committee meetings during the year ended 31 December 2009 are given in the table overleaf.


Corporate Governance statementcontinued

In addition to the formal Board meetings, the Board held six ad hoc telephone conference meetings during the year.

Under the Companies Act 2006 (the ‘2006 Act’), a director must avoid a situation where he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the Company’s interests. The 2006 Act allows directors of public companies to authorise conflicts and potential conflicts, where appropriate, and where the articles of association contain a provision to this effect. The 2006 Act also allows the articles of association to contain other provisions for dealing with directors’ conflicts of interest to avoid a breach of duty. The Articles give the directors authority to approve such situations. The Company annually sends a questionnaire to directors to ensure that the Company had an exhaustive list of the other directorships of each director, any material share ownerships, and to identify potential conflicts of interest which might need authorising and requires directors to notify the Company when any change occurs. The Board (the unconflicted directors) considered potential conflicts of interest in the light of the duty to promote the success of the Company and, in authorising conflicts, considered and imposed certain terms and conditions on the authorisation. The Company Secretary keeps a record of all disclosures by directors of their outside interests and the terms and conditions of authorisation of conflicts. The Board will review periodically the conflicts authorisation to determine whether any authorisation given should continue on the terms and conditions upon which it has been granted or whether additional terms and conditions should be imposed or whether the authorisation should upon reasonable notice be revoked.

The Board has adopted a schedule of matters specifically reserved to itself for decision. The principal matters reserved to the Board include: setting Group strategy and approving the annual budget and medium-term projections; reviewing operational and financial performance; approving major acquisitions, divestments and capital expenditure; reviewing the Group’s systems of financial control and risk management; ensuring that appropriate management development and succession plans are in place; reviewing the environmental, health and safety performance of the Group; approving appointments to the Board and the appointment of the Company Secretary; approving policies relating to executive directors’

remuneration and the severance of executive directors’ service agreements; and ensuring that a satisfactory dialogue takes place with shareholders. The schedule of matters reserved to the Board will be reviewed in 2010.

The Company has complied with provision A3.3 of the Combined Code by appointing John Bryant as Senior Independent Director. The Board decided that the role of the Senior Independent Director should encompass the following:

• Evaluation and appraisal – meet with the other members of the Board without the Chairman present on at least an annual basis in order to evaluate and appraise the performance of the Chairman.

• Succession – chair the Nomination Committee when the succession to the role of the Chairman of the Board is being considered.

• Shareholder/stakeholder contact – act as a point of contact for shareholders and other stakeholders with concerns which have either not been resolved or which it would not be appropriate to raise through the normal channels of the Chairman, Chief Executive and/or Finance Director.

• Executive director contact – act as an alternative point of contact for executive directors, if required, in addition to the normal channels of the Chairman and/or Chief Executive.

• Non-executive director contact – meet with the other members of the Board as and when deemed appropriate.

As required by provision A5.3 of the Combined Code, all directors have access to the advice and services of the Company Secretary and a procedure also exists whereby any director, wishing to do so in furtherance of his duties, may take independent professional advice at the Company’s expense as required by provision A5.2. In the year ended 31 December 2009, no director sought independent professional advice.

In order to discharge their duties, the directors are provided with full and timely access to papers prior to Board meetings and the directors are free to seek any further information they consider necessary. In addition, between Board meetings, non-executive directors have access to the Chief Executive, Finance Director and Company Secretary in order to progress the Company’s

Board Audit Remuneration Nomination

Number of meetings held in the year 8 5 6 3D P Allvey 8 (Chairman) 5* 4* 3 (Chairman)A Wyllie 8 5* 4* 2*A O Bickerstaff 8 5* 1* 2*J M Bryant 8 5 5 3M R Alexander 7 2 6 (Chairman) 3J Morley 8 5 (Chairman) 6 3S G Younis (appointed 23 June 2009) 4 1* 1* 1

M H Hamid (resigned 4 December 2009) 6 2* - 2S Y Shehata (resigned 23 June 2009) 3 1* 1* 1

* By invitation.


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business. The non-executive directors also receive a weekly report from the Chief Executive and monthly management accounts, certain internal audit reports and regular management reports and information, which enable them to scrutinise the Group’s and its management’s performance against agreed objectives.

On appointment, the directors, as required by provision A5.1 of the Combined Code, take part in an induction programme, where they receive information about the Group, the role of the Board and the matters reserved for its decision, the terms of reference and membership of the principal board committees and the powers delegated to the committees, the Group’s corporate governance practices and procedures, and the latest financial information about the Group. As to the continuing education of the executive and non-executive directors, Board members, independent of any formal training arranged by the Company, are encouraged to attend seminars and conferences on issues relevant to their appointment as directors of a public company, particularly matters concerned with corporate governance, audit and remuneration issues.

The Board has established a formal process for the evaluation of the performance of the Board and its principal committees. Since the process was introduced, the evaluations have either been performed using independent advisers or by using questionnaires which were generated internally. In 2009, the evaluation was conducted by a third party consultant (the ‘Consultant’). The review covered some nine areas of Board effectiveness, including the role and composition of the Board, strategy, management of the business of the Board, stakeholder engagement, sub-committees and risk. Board members were invited to complete a questionnaire, which was followed up by an interview which probed the views expressed in the replies to the questionnaire and the evidence supporting them. The Consultant also reviewed documentation relating to the Board and committees, including the schedule of matters reserved for the Board, the terms of reference of the committees, the agendas and minutes covering the majority of meetings of the Board and committees in 2009 and the corporate strategy. The Consultant also sat in on a Board meeting and Audit Committee meeting. The Consultant’s review was debated in a special meeting of the Board with the Consultant present and the Board adopted a number of the proposals to improve its effectiveness.

The Company did not comply with parts of provision A6.1 of the Combined Code in that the Chairman, during 2009, did not undertake an individual appraisal of each director as this was encompassed in the review undertaken by the Consultant referred to above. However, the Chairman did engage in regular dialogue with directors, which enabled him to refine his assessments of individual directors and guide them on future performance. The Company does comply with parts of provision A6.1 of the Combined Code in that a performance evaluation was undertaken on the Chairman. The Chairman does hold meetings with the non-executive directors without the executive directors being present, as required by provision A1.3 of the Combined Code.

The Chairman’s other significant commitments during 2009 are disclosed in the Chairman’s biographical details (provision A4.3 of the Combined Code).

In accordance with provision A1.5 of the Combined Code, the Company has in place Directors’ and Officers’ Insurance in respect of the directors’ duties as directors.

The principal Board Committees are the Audit Committee, the Remuneration Committee and the Nomination Committee. Current members of the Audit Committee are Mr Morley as Chairman, Mr Bryant and Mr Alexander, who have all been members throughout the financial year ended 31 December 2009. The Company complies with provision C3.1 of the Combined Code. The Audit Committee has established written terms of reference, which were last reviewed, revised and re-issued on 9 September 2008. Details of the attendance at Audit Committee meetings in 2009 are given in the table on page 50. The executive directors, the external auditors, the Head of Internal Audit and the Group Financial Controller attend all meetings by invitation. The Audit Committee regularly meets privately with the external auditors and internal auditors. The Company Secretary is the Secretary to the Audit Committee.

The Company considered that it had in Mr Morley, as Chairman of the Audit Committee, an appropriate person possessing what the Smith Report describes as recent and relevant experience. Mr Morley, a chartered accountant, was Finance Director, Avis Europe PLC (1976-1989), Group Executive Director, Finance, Guardian Royal Exchange Plc (1990-1999), Group Finance Director, Arjo Wiggins Appleton Plc (1999-2001) and Group Finance Director, Cox Insurance Holdings Plc (2002-2005).

Under its terms of reference, the Audit Committee monitors the integrity of the Group’s financial statements and any formal announcement relating to the Group’s performance. The Committee is responsible for monitoring the effectiveness of the external audit process and making recommendations to the Board in relation to the appointment, re-appointment and remuneration of the external auditors. It is responsible for ensuring that an appropriate relationship between the Group and the external auditors is maintained, including reviewing non-audit services and fees. The Audit Committee also reviews the Group’s system of internal controls and the processes for management of the risks facing the Group. The Committee reviews the effectiveness of the internal audit function and is responsible for approving, in consultation with the Chief Executive, the appointment and termination of the head of that function. The Committee reviews its terms of reference and its effectiveness from time to time and recommends to the Board any changes required as a result of the review. The Committee’s terms of reference are available from the Company Secretary and are published on the Company’s website.



In 2009, the Audit Committee discharged its responsibilities by:

• reviewing the Group’s draft financial statements and interim results prior to Board approval and reviewing the external auditors’ detailed reports thereon;

• reviewing the Group’s draft interim management statements prior to Board approval;

• reviewing the appropriateness of the Group’s accounting policies;

• reviewing and approving the audit fee and reviewing non-audit fees payable to the Group’s external auditors;

• reviewing the external auditors’ plan for the audit of the Group’s financial statements (this plan includes the audit scope, auditors’ assessment of the key risks for the financial statements, confirmation of auditor independence and the proposed audit fee) and approving the terms of engagement for the audit;

• reviewing and monitoring the external auditors’ independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements;

• reviewing the internal audit function’s terms of reference, its work programme, internal audit reports and quarterly reports on its work during the year;

• reviewing the risks associated with the business; • reviewing and monitoring the development of the Group’s

commercial and financial IT systems; and • reviewing the Group’s system of internal controls and its

effectiveness, reporting to the Board on the results of the review and receiving regular updates on key risk areas of financial control.

The processes used by the Audit Committee on behalf of the Board to review the effectiveness of the system of internal controls include the following:

• reviewing and agreeing the external and internal audit work plans;

• monitoring the process for formally identifying, evaluating and managing any significant risks and opportunities within the business;

• overseeing the establishment of procedures to identify and manage perceived and real risks;

• consideration of reports from management and internal and external auditors on the adequacy and effectiveness of the system of internal control, including risk management systems and any material control weaknesses;

• discussion with management of the actions taken on problem areas identified by Board members or in management reports or in the internal or external audit reports and monitoring the follow-up on any agreed remedial action; and

• a review of the self-certification returns on risks and internal controls from the various operations of the Group.

The process of self-certification and hierarchical reporting, which is in place, provides for a documented and auditable trail of accountability. These procedures are relevant across Group operations and provide assurance to senior management and, finally, to the Board. Internal Audit also provides assurance as to the operation and validity of the systems, processes and checks within the internal control environment.

The Chairman of the Audit Committee is one of the individuals named in the Company’s Public Interests Disclosure Policy (whistle-blowing procedures) to whom employees and third parties may communicate any wrongdoing, which they believe has occurred or is about to occur. The Audit Committee has wide powers to establish special investigations in the event that any wrongdoing is brought to its notice, in particular, in the case of defalcations, fraud and theft.

The Audit Committee monitors the non-audit services being provided to the Group by its external auditors, and has developed a formal policy on the provision of non-audit services by the external auditors to check this does not impair their independence or objectivity, and that the Group maintains a sufficient choice of appropriately qualified audit firms. The policy sets out four key principles that underpin the provision of non-audit services by the external auditors: the auditors should not audit their own firm’s work; make management decisions for the Group; have a mutuality of financial interest with the Group; or be put in the role of advocate for the Group. Prior approval of the Audit Committee is required for any services provided by the external auditors where the fee is likely to be in excess of £25,000. The Audit Committee reviews all services being provided by the external auditors annually to review the independence and objectivity of the external auditors, taking into consideration relevant performance and regulatory requirements so that those are not impaired by the provision of permissible non-audit services.

Full particulars of the Remuneration Committee are given in the Directors’ remuneration report, which appears on pages 63 to 69. The Company complies with that element of provision B2.1 of the Combined Code, which requires that all members of the Remuneration Committee are independent non-executive directors. The Remuneration Committee comprises three independent non-executive directors, namely Mr Alexander as Chairman, Mr Morley and Mr Bryant. The Remuneration Committee’s terms of reference were last reviewed, revised and re-issued on 8 October 2009. The Committee’s terms of reference are available from the Company Secretary and are published on the Company’s website. The Company Secretary is the Secretary of the Remuneration Committee.


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The Nomination Committee comprises the Chairman and all non-executive directors. The Chairman is the Chairman of the Committee. The Combined Code recommends that the majority of members of the Committee should be independent non-executive directors. The Nomination Committee has established written terms of reference, which were last reviewed, revised and re-issued on 9 September 2008. The Committee’s terms of reference are available from the Company Secretary and are published on the Company’s website. This Committee meets, as required, to select and propose to the Board suitable candidates for appointment as executive and non-executive directors. The Nomination Committee directs the Board effectiveness review and also reviews management training and succession planning arrangements in respect of senior management. The Company Secretary is the Secretary of the Nomination Committee. In 2009, the Nomination Committee met formally on three occasions. Details of the attendance at the Nomination Committee meetings in 2009 are given in the table on page 50.

The Disclosure and Transparency Rules introduced new rules regarding the way listed companies manage inside information. In consequence, the Company introduced a set of procedures, rules and controls to ensure compliance with the Company’s obligations under the Listing Rules (including the obligations under the Disclosure and Transparency Rules) of the United Kingdom Listing Authority (UKLA). It is recommended good practice that each listed company should have a Disclosure Committee. The Company established a Disclosure Committee with its own terms of reference that are available from the Company Secretary. The members of the Disclosure Committee are the Chairman of the Company, the Chairman of the Audit Committee, Chief Executive, Finance Director and Group Financial Controller. The Company Secretary is the Secretary of the Disclosure Committee. The procedures also deal with the insider list process and a code for dealing in securities.

Relationship with institutional investors and private investorsThe Company continues to increase its communication with institutional investors and brokers. At the time of the announcement of the full year and half-year results, presentations are made to brokers’ analysts, the press and institutional investors. In addition, there are meetings with analysts, financial journalists and institutional investors throughout the year.

The Company has two major shareholders, who between them control the beneficial interest in 43% of the issued share capital of the Company and, also, provided that their shareholding remains above a certain level, each have the right to appoint a nominee to sit on the Board of the Company. Currently, only one of the major shareholders exercises this right. The Company has approximately 13,000 other shareholders. In 2009, the Company asked shareholders whether they would prefer to receive the Annual Report, Interim Report and other communications from the Company, such as circulars and prospectuses, in paper form or electronically. In common with most other companies, only a minority of shareholders elected to receive communications in paper form. The Company has an internet website www.costain.com on which it publishes the Annual Report, Interim Report and any other communications which shareholders are to be made aware of, together with ‘copies’ of Stock Exchange announcements, press releases, a Costain on-line news service (which replaced the Company in-house magazine (Blueprint)) and other information covering the Company’s business. The Annual General Meeting is normally attended by all directors, shareholders are invited to ask questions during the meeting and to meet with the directors after the formal proceedings have ended. Shareholders, whose shares are held by nominees, may access communications on the Company’s website.

The Company will comply with provision D2.4 of the Combined Code by giving 20 working days’ notice of the Annual General Meeting. The Company complied with this obligation in respect of the notice for the Annual General Meeting in 2009. The Company will provide shareholders voting by proxy with the option of withholding their vote on a resolution and the Company will publish details of proxies lodged on resolutions where votes are taken on a show of hands.



Internal controls and Risk management

Review of internal controlsThe Board is responsible for the Group’s system of internal controls and for reviewing its effectiveness. However, such a system can only manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable, but not absolute, assurance against material misstatement or loss.

The Board maintains full control over strategic, financial, operational and compliance issues. Within the overall objectives set by the Board, the management of the Group is delegated to the Chief Executive, who is assisted by members of the Executive Board. The responsibilities of the Executive Board include:

• the development and recommendation of strategic plans for consideration and approval by the Board that reflect the longer term objectives and priorities established by the Board;

• implementation of the strategies and policies of the Group as determined by the Board;

• monitoring of the operating and financial results against the plans and budgets;

• prioritising the allocation of technical, financial and human resources;

• developing and implementing risk management systems; and

• managing and monitoring health, safety and environmental matters.

The Chief Executive has full authority to act subject to the matters reserved to the Board and to the requirements of Group Policies.

The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place for the year under review and up to the date of approval of the Annual Report. This process extends not only to projects undertaken solely by subsidiaries of the Group but also to projects undertaken in joint arrangements and by joint ventures and associates. This process is reviewed by the Audit Committee on behalf of the Board and accords with the Turnbull guidance.

The Audit Committee has reviewed the effectiveness of the system of internal controls. The review covered all controls, including financial, operational and compliance controls and risk management.

Risk managementRisk management has been an important issue within the Company for many years but, following the publication of the Turnbull guidance, the Company formalised its risk evaluation processes and at the same time introduced new procedures to assist in the identification and management of risk. These procedures included a specific project risk management procedure, which among other things requires a Tender Project Risk Register and a Commercial Risk Review of the contract to be prepared in respect of each contract bid. This identifies key risks, the probability of those risks occurring, their impact if they do occur and the actions necessary to manage those risks to an acceptable level. The risks are divided into four broad categories: safety; technical; operational; and environmental. They are reviewed by the project manager and commercial manager of the project on a continuing basis following contract award.

The Company’s risk register includes opportunities as well as risks. The Company has also established sector business risk registers, which are monitored and updated regularly. The Sector Directors submit quarterly reports on the risks and opportunities faced by their respective Sectors to the Group Commercial Director for analysis. The Group Commercial Director submits a Corporate Risk/Opportunity Register, which encompasses the Site and Sector Risk Reports, to each Executive Board meeting with a summary of the main corporate risks facing the Company. This includes a note of actions taken to reduce the risk profile since the provision of the last report and the most significant risks facing the Company’s operations, naming the person responsible for their management and the steps being taken to mitigate them. The Group Commercial Director also reports to the Audit Committee and with the Finance Director submits reports to that Committee on the main corporate risks and opportunities facing the Company.

The Project Manager is responsible for ensuring that an initial site workshop takes place and there is a full handover from the tender team. The Regional Systems Managers assist with the risk management inductions and facilitation. Under the Implementing Best Practice (IBP) programme, the Systems Managers ensure, by audit, that both the initial workshop and close-out workshop occur; if not, the deficiency appears on Project Performance Assessment Reports.

During the currency of the contract, the Risk/Opportunity Registers are updated monthly and the top five risks and opportunities are included on the Project Manager’s Report (PMR); these are interrogated at the formal monthly PMR meeting attended by Group senior management, including the Chief Executive, Finance Director, Group Financial Controller and Group Commercial Director and relevant divisional management, including the Managing Director, Commercial Director, and, by invitation, representatives from site teams. In addition, Internal Audit carries out site reviews and circulates reports with further follow-up actions and inspections.


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The Executive Investment Panel, which has been operating since 2005, is a sub-group of the Executive Board. It is empowered to review tender bids and risk mitigations in respect of those bids, including projects with joint venture partners and projects that require equity participation. Part of the purpose of the review is to ensure that the Group is selective when it comes to taking on potential liabilities or recognising opportunities. This approach has proved to be successful and has allowed the Group to build its order book in-line with published strategy and its desired risk appetite.

IBP remains the Company’s risk-based management system focussing on the key business areas: work winning; risk/opportunity management; planning and programming; design management; supply chain management; subcontractor management; temporary works management; and corporate accounting and reporting. These standards are presented as process flowcharts and are supported by tools and guides, which are available to employees of the Group on the Costain intranet (iCosNet).

The Company has developed and implemented a new project management process, focussing on raising minimum standards in project delivery. To support this process, a new Project Performance Assessment (PPA) was introduced, which addresses Leadership, Policy and Strategy, People, Resources and Partnerships, as well as Processes (IBP). The PPA scores a project on how well the team plans to tackle something, executes its plans and reacts to the results achieved. Results are issued as graphical reports to senior management, with four traffic lights showing how well the key areas of Safety, Quality, Programme and Cost are being managed. Benefits of the PPA include: extending the scope for projects to demonstrate improvement; all projects irrespective of size can be assessed using the same model; and it provides senior management with an early warning indication of project performance and potential project outcome.

Internal Audit provides the Audit Committee, the remaining members of the Board and corporate and project management with independent assurance that risks inherent to the business processes are reasonably controlled. It assists management in assessing the risks the Company faces in its business activities and helps management evaluate the effectiveness of internal controls that manage those risks. Internal Audit also promotes best practice in risk management processes to ensure delivery of corporate objectives.

In 2009, Internal Audit conducted project and departmental reviews in the UK and internationally to appraise and report on the effectiveness of the risk management processes. All reviews carried out were subject to appropriate follow-up action, which revisits areas previously subject to audit and provides assurance that accepted recommendations have been implemented effectively. The overall assessment is that a strong risk management culture is continuing to develop within the Group.

Internal Audit meets monthly with the Chief Executive, Finance Director and Group Financial Controller. In addition to reviewing the risk based audit plan, these meetings enable Internal Audit to outline key findings from recent reviews and to discuss any management actions that may result. The effectiveness of the controls in place, including risk management, forms a key agenda item. The Head of Internal Audit attends most Audit Committee meetings and reports on the activities of Internal Audit. The Head of Internal Audit also has unfettered access to the Chairman of the Audit Committee.

Internal Audit also meets with the Business Systems Group on a quarterly basis. These forums allow Internal Audit to inform those responsible for developing company systems about key issues and trends from audit assignments, in order to maintain a continuous improvement feed-back process. Internal Audit has developed a ‘lessons learned’ register of non-compliances identified, which is communicated to business units to ensure continuous improvement.

Management reviews the role of insurance in managing risks across the Group and brings any important issues to the attention of the Board.

OperationalControls and procedures are detailed in Group Policy Statements, procedure manuals and other written instructions. The procedure manuals are reviewed regularly by management and are published on iCosNet. A method of navigating the various controls is included in training programmes to ensure all project managers are aware of their obligations and accountability.

In the United Kingdom, the Company has developed operational management systems that are accredited to ISO 9001: 2000. These systems are designed to set out an operating framework that supports management in the provision of safe construction processes of the highest quality. The IBP standards referred to above are incorporated within the Project Management Plan for each new contract and this also forms part of the accredited management system. The implementation and compliance with the management system are monitored and audited by Internal Audit. In order to maintain the Company’s accreditation, external audits of the management systems are undertaken twice yearly by the British Standards Institution.

The monthly PMR is the key tool for reporting performance at a project level. Each PMR is completed by the Project Manager and is copied to the Chief Executive, Finance Director, Group Commercial Director and the operational Managing Director and Commercial Director. The information provided in the PMR includes, safety, health and environmental statistics, cash flow, value, cost and profit, claims and variations, risk management, progress and staffing levels. Guidance notes have been issued on the completion of the PMRs.



Internal controls and Risk management continued

All projects operate within a controlled framework of best practice, safety, health and environmental guidelines. Execution of and compliance with these systems are monitored by the project management team and audited by Safety, Health and Environmental advisers.

The Board and Executive Board receive reports at each meeting on safety, health and environmental performance and on significant operational matters. The responsibility for ensuring compliance with the Company’s procedures lies with the Executive Board. The Chief Executive is the Board member responsible for Health and Safety.

FinancialThere is a comprehensive annual budgeting system for each business within the Group, which is linked to the annual review of strategy. The annual budget is discussed by the Executive Board and reviewed by the Chief Executive, Finance Director and Group Financial Controller prior to presentation to the Board by the Executive Board for approval. The Company produces monthly a rolling forecast update for the current year, which is compared with the annual budget.

Monthly actual performance of each operation is reviewed by management and reported against budget to the Executive Board and to the Board. Reports cover profit and loss and cash flow with an accompanying narrative on significant issues underlying the financial reports.

The Group Treasurer and Group Taxation Manager report to the Finance Director, who reports to the Audit Committee, from time to time, on any issues of significance to the Group.

ComplianceThe Group’s policies contain a statement on business conduct, which emphasises the legal, ethical and moral standards that have to be employed in all of the Company’s business dealings. The Company expects the highest standards from all employees and key suppliers.

Litigation and other legal matters were controlled in 2009 by the Head of Legal. A legal report is submitted to the Board in the event of a critical legal issue and, subject to that, a review of all litigation with a value above £50,000 is submitted to, and reviewed by, the Board annually. Significant changes in laws and regulations are drawn to the attention of the appropriate staff and training is given where necessary.

The Chairman of the Audit Committee reports the outcome of the Audit Committee meetings to the Board and all Board members receive the minutes of all Audit Committee meetings.


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Directors’ report

The directors submit to the members their Report and Accounts of the Company for the year ended 31 December 2009.

The Director’s report of the Company for the year ended 31 December 2009 is set out on pages 57 to 62 and the Business & Operational review (pages 36 to 39), the Principal Risks (pages 40 to 42) and Key Performance Indicators (page 43) are incorporated by reference into this Directors’ report, together with the other sections of the Report and Accounts referred to in the Directors’ report.

ActivitiesThe principal activities of the Group are Engineering, Construction, Maintenance and Land Development. The progress and prospects of the Group’s businesses and the main factors which could affect the future development and performance of the Group are set out in the Chairman’s statement (pages 30 and 31), the Chief Executive’s review (pages 32 to 34), the Business & Operational review (pages 36 to 39), the Principal Risks (pages 40 to 42) and Key Performance Indicators (page 43).

Fixed assetsThe Board is of the opinion that the aggregate market value of the Group’s land and buildings is in excess of book value but that this difference is not significant in relation to the affairs of the Group as a whole.

Profit and dividendsThe profit after tax for the financial year ending 31 December 2009 amounted to £14.6 million. An interim dividend of 0.275 pence per share (2008: 0.25 pence) amounting to £1.74 million (2008: £1.6 million) was paid on 31 October 2009. The directors propose to recommend a payment of a final dividend at the rate of 0.55 pence per share (2008: 0.5 pence) amounting to £3.5 million (2008: £3.2 million). If approved, the dividend will be paid on 21 May 2010 to shareholders registered at close of business on 23 April 2010.

Going ConcernThe directors believe, after due and careful enquiry, that the Group has sufficient resources for its present requirements and, therefore, consider it appropriate to adopt the going concern basis in preparing the 2009 financial statements as discussed on page 45 of the Financial review.

Forward looking statementsThis Annual Report contains forward looking statements. These forward looking statements are not guarantees of future performance. Rather, they are based on current views and assumptions and involve known and unknown risks, uncertainties and other factors that may cause actual results to differ from any future results or developments expressed or implied from the forward looking statements. Each forward looking statement speaks only as of its particular date.

Directors and directors’ interestsBrief biographies of the present members of the Board are given on pages 46 and 47.

Mr Samer Younis, a nominee of Mohammed Abdulmohsin Al-Kharafi & Sons WLL, was appointed as a non-executive director on 23 June 2009 to replace Mr Saad Shehata, who had been a non-executive director of the Company since 1997 and who resigned on 23 June 2009.

Mr Mohd Hussein bin Abdul Hamid, a nominee of UEM Builders Berhad, resigned as a non-executive director on 4 December 2009. UEM Builders Berhad have not yet exercised their right to appoint a successor to Mr Hamid.

As Mr Younis was appointed as a non-executive director during the period since the last Annual General Meeting, the Company’s Articles of Association and the Combined Code on Corporate Governance require that he retire, and being eligible, offer himself for re-election. In accordance with the Company’s Articles of Association and the Combined Code on Corporate Governance, Mr Bickerstaff, being eligible, will offer himself for re-election at the Annual General Meeting. Mr Bickerstaff has a service agreement with the Company. Mr Younis does not have a service agreement with the Company.

With regard to the re-election of Mr Bickerstaff, the Chairman has confirmed that, following a performance evaluation, Mr Bickerstaff continues to perform effectively and demonstrate commitment of time for Board and committee meetings and other respective duties.

No director had any material interest in any contract of significance with the Group during the period under review. Details of directors’ emoluments and interests in shares in the Company, including any changes in interests during 2009, are contained in the Directors’ remuneration report, which appears on pages 63 to 69.

Related party transactionsDetails of transactions with related parties undertaken by the Group during the year are disclosed in Note 25 to the financial statements on page 110 and 111.

Share capital and major shareholdersAs at 31 December 2009, the Company’s issued share capital comprised a single class of ordinary shares. Details of the share capital of the Company as at 31 December 2009 are set out in Note 21 on page 107.

The five-year savings contracts in the Company’s 2004 Save As You Earn Plan matured in December 2009. The Save As You Earn Plans had been approved by shareholders at an Annual General Meeting held on 24 May 2002. The Company made a block listing of 10,511,630 ordinary shares of 5 pence each in the capital of the Company on 30 November 2007 in order to satisfy options granted to employees under the Save As You Earn Plans. The Company’s share price at the time of the maturity of the five-year 2004 Save As You Earn Plan was below the option price for that Plan and, since 1 January 2009, a total of 22,566 ordinary shares of 5 pence each have been allotted for a consideration of £6,609.58.


Directors’ reportcontinued

At the Annual General Meeting in 2008, the shareholders approved the introduction of a scrip dividend scheme which authorises the directors to offer and allot ordinary shares in lieu of a cash dividend to those members who elect to participate in the scrip dividend. In May 2009, 330,328 ordinary shares of 5 pence each were allotted to shareholders in respect of the final dividend for 2008, and 529,756 ordinary shares of 5 pence each were allotted to shareholders in October 2009, in respect of the interim dividend for 2009. The issued share capital of the Company as at 31 December 2009 was £31,712,435.65, consisting of 634,248,713 ordinary shares of 5 pence each. As at 9 March 2010, the Company had been notified, in accordance with the Disclosure and Transparency Rules issued by the Financial Services Authority, of the following interests in its ordinary share capital:

Mohammed Abdulmohsin Al-Kharafi & Sons WLL 138,544,915 21.84%York Place Limited* 138,108,505 21.78%Gartmore Investments Limited 32,148,621 5.07%Legal & General Group PLC 25,858,465 4.08%

* UEM Builders Berhad owns 100% of York Place Limited.

The above holdings are all indirect, being held by nominees on behalf of the beneficial owners.

Corporate ResponsibilityThe Company’s Corporate Responsibility section of this report is on pages 14 to 27.

Group policiesDetails of some of the policies are given below:

• Business Conduct policy, which covers the legal, ethical and moral standards that the Group must adhere to in all its business dealings. It covers conflict of interest and lays down stringent guidelines for the receiving and the giving of gifts, loans and entertainment and makes it clear that the offering of a gift (however nominal in value) could constitute bribery and corruption. It deals with the current statutes covering corruption in the United Kingdom and the Anti-Terrorism Crime and Security Act 2001, which gives extra-territorial scope to the statutes covering the United Kingdom and so covers bribery and corruption of a foreign official, notwithstanding the act of bribery and corruption is carried out in a country or territory outside the United Kingdom. The policy also prohibits anti-competitive behaviour.

• Community Involvement policy, which recognises that the work of the Company impacts on communities throughout the world. It is therefore important for the Group to (i) support employees involved in the community for both business reasons and their personal development; (ii) safeguard both the built and natural environment; (iii) create employment; (iv) encourage enterprise and promote regeneration in areas of need; (v) contribute to education and training through true partnerships and (vi) develop awareness of the work and values of the Group and the construction industry, as a whole, as a resource for education in the wider community;

• Political and Other Charitable Donations policy, which prohibits political donations without Board approval. The Company has not made political donations since 1990;

• Equal Opportunities policy, which provides for non-discrimination and equal opportunities. The policy is directed to avoiding discrimination based on gender, ethnic origin, religion, age, disability or sexual orientation. The policy also contains the Company’s code of practice on harassment at work; and

• Public Interest Disclosure policy (whistleblowing procedure), which encourages employees and their partners to report wrongdoing by the Company or any of its employees that fall short of the business principles of the Group and ensures that employees who do report wrongdoing are protected.

Group policies are kept under regular review.

Employment and employment policiesEmployment is addressed in ‘Corporate Responsibility’ section of this report under the heading ‘Our People’. The ‘Achieving Value Through People’ strategic plan has been developed after reviewing the business strategy for the next three years. By developing interventions that address the people implications of this business strategy, we will help drive superior business results. Our people are the key to Costain being a corporately responsible business, and our people initiatives over the next three years will uphold our values and standards around people, by promoting behaviours such as integrity, tolerance, teamwork and inclusion.

It is our vision over the next three years to have the very best team of people. This is dependent upon the creation of a shared culture and work ethic, driven by strong leaders that is sustained through career progression and enhanced through talent identification and management, personal development, recognition and reward.

The identification and management of high potential employees and the management of poor performance continue to be key parts of our strategic plan. In 2008/2009, we introduced a comprehensive performance management system to ensure that Costain attracts, retains, motivates and develops the talented people it needs now and in the future. Training continues to be given to help managers deal with performance issues.

Strong, proactive and visible leadership remains the focus within Costain. We will be running a further High Potential Development Programme and a new 2020 Board, designed to identify and develop individuals on our Graduate Development Programme, who could be leaders within Costain in 2020. The Project Management Academy, designed to build project management excellence, is now well developed and has been recognised in the recent Construction News quality awards.

Manpower planning is focussed on ensuring that the business has the right people, at the right time on projects, facilitating the transfer of skills and experience across projects and sectors. Our next step is to align resource planning, with retention methods, such as talent management and reward. We will bring the recruitment and management of weekly paid staff into the Human Resources function to ensure a fair and consistent approach for all Costain people. We will ensure that all people


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activities continue to be inclusive and that we provide fair access and participation in training, promotions, reward and recognition, behavioural and technical competencies. We will continue to encourage and retain entrants into the industry from non-traditional backgrounds.

Costain is committed to providing a working environment that promotes and maintains the wellbeing and good health of our own staff and other personnel engaged in work for Costain. There is regular occupational health support on all Costain sites and offices and all new employees, who are undertaking safety critical roles are required to undergo a full medical examination. Also, we implemented random drugs and alcohol testing in 2009.

We continue to position Costain as ‘Being Number One’ for skills and development and to drive our clients’ strategy on this topic. We aim to encourage people to develop continuously their skills, broaden their knowledge and widen their experience within the business. We are committed to delivering training that is targeted and enhances individual and company performance. This is being aided by the Career Development Review, which for the first time enables us to ascertain competency, performance, mobility, ability and aspiration.

We implement our National Skills Academy model across our sites as appropriate. This model for work based learning centres will enable Costain to train local people into jobs at the same time as raising the skills of our own workforce. The key focus of this model will be around apprentices and supply chain engagement. During 2010, we will be looking at making available around 20 apprenticeships and delivering to them a structured development programme, including key skills, academic study and experience, leading to level 3 qualifications and a wide range of careers in construction, including front line supervision.

The Company is committed to positive policies, which promote equal opportunities and diversity in employment. The Company believes that it is in its best business interests to offer both employees and potential employees a fair and consistent environment in which they can contribute their best efforts and talent, in the knowledge that the Company will recruit, select, promote and train people on the basis of merit.

The Company will not discriminate on the grounds of race, gender, disability, nationality, religion, age, sexual orientation, family status or any other irrelevant factor and we will build a culture that values meritocracy, openness, fairness and transparency. Using fair, objective and innovative employment practices, as described above, the Company will endeavour to ensure that:

• all employees and potential employees are treated fairly and with respect at all stages of their employment;

• all employees have an equal chance to contribute and to achieve their potential; and

• all employees have the right to be free from harassment and bullying or any other form of unwanted behaviour.

The Company will support the supply chain and encourage its active commitment to our approach on equality and inclusion.

Although this policy is a fundamental part of the Company’s diversity strategy, it will only succeed if it is reinforced by a focussed and structured strategic diversity plan. In order to do this, the Company is committed to:

• Developing and cascading policies, benchmarking our approach to that of our sector;

• Recruiting and selecting the most suitable candidates for all roles, minimising the need for external recruitment by implementing sound development, training, promotion and transfer policies and continually reviewing the terms and conditions of employment;

• Providing offers of employment, which ensure that no Group employment on work rated as equivalent or on work of equal value in terms of effort, skill and decisions made, is treated less favourably than another on the basis of gender, marital status, age, sexual orientation, disability, religion, colour, nationality or race;

• Providing promotion opportunities and succession planning; • Offering training and development on a fair basis to all

employees to support them in their jobs, improve performance and develop the skills necessary for the future of the business; and

• Support the continuing employment, to the extent practicable, of employees who have become disabled whilst employed by the Company, providing training and reasonable adjustments where possible.

Companies in all business sectors are looking for effective ways to predict and control the risks involved in providing pension arrangements for their employees. Costain is no exception and in 2009, we undertook a review of our pension schemes. We worked closely with our Pensions Advisers, and after full consultation with affected employees, the Costain Pension Scheme and the Costain Group Stakeholder Plan were closed to existing contributory members on 30 September 2009. All employees were invited to join the Costain Pension Plan – a Group Flexible Retirement Plan – on 1 October 2009. As part of the changes to our pension arrangements, we introduced salary exchange as a more efficient way of making pension contributions. We will monitor the impact of the changes to the pension schemes and the introduction of salary exchange. We will explore further cost effective benefits, particularly in health, using salary exchange where possible.

All employment policies are reviewed regularly and available for staff to view on iCosnet, the Company’s intranet. In 2009, we have reviewed our policies on expenses and allowances.

Employee involvementThe Company provides information to its employees, both of a general company nature and to encourage awareness of financial and economic factors, which affect the Company in various ways. These include a monthly update to all staff from the Chief Executive, a Costain on-line news service (which replaced the Company in-house magazine), information via our electronic mail system, circulation of press releases, management briefings on Company results and a report to employees on the annual accounts of the Company.



Employee involvement in the Company’s performance is encouraged through participation in the Company’s share incentive schemes.

The Employee Consultative Committee (ECC) has now been running for a year, enabling our people to obtain a better understanding of, and wider interest in, matters affecting the organisation as a whole; to permit Staff and Management jointly to examine and discuss problems of concern to both and to seek, where possible, mutually acceptable solutions through a genuine exchange of views and information. The ECC facilitates discussions in areas of good practice and performance and provides the opportunity for members of Staff to suggest areas for performance improvement or innovation to enhance the competitive position of Costain. The ECC is also the body required by statute to consult on Health and Safety, the Environment, continuity of employment and transfer of undertakings. The ECC has recently had its profile raised within the business through its involvement in the consultation period prior to the change in pension provision. Our objective during 2010 is to continue further to raise this committee’s profile within the business. Participation and involvement are encouraged through regular management meetings with employees.

Policy and practice on payment of suppliersAs a result of the nature of the Group’s business, the contractual relationships with suppliers of goods and services and with sub-contractors vary according to circumstances. It is the Group’s policy to enter into an appropriate form of contractual agreement on payment terms when agreeing the terms of each transaction and to pay according to those terms. The Group does not follow any particular code or practice for the payment of creditors. In practice, the Group makes every effort to pay accordingly when it can be confirmed that the supplier has provided the goods or services in accordance with the relevant terms of the contract. The amount for trade creditors of the major subsidiary trading companies represents 47 (2008: 60) days of average daily purchases. The Company has no trade creditors (2008: Nil).

Significant agreementsThe directors are not aware of any significant agreements to which the Company and/or any of its subsidiaries or associates is a party that take effect, alter or terminate upon a change of control of the Company following a takeover bid, save in respect of the Facility Agreements relating to the Company’s banking and surety bonding facilities and that a subsidiary that ceased to be a subsidiary of the Company would cease to benefit from the Company’s financing arrangements. There are no agreements between the Company and its directors or employees providing for compensation for loss of office or employment that occurs because of a takeover bid.

Research and developmentThe Group is involved in research and development in all sectors in which it operates but specifically in highways, rail, airports, nuclear, energy & process, waste and water. The Group’s engineers and technical staff in these named sectors develop and deliver technical advances, processes and innovations in an effort to achieve practical, integrated solutions that incorporate the most advanced technologies, while taking account of the broader regulatory perspective and seek to resolve all scientific and technological uncertainties. In undertaking certain elements of this research and development work, the Group is supported by arrangements with certain British universities.

DonationsGroup charitable donations of £95,293 (2008: £68,759) were made during the year. Further information on charitable giving can be found in the Corporate Responsibility section of this report. No political donations were made (2008: £Nil).

As required by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, donations in excess of £2,000 must be reported in the Annual Report: £

Community and Sport 32,907WaterAid 12,164East Anglian Children’s Hospice 2,000Business in the Community 5,800Rainbow Trust Children’s Charity 2,157Cherished Memories 3,000Help for Heroes 2,200Kent Air Ambulance Trust 9,000CRASH 6,000 75,228

* A total of £20,065 was donated in amounts smaller than £2,000 and so are not included above.

Disclosure of information to auditorsThe directors who held office at the date of approval of this report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s external auditors are unaware; and each director has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Company’s external auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006.

AuditorsKPMG Audit Plc has expressed its willingness to continue in office, as independent auditor of the Company and a resolution to re-appoint will be proposed at the forthcoming Annual General Meeting.


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Directors’ IndemnityThere are no subsisting indemnities in favour of directors.

Directors’ conflicts of interestThere are procedures in place to deal with directors’ conflicts of interest arising under Section 175 of the Companies Act 2006 and such procedures have operated effectively from 1 October 2008.

Directors’ responsibilitiesThe directors’ responsibilities for the financial statements contained within this Annual Report and the directors’ confirmations required under DTR 4.1.12 are set out on page 70.

The Takeover Directive requires the disclosure of certain information in the Directors’ report. To the extent not disclosed elsewhere in the report, this information is set out below.

Rights and obligations attaching to sharesSubject to applicable statutes (in this section the ‘Companies Acts’), any resolution passed by the Company under the Companies Acts and other shareholders’ rights, shares may be issued with such rights and restrictions as the Company may by ordinary resolution decide, or (if there is no such resolution or so far as it does not make specific provision) as the Board may decide. Subject to the Articles, the Companies Acts and other shareholders’ rights, unissued shares are at the disposal of the Board.

VotingEvery member and every duly appointed proxy present at a general meeting or class meeting has, upon a show of hands, one vote and every member present in person or by proxy has, upon a poll, one vote for every share held by him. In the case of joint holders of a share, the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders and, for this purpose, seniority shall be determined by the order in which the names stand in the register in respect of the joint holding.

Restrictions on votingNo member shall be entitled to vote at any general meeting or class meeting in respect of any share held by him if any call or other sum then payable by him in respect of that share remains unpaid or if a member has been served with a restriction notice (as defined in the Articles) after failure to provide the Company with information concerning interests in those shares required to be provided under the Companies Acts.

The Company is not aware of any agreements between holders of securities that may result in restrictions on voting rights.

Dividends and Other DistributionsThe Company may by ordinary resolution from time to time declare dividends not exceeding the amount recommended by the Board. Subject to the Companies Acts, the Board may pay interim dividends, and also any fixed rate dividend, whenever the financial position of the Company, in the opinion of the Board, justifies its payment. If the directors act in good faith, they are not liable for any loss that shareholders may suffer because a lawful dividend has been paid on other shares which rank equally with or behind their shares.

The Board may withhold payment of all or any part of any dividends or other monies payable in respect of the Company’s shares from a person with a 0.25% interest in a class of the Company’s shares if such a person has been served with a restriction notice after failure to provide the Company with information concerning interests in those shares required to be provided under the Companies Acts.

Variation of RightsSubject to the Companies Acts, rights attached to any class of shares may be varied with the written consent of the holders of not less than three-fourths in nominal value of the issued shares of that class (calculated excluding any shares held as treasury shares), or with the sanction of a special resolution passed at a separate general meeting of the holders of those shares. At every such separate general meeting (except an adjourned meeting), the quorum shall be one or more persons holding or representing by proxy not less than one-third in nominal value of the issued shares of the class (calculated excluding any shares held as treasury shares). The rights conferred upon the holders of any shares shall not, unless otherwise expressly provided in the rights attaching to those shares, be deemed to be varied by the creation or issue of further shares ranking pari passu with them.

Restrictions on transfer of securities in the CompanyThere are no restrictions on the transfer of securities in the Company, except:

• that certain restrictions may from time to time be imposed by laws and regulations (for example, insider trading laws); and

• pursuant to the Listing Rules of the Financial Services Authority whereby certain employees of the Company require the approval of the Company to deal in the Company’s ordinary shares.

The Company is not aware of any agreements between holders of securities that may result in restrictions on the transfer of securities.

Amendment of Articles of AssociationUnless expressly specified to the contrary in the Articles of Association of the Company, the Company’s Articles of Association may be amended by a special resolution of the Company’s shareholders. The Company will at the Annual General Meeting to be held on 6 May 2010 seek shareholders’ approval to adopt new articles of association (the ‘New Articles’) in order to update the Company’s current articles of association (the ‘Current Articles’) primarily to take account of the coming into force of the Companies (Shareholders’ Rights) Regulations 2009 and the implementation of the last parts of the Companies Act 2006.



Appointment and replacement of directorsThe directors shall be not less than four (or two under the New Articles) and not more than eighteen in number. The Company may by ordinary resolution vary the minimum and/or maximum number of directors.

A director shall not be required to hold any shares in the Company. Directors may be appointed by the Company by ordinary resolution or by the Board. A director appointed by the Board holds office only until the next following Annual General Meeting of the Company and is then eligible for re-appointment. The Board or any committee authorised by the Board may from time to time appoint one or more directors to hold any employment or executive office for such period and on such terms as they may determine and may also revoke or terminate any such appointment.

At every Annual General Meeting of the Company, any director who has been appointed by the Board since the last Annual General Meeting, or who held office at the time of the two preceding Annual General Meetings and who did not retire at either of them, or who has held office with the Company, other than employment or executive office, for a continuous period of nine years or more at the date of the meeting, shall retire from office and may offer himself for re-appointment by the members. The Company may by special resolution remove any director before the expiration of his period of office. The office of a director shall be vacated if: (i) he resigns or offers to resign and the Board resolve to accept such offer; (ii) his resignation is requested by all of the other directors and all of the other directors are not less than three in number; (iii) he is or has been suffering from mental or physical ill health and the Board resolves that his office be vacated; (iv) he is absent without the permission of the Board from meetings of the Board (whether or not an alternate director appointed by him attends) for six consecutive months and the Board resolves that his office is vacated; (v) he becomes bankrupt or compounds with his creditors generally; (vi) he is prohibited by a law from being a director; (vii) he ceases to be a director by virtue of the Companies Acts; or (viii) he is removed from office pursuant to the Company’s Articles.

Powers of the directorsSubject to the Company’s Memorandum of Association (which will cease to apply in the event that the New Articles are approved), the Articles, the Companies Acts and any directions given by the Company by special resolution, the business of the Company will be managed by the Board who may exercise all the powers of the Company, whether relating to the management of the business of the Company or not. In particular, the Board may exercise all the powers of the Company to borrow money, to guarantee, to indemnify, to mortgage or charge any of its undertaking, property, assets (present and future) and uncalled capital and to issue debentures and other securities and to give security for any debt, liability or obligation of the Company or of any third party.

Powers in relation to the Company issuing its own sharesThe directors may only issue and buy back shares if authorised to do so by the Articles of Association or the shareholders in general meeting. At the Company’s Annual General Meeting held on 8 May 2008 shareholders granted an authority to the directors to allot or grant rights over ordinary shares up to an aggregate nominal amount of £10.47 million such authority to apply until 7 May 2013. As at 31 December 2009, no ordinary shares had been allotted save for any shares allotted in order to satisfy awards under employee share schemes and the 2008 and 2009 scrip dividends. The directors did not request authority to allot or to buy back any of the Company’s shares at the last Annual General Meeting in 2009 and they do not propose to do so at this year’s Annual General Meeting.

Major shareholdersDetails of the major shareholders of the Company are given on page 58 of the Directors’ report.

Securities carrying special rightsNo person holds securities in the Company carrying special rights with regard to control of the Company.

Rights under the employee share schemesExcellerate HRO Share Plan Services (Guernsey) Limited, as Trustee of the Costain Group Employee Trust, holds 0.004% of the issued share capital of the Company as at 31 December 2009 on trust for the benefit of ‘good leavers’ from the Company who are members of any Save As You Earn Plan and leave the employment of the Company before the scheme matures.

Annual General MeetingThe Annual General Meeting of the Company will be held in the East Room at Tate Modern, Bankside, London, SE1 9TG (via the River Entrance) on Thursday 6 May 2010 at 11.00 am.

The Notice of Annual General Meeting will be sent in paper form to all shareholders. It will also be available on the Company’s website – www.costain.com. This 2009 Annual Report will be available on the Company’s website. You may recall that the Company now provides this information in electronic form unless you have elected to receive the documents in paper form. For those who elected for paper form, this 2009 Annual Report will accompany the Notice of Annual General Meeting.

The Notice of Annual General Meeting contains: a letter from the Chairman; the Notice of Annual General Meeting; an explanatory note on the proposed resolutions; and, as one of the resolutions relates to the adoption of the New Articles, an explanatory note on the principal changes to the Company’s Articles of Association.

Mr James Morley, the Chairman of the Audit Committee and Mr Mike Alexander, the Chairman of the Remuneration Committee will be available at the Annual General Meeting.

By Order of the Board

Clive L Franks Company Secretary10 March 2010


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Directors’ remuneration report

IntroductionThis report, approved by the Board, has been prepared in accordance with the requirements of the Companies Act 2006, (the ‘Act’) and the Listing Rules of the Financial Services Authority. The Board has applied the principles of good governance relating to directors’ remuneration contained within the Combined Code on Corporate Governance – June 2008 (‘Combined Code’).

The Act requires the auditors to report to the Company’s shareholders on the audited information within the report and to state whether, in their opinion, those parts of the report have been prepared in accordance with the Act. The auditors will report on ‘Long-Term Incentive Plan’, ‘Save As You Earn Share Option Scheme’, ‘pension’, sums paid to third parties and on the tables relating to directors’ remuneration and directors’ interests section of this report. Other elements of this report are unaudited. The auditors’ opinion is set out on page 71.

Remuneration CommitteeThe Remuneration Committee (the Committee) members are Michael Alexander (Chairman), John Bryant and James Morley. Each of these non-executive directors is recognised by the Board as independent and has served throughout the year.

The Company’s Chairman and Chief Executive attend Committee meetings but by invitation only. They do not attend where their individual remuneration is discussed and no director is involved in deciding his own remuneration.

In 2009, the Committee met six times and details of the attendance at those meetings are provided in the Corporate Governance statement on page 50.

The Committee has authority to obtain advice from external independent remuneration consultants. It is solely responsible for their appointment, retention and termination and for approval of the basis of their fees and other terms. In the year to 31 December 2009, the following provided advice to the Committee:

• Hewitt New Bridge Street (HNBS) as independent remuneration advisors. HNBS also provided advice to the Company in connection with the closure of the Company’s Deferred Benefit Pension Scheme to future accrual; and

• Slaughter and May who drafted and advised on the rules of the deferred share bonus plan and associated documentation. Slaughter and May also provide legal advice to the Company.

Remuneration PolicyThe Committee determines remuneration policy for executive directors and other senior management with the aim of attracting, motivating and retaining executives of the appropriate calibre and expertise so that the Company is managed successfully for the benefit of its stakeholders. The Committee is aware that it should avoid paying more than is appropriate or necessary. The Committee accepts that total rewards should be set at levels that are competitive in the sector and to assist in determining this HNBS carried out an exercise to benchmark remuneration packages and their constituent elements with those of comparable organisations, primarily within the UK-based

contracting sector, to ensure that the remuneration packages within the Group bear reasonable comparison with those of other companies of a similar size. The Committee is, however, conscious that such comparisons must be viewed with caution in order to avoid the risk of an upward ratchet of remuneration levels without corresponding improvement in performance levels. The analysis and comparison exercises referred to earlier are only one element to assist the Committee in exercising its judgment; the Committee also takes into account personal performance.

In early 2009, with the assistance of HNBS, the Committee undertook a review of the reward structure for the executive directors and senior management which resulted in certain changes to the weightings as between different performance targets and the introduction of a wider usage in the calibration of annual bonus targets. A deferred share bonus plan was introduced to operate alongside the Long-Term Incentive Plan. The overall effect was to enhance the pay for performance principle and to strike a better balance between short term and longer term incentives. Subject to corporate performance, this can promote alignment through higher levels of share ownership and retention of key executives.

The Committee has concluded that the current remuneration policy remains appropriate, and intends to continue with this policy for executive directors and other senior management for 2010 and subsequent financial years.

Remuneration packagesRemuneration packages for executive directors and other member of senior management consist of the following elements:

• Basic salary; • Annual bonus;• Deferred share bonus plan;• Long-Term Incentive Plan;• Pension provision; and• Other benefits.

Basic salary – salary is the major element of the remuneration package. The Committee reviews in February/March of each year the salaries of the executive directors and the Company Secretary, having reviewed the performance of the individuals and, at the same time, gives guidance to the Chief Executive as to the matters to be taken into account in the salary review of other senior management and all other employees of the Group. The remuneration of the executive directors and other senior management is targeted broadly at the median position and is determined in the light of the levels of remuneration generally within the Company and other companies in the UK-based construction sector. The level of remuneration also takes account of the executive’s experience, responsibilities and performance. A salary increase, if awarded, is effective from 1 April in each year.

The Board took the decision in early 2009 that in the light of the then current economic climate it would be inappropriate to increase salaries in 2009.


Directors’ remuneration reportcontinued

The Committee have approved salary increases across the Company in 2010. This decision was influenced by the performance of the business during the challenges of 2009, the closure of the final salary pension scheme and demotivational impact of a second year of a salary freeze at a time when inflation is increasing. The basic salaries of the executive directors with effect from 1 April 2010 will be:

Basic salary Basic salary at 1 April at 1 April Executive Director 2009 2010

A Wyllie £375,000 £400,000A O Bickerstaff £240,000 £265,000

Annual bonus – an annual bonus scheme is a further component of the remuneration package for executive directors and other senior management. The targets for the annual bonus are set at the beginning of the year by the Committee and are reviewed with appropriate input from the Audit Committee at the end of the year. The Chief Executive has a maximum bonus potential of 100% of basic salary and the Finance Director has a maximum bonus potential of 80% of basic salary.

For the year ended 31 December 2009, 90% of the executive directors’ annual bonus metrics were set as measurable financial targets. These metrics included Group earnings before interest and tax, Group overhead costs, committed revenue and health and safety targets. The remaining 10% of the bonus was linked to personal development goals. Notwithstanding the economic conditions experienced during the year, the Group’s earnings before interest and tax increased by 14% over the previous year and other pre-set targets were met in full. No discretion has been used and no financial targets have been amended during the year. This has resulted in Mr Wyllie being awarded a bonus of £322,500 and Mr Bickerstaff being awarded a bonus of £165,120 for 2009.

The bonus payments are not pensionable and are payable in cash.

Deferred share bonus plan – the Committee introduced a deferred share bonus plan (DSBP) which was approved by the Board in 2009. On the introduction of the DSBP, the executive directors’ entitlement under the LTIP award was reduced from 100% of salary to 50% of salary. The first performance period for the DSBP was the financial year ending on 31 December 2009. The performance measure was Earnings Before Interest and Tax (EBIT) for the Group. If the EBIT achieved is above £19 million but below £21.5 million for the year ended 31 December 2009, a nil-cost option would be granted to participants on a sliding scale between 0% and 100% pro rata to the EBIT achieved. The EBIT for the Group for the year ended 31 December 2009 was £20.8 million and so the measure has been met as to 72%. The number of shares to which a participant in the DSBP will be entitled will be calculated on the basis of the monetary value of the deferred bonus divided by the average closing share price for the Group during the month of December 2009. The grant of the deferred bonus award will be

made in the six weeks following the preliminary announcement of the results for the financial year ended 31 December 2009. The deferred bonus award will vest on the second anniversary of the date of grant. The shares to satisfy the deferred bonus will be purchased by a trust on behalf of the Group and so the DSBP will not lead to any dilution of shareholder interest. A condition of the vesting of the deferred bonus is that the participants must be in employment with the Company and not under notice of termination (either given or received) on the date of vesting. There are carve-outs for good leavers (e.g. death, disability, redundancy, etc). However, if employment ceases for other reasons then the award lapses.

It is intended that the DSBP includes a mechanism to allow the Company to deliver the DSBP awards in a tax-efficient manner at no additional cost to the Company by delivering to participants a combination of HM Revenue & Customs (HMRC) tax-approved market value share options over a fixed number of shares and non tax-approved market value share options over a fixed value of shares. These two sets of options would be linked, both in terms of value and on exercise, and would mirror the same commercial terms as a DSBP award.

It is intended that the first awards under the combined arrangement will be granted in March 2010, to eligible employees.

The advantages of the DSBP include: it is a more focussed incentive arrangement in that executives are awarded for delivering good performance in the shorter term; it is more retentive in that executives know the value of the awards after one year; it promotes greater alignment with shareholders because after the grant of the deferred share award the executives own a direct interest in shares; it has a lower expected accounting cost for the Company; and the combined arrangement allows for greater tax efficiencies for the participant and the Company.

For its inaugural year and in response to the economic conditions, the executive directors were given a transitional maximum potential of 35% of salary under the DSBP in respect of the year ended 31 December 2009. This means that the executive directors will be granted a deferred share bonus with a value equivalent to 25.2% of their salary in respect of the results for 2009. For 2010, the executive directors will have a maximum potential of 50% of salary under the DSBP. With the reduction of the LTIP grant from 100% of salary to 50% of salary, the overall level of variable remuneration remains broadly the same as in 2009 and earlier years.

As it has this year in respect of the 2009 DSBP award, the Committee will disclose on a retrospective basis the EBIT measure for 2010 in next year’s Directors’ remuneration report.

Long-Term Incentive arrangements – the Long-Term Incentive Plan (LTIP) was approved by shareholders on 24 May 2002. The LTIP was designed to reward executive directors and other senior management by reference to the performance of the Group. The LTIP allows for conditional awards to a


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participant with a maximum face value of up to 100% of basic annual salary at the date of grant of the award. In respect of all outstanding awards other than the award made in 2009, the Chief Executive and Finance Director are entitled to a number of shares calculated by reference to 100% of their annual salary at the time of grant. In 2009, following the introduction of the DSBP, the Committee decided that the entitlement of the executive directors to conditional awards under the LTIP should be reduced from 100% of their basic salary at the date of grant of award to 50% of their basic salary. The performance condition for each award was earnings per share (EPS) as the Committee considers this to be the most appropriate performance target in order to focus on achieving a demanding business plan.

The performance conditions for unvested awards are as follows:

Award made on 18 April 2007In the event that an EPS of 3.27p was achieved for the financial year ended 31 December 2010, 25% of the award would vest;

In the event that an EPS of 3.71p was achieved for the financial year 31 December 2010, 100% of the award would vest; and

In the event that an EPS was achieved above 3.27p but below 3.71p for the year ended 31 December 2010, an award would vest on a sliding scale between 25% and 100% pro rata to the EPS actually achieved.

Award made on 21 April 2008In the event that an EPS of 3.09p was achieved for the financial year ended 31 December 2010, 25% of the award would vest;

In the event that an EPS of 3.43p was achieved for the year ended 31 December 2010, 100% of the award would vest; and

In the event that an EPS above 3.09p but below 3.43p was achieved for the financial year ended 31 December 2010, an award would vest on a sliding scale between 25% and 100% pro rata to the EPS actually achieved.

Award made on 7 April 2009In the event that an EPS of 2.10p was achieved for the financial year ending 31 December 2011, 15% of the award would vest;

In the event that an EPS of 2.75p was achieved for the financial year ending 31 December 2011, 100% of the award would vest; and

In the event that an EPS was achieved above 2.10p but below 2.75p for the year ending 31 December 2011, an award would vest on a sliding scale between 15% and 100% pro rata to the EPS actually achieved.

Details of the executive directors’ participation in the LTIP are as follows:

Maximum number of shares subject to award

Granted Lapsed Vested Date At 1 Jan during during during At 31 Dec Exercisable Name of Director Granted 2009 the year the year the year 2009 from

A Wyllie 19.09.05 777,715 – 777,715 – – – 21.04.06 696,855 – – – 696,855* – 18.04.07 775,998 – – – 775,998 March 2011 21.04.08 1,546,391 – – – 1,546,391 March 2011 07.04.09 – 824,175 – – 824,175 March 2012A O Bickerstaff 10.10.06 382,376 – – – 382,376* – 18.04.07 434,109 – – – 434,109 March 2011 21.04.08 907,216 – – – 907,216 March 2011 07.04.09 – 527,472 – – 527,472 March 2012

Notes(a) The awards, which are expressed as options, are subject to an exercise price of £1. (b) The average closing middle market price of ordinary shares of 5p each in the Company for the dealing day immediately preceding the date of the

grant for the 2007 award was 51p, for the 2008 award was 24.25p and for the 2009 award was 22.75p. (c) The number of ordinary shares of 5p each still outstanding and the subject of the 2007 award is 1,210,107 (2008: 1,210,107) and the 2008 award

is 2,453,607 (2008: 2,453,607) and the 2009 award is 7,339,788.(d) At 31 December 2009, the derived mid-market price of the ordinary shares of the Company, as advised by the Company’s Brokers, was 24.75p.

The range of the share price of the ordinary shares during 2009 was 19.5p to 35p.

* The respective awards to Mr Wyllie and Mr Bickerstaff of 696,855 and 382,376 ordinary shares of 5p each in the Company lapsed when it became apparent in March 2010 that the performance target had not been met.



In May 2007, the Committee introduced the Phantom for members of the Executive Board (excluding the executive directors) and other members of senior management. The rules of the Phantom closely follow those of the LTIP but, whereas the LTIP normally results in the award of shares if performance conditions are met, the Phantom results in the award of cash if the performance target is met. The Phantom is driven by a notional award of shares in the same way as the LTIP but the cash received by the participant is calculated by converting to cash at the time the award matures the value of the notional number of shares that the participant would have received if the performance target is met. The Phantom, which did not require shareholder approval, was adopted by the Company on 9 May 2007. Awards have been made on 14 June 2007 and 21 April 2008 with the same performance targets as apply to the share based awards made to the executive directors in the same year. Following the introduction of the DSBP, no further awards will be made under the Phantom.

Save As You EarnA Save As You Earn Share Option Scheme (the Plan) was approved by shareholders at the 2002 Annual General Meeting. All eligible employees and executive directors are entitled to participate in the Plan. The option prices of the shares under the Plan that were impacted by the 2007 rights issue were adjusted in 2007.

The Company granted options on 22 October 2002 at an option price of 17.43p per share and the entitlement to participate was subject to the proviso that the eligible employee had been in the employment of the Company for 12 months. The Company granted options on 21 October 2004 at an option price of 29.29p and participants were not subject to any service qualification. The Company granted options on 18 May 2007 at an option price of 33.30p and participants were not subject to any service qualification. The Company granted options on 23 May 2008 at an option price of 19.60p and participants were not subject to any service qualifications. Mr Wyllie and Mr Bickerstaff participated in the 2008 Plan. The details are given below:

Number of Options At Granted Exercised Lapsed At Date 1 Jan during during during 31 Dec Exercise Exercisable Name of Director granted 2009 the year the year the year 2009 price from

A Wyllie 23.05.08 47,959 – – – 47,959 19.60p Jul-Dec 2011

A O Bickerstaff 23.05.08 47,959 – – – 47,959 19.60p Jul-Dec 2011

Details of the grants made under the Plan are shown in Note 20 to the financial statements on pages 103 to 106.

No payments were made to or benefits received by the executive directors during the year under any long-term incentive scheme.

Pension arrangements – neither executive director participated in the Group’s main registered pension scheme, which was closed to the future accrual of benefits with effect from 30 September 2009. Senior management participated in the executive section of the Group’s main registered pension scheme up until 30 September 2009. From 1 October 2009, a new Group Flexible Retirement Plan was set up with the Standard Life for employees and senior management.

Members of senior management joining the Group on or after 1 October 2009 are offered pension provision on a defined contribution basis through the Group Flexible Retirement Plan and they are covered for a lump sum death in service benefit of four times basic salary through a separate life assurance scheme.

In the case of Mr Wyllie, he is entitled, under his terms of engagement, to an annual pension allowance of 22% of his basic salary. The Company contributes the pension allowance to the Scottish Widows Plc stakeholder pension scheme. The Company contributed a sum of £82,500 (2008: £80,850) towards Mr Wyllie’s pension provision during the year. Mr Bickerstaff is entitled, under his terms of engagement, to an annual pension allowance of 22% of his basic salary. The Company contributes the pension allowance to the Winterthur Life stakeholder pension scheme. The Company contributed a sum of £52,066 (2008: £46,915) towards Mr Bickerstaff’s pension provision during the year.

Life assurance cover of four times basic salary is provided through the Costain Life Assurance Scheme. The annual premiums payable in respect of life assurance for Mr Wyllie and Mr Bickerstaff were respectively £2,531 (2008: £4,410) and £1,568 (2008: £2,559).

Benefits – Benefits comprise primarily of the provision of a company car or car allowance, fuel and medical insurance and the amounts stated exclude the pension and life assurance costs identified separately under ‘Pension Arrangements’. The amounts stated also exclude the cost of permanent health insurance, which is provided by the Group to all staff employees under a general policy with no separately-identifiable costing in respect of individual beneficiaries. The premiums attributable to Messrs Wyllie and Bickerstaff in respect of permanent health insurance, based on a proportion of total cost, were respectively £1,875 (2008: £1,837) and £1,183 (2008: £1,066).


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Contracts of Service – The executive directors have service contracts that can be terminated by either party on the giving of one year’s notice. The Remuneration Committee considers that such notice periods are reasonable and fair in the interests of the Group and the individual concerned, having regard to prevailing practice amongst public companies both in the industry in which the Group operates and elsewhere.

There is no provision for payment of predetermined compensation in case of wrongful termination by the Group. The Remuneration Committee also believes that a robust line should be taken on reducing compensation to reflect the departing directors’ obligations to mitigate loss.

Mr Wyllie’s service agreement is dated 25 April 2005 and provides for him to serve the Company as Chief Executive or in such capacity of a like status as the Company may require. Mr Wyllie’s service agreement terminates automatically when he reaches the age of 60 years. Subject to that, Mr Wyllie’s engagement as Chief Executive can be terminated on 12 months’ notice given at any time.

Mr Bickerstaff’s service agreement is dated 3 March 2006 and provides for him to serve the Company as Finance Director or in such other capacity of a like status as the Company may require. Mr Bickerstaff’s service agreement terminates automatically when he reaches the age of 60 years. Subject to that, Mr Bickerstaff’s engagement as Finance Director can be terminated on 12 months’ notice given at any time.

Outside Appointments – The Company encourages executive directors to take an outside appointment, with the prior consent of the Company, in the belief that such appointments broaden their skills and the contribution, which they can make to the Company’s performance. However, not more than one such appointment may be undertaken except in special circumstances. There must be no conflict of interest, and the time to be devoted to the outside appointment must be reasonable in relation to the individual’s commitment to the Company. Fees paid for outside appointments may be retained by the individual concerned. The Company announced on 7 April 2009 that Mr Wyllie had been appointed a Non-Executive Director of Scottish Water. The fee received and retained by Mr Wyllie is £19,872 per annum.

Total shareholder return performance graph The graph below shows the Company’s Total Shareholder Return (TSR) performance compared to the FTSE All-Share Index TSR over the last five years, namely the period from 1 January 2005 to 31 December 2009. TSR is defined as share price growth plus reinvested dividends. The FTSE All-Share Index TSR has been rebased so that it starts at the same TSR point as the Company on 1 January 2005. As a broad index is required for a comparison, the Board is of the opinion that the FTSE All-Share Index is the most appropriate for the Company as the Company is a constituent part of that index.

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Costain

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Directors’ remunerationThe aggregate directors’ remuneration for the year ended 31 December 2009 was £1,457,902 as set out in the following table:

Salary/fee Bonus Benefits 2009 2008Name of Director £ £ £ Total £ Total £

Executive Directors A Wyllie 375,000 322,500 13,314 710,814 723,634A O Bickerstaff 236,666 165,120 11,814 413,600 391,279

Non-Executive DirectorsD P Allvey 120,000 – – 120,000 120,000M H Hamid¹ 36,088 – – 36,088 39,000M R Alexander 45,000 – – 45,000 44,250J M Bryant 45,000 – – 45,000 44,250J Morley 47,500 – – 47,500 46,750S Y Shehata² 19,500 – – 19,500 39,000S G Younis³ 20,400 – – 20,400 –Former Directors – – – – 27,389Total 945,154 487,620 25,128 1,457,902 1,475,552

1 Resigned 4 December 2009.2 Resigned 23 June 2009.3 Appointed 23 June 2009.

The Company discloses the bonuses above on a payable basis.

Mr Wyllie is entitled to a performance related bonus for 2009 of £322,500. Mr Bickerstaff is entitled to a performance related bonus for 2009 of £165,120.

No compensation was paid to a former director for loss of office during 2009 (2008: £Nil).

Payments made to third parties in respect of directors’ services amounted to £36,088 (2008: £52,639). This figure is included within the directors’ emoluments.

There are no alternate directors.

The emoluments of the highest paid director were £710,814 (2008: £723,634); both figures exclude attributable pension contributions.

Directors’ interestsDirectors’ interests recorded by the Company are as follows:

Name of Director At 01.01.09 At 31.12.09

D P Allvey a 52,500 52,500M H Hamid – –+

A Wyllie a 268,009 275,938†

b 777,715 – c 696,855 696,855 f 775,998 775,998 g 1,546,391 ,1,546,391 h 47,959 47,959 i – 824,175A O Bickerstaff a 120,000 120,000 d 382,376 382,376 e 401,495 – f 434,109 434,109 g 907,216 907,216 h 47,959 47,959 i – 527,472J M Bryant a 90,194 92,861†

M R Alexander a 41,232 42,452†

J Morley a 50,000 50,000S Y Shehata – –+

S G Younis –º –


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Notes to Directors’ interests(a) Costain PLC ordinary shares of 5p each. (b) Options granted on 19 September 2005 to acquire Costain Group PLC ordinary shares of 5p each under the 2005 Long-Term

Incentive Plan. This option lapsed in 2009. (c) Options granted on 21 April 2006 to acquire Costain Group PLC ordinary shares of 5p each under the 2006 Long-Term Incentive

Plan. This option lapsed in March 2010. (d) Options granted on 10 October 2006 to acquire Costain Group PLC ordinary shares of 5p each under the 2006 Long-Term

Incentive Plan. This option lapsed in March 2010.(e) Options granted on 10 October 2006 to acquire Costain Group PLC ordinary shares of 5p each. This option lapsed in 2009. (f) Options granted on 18 April 2007 to acquire Costain Group PLC ordinary shares of 5p each under the 2007 Long-Term

Incentive Plan. (g) Options granted on 21 April 2008 to acquire Costain Group PLC ordinary shares of 5p each under the 2008 Long-Term

Incentive Plan. (h) Options granted on 23 May 2008 to acquire Costain Group PLC ordinary shares of 5p each under the 2008 Save As You Earn

Share Option Plan.(i) Options granted on 7 April 2009 to acquire Costain Group PLC ordinary shares of 5p each under the 2009 Long-Term Incentive Plan.º At date of appointment. + At date of resignation.† Messrs Alexander, Bryant and Wyllie participated in the Scrip dividend scheme and during the course of the year were issued with 1,220, 2,667 and 7,929

ordinary shares of 5p each respectively.

All interests are beneficial. Particulars of directors’ options are contained in the register of directors’ interests. The basis on which executive directors participate in Long-Term Incentive Plans is decided by the Remuneration Committee, except for the Costain SAYE Scheme which is open to all relevant UK employees. Non-executive directors do not participate in any of these schemes.

No options were exercised by directors during the year.

Details of all outstanding options are set out in Note 20 to the financial statements on pages 103 to 106.

Non-executive directorsThe independent non-executive directors have letters of appointment. These cover, amongst other things, the initial terms for which the independent non-executive directors are appointed, a general statement on their role and duties, and the fees they will receive as a non-executive director. The dates of their original appointment were as follows Date of Expiry of Non-executive Director Appointment current term*

David P Allvey 01.11.2001 31.10.2010John M Bryant 01.02.2002 31.01.2011Mike R Alexander 25.07.2007 24.07.2010James Morley 09.01.2008 08.01.2011Samer G Younis 23.06.2009 22.06.2012

* Subject to election at the AGM following their appointment and subsequent re-election at intervals of no more than three years in accordance with the Company’s Articles of Association.

The appointment of an independent non-executive director can be terminated by reasonable notice on either side. At the end of the initial period, the appointment may be continued by mutual agreement. Messrs Allvey, Alexander, Bryant and Morley are not entitled to compensation for loss of office.

The nominee non-executive directors, as indicated in the Directors’ Report, hold office for as long as the shareholder nominating them holds a specific percentage of the issued share capital of the Company. The nominee non-executive directors are nevertheless required to stand for re-election in the usual way and are not entitled to compensation for loss of office. Currently, only one of the two major shareholders has appointed a nominee to sit on the Board.

Under the terms of reference of the Remuneration Committee, the fee of the Chairman is determined and recommended to the Board following consultation between the non-executive directors acting through the Remuneration Committee and the Chief Executive. The fees payable to all other non-executive directors are recommended to the Board following consultation between the Chairman and the Chief Executive. The fees of the Chairman and the other non-executive directors were to be reviewed annually in October but the Board on the advice of the Committee has decided that the fees payable to the Chairman and the other non-executive directors will be reviewed in February/March in each year at the same time as the employees of the Group and any increase will be effective as from 1 April in each year.

The fees were not adjusted in 2009. However, a review was undertaken by HNBS early in 2010 to determine the appropriate level of fees for the Chairman and non-executive directors of the Company. As a result of the advice received from HNBS, it was decided not to adjust the fees in 2010.

This report was approved by the Board of directors on 10 March 2010 and has been signed on its behalf by:

Michael R Alexander Chairman of the Remuneration Committee10 March 2010


Statement of Directors’ responsibilities

The directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations.Company law requires the directors to prepare the Group and parent company financial statements for each financial year. Under that law, they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis.

Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of their profit or loss for that period.

In preparing each of the Group and parent company financial statements, the directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgments and estimates that are reasonable and prudent;

• state whether they have been prepared in accordance with IFRSs as adopted by the EU; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business.

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the directors are also responsible for preparing a Directors’ report, Directors’ remuneration report and Corporate governance statement that comply with that law and those regulations.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

We confirm that to the best of our knowledge:

• the financial statements, prepared in accordance with the applicable set of accounting standards give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

• the Directors’ report, the Business & Operational review, the Principal risks, Key Performance Indicators and the Financial review sections of this report include a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

On behalf of the Board


Andrew Wyllie Chief Executive10 March 2010


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Independent Auditors’ Report to the members of Costain Group PLC

We have audited the Group and parent company financial statements of Costain Group PLC for the year ended 31 December 2009 set out on pages 72 to 111. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditorsAs explained more fully in the Statement of Directors’ responsibilities set out on page 70, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (‘APB’s’) Ethical Standards for Auditors.

Scope of the audit of the financial statementsA description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/UKP.

Opinion on financial statementsIn our opinion:

• the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2009 and of the Group’s profit for the year then ended;

• the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;

• the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and

• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as regards the Group financial statements, Article 4 of the IAS Regulation.

Opinion on other matters prescribed by the Companies Act 2006In our opinion:

• the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006;

• the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

• information given in the Corporate governance statement on pages 49 to 56 with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements.

Matters on which we are required to report by exceptionWe have nothing to report in respect of the following:Under the Companies Act 2006 we are required to report to you if, in our opinion:

• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

• the parent company financial statements and the part of the Directors’ remuneration report are not in agreement with the accounting records and returns; or

• certain disclosures of directors’ remuneration specified by law are not made; or

• we have not received all the information and explanations we require for our audit.

Under the Listing Rules we are required to review: • the directors’ statement, set out on page 57, in relation to going

concern; and• the part of the Corporate governance statement on pages 49 to

56 relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review.

S McCallion (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory Auditor 8 Salisbury Square London EC4Y 8BB 10 March 2010


Consolidated income statementYear ended 31 December

2009 2008 Notes £m £m

Revenue 3 1,061.1 996.0Less: Share of joint ventures and associates revenue 13 (67.7) (93.4)Group revenue 993.4 902.6

Cost of sales (949.2) (861.3)Gross profit 44.2 41.3

Administrative expenses (22.2) (21.8)Group operating profit 22.0 19.5

Profit on sale of interests in joint ventures and associates 2.0 2.7 Share of results of equity accounted joint ventures and associates 13 (3.2) (3.9)Profit from operations 3 20.8 18.3

Finance income 7 26.0 34.8 Finance expense 7 (28.7) (30.0)Net finance (expense)/income (2.7) 4.8

Profit before tax 4 18.1 23.1 Income tax expense 8 (3.5) (4.9)Profit for the year attributable to equity holders of the parent 14.6 18.2

Earnings per shareBasic 9 2.3p 2.9pDiluted 9 2.3p 2.9p During the year and the previous year, no businesses were acquired. The impact of business disposals in either year was not material and, therefore, all results are classified as arising from continuing operations.


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Consolidated statement of comprehensive income and expenseYear ended 31 December

2009 2008 £m £m

Profit for the year 14.6 18.2

Exchange differences on translation of foreign operations (3.6) 9.7 Cash flow hedges Group: Effective portion of changes in fair value during year (0.4) 0.9 Net change in fair value of cash flow hedges transferred to retained earnings (0.9) 0.1 Tax recognised on changes in fair value 0.4 (0.3) Joint ventures and associates: Effective portion of changes in fair value (net of tax) during year 2.7 (10.9) Disposed of during year (net of tax) 1.9 (0.7)Actuarial losses on defined benefit pension scheme (67.4) (10.5)Tax recognised on actuarial losses recognised directly in equity 18.9 3.0 Other comprehensive expense for the year (48.4) (8.7) Total comprehensive (expense)/income for the year attributable to equity holders of the parent (33.8) 9.5

Company statement of comprehensive income and expenseThe Company does not have any comprehensive income or expense, other than a profit for the year of £2.1 million (2008: loss of £0.8 million).


Consolidated statement of financial positionAs at 31 December

2009 2008 Notes £m £m

AssetsNon-current assetsProperty, plant and equipment 11 11.5 7.7 Intangible assets 12 1.0 1.8 Investments in equity accounted joint ventures 13 27.2 32.2 Investments in equity accounted associates 13 1.6 0.1 Loans to equity accounted joint ventures 13 12.8 9.5 Loans to equity accounted associates 13 2.5 0.9 Other receivables 14 12.7 6.0 Deferred tax 8 34.6 18.9 Total non-current assets 103.9 77.1

Current assetsInventories 2.4 1.6 Trade and other receivables 14 201.9 180.3 Cash and cash equivalents 15 120.8 147.3 Total current assets 325.1 329.2 Total assets 429.0 406.3

EquityShare capital 21 31.7 31.7 Share premium 1.9 1.7 Foreign currency translation reserve 7.0 10.6 Hedging reserve (9.0) (12.7)Retained earnings (35.4) 2.3 Total equity attributable to equity holders of the parent (3.8) 33.6 LiabilitiesNon-current liabilities Retirement benefit obligations 20 104.7 50.2 Other payables 18 4.5 2.4 Provisions for other liabilities and charges 19 3.1 8.0 Total non-current liabilities 112.3 60.6 Current liabilities Trade and other payables 18 313.3 305.0 Income tax liabilities 8 1.7 1.7 Bank overdrafts 15 0.3 0.4 Interest bearing loans and borrowings 16 – 0.3 Provisions for other liabilities and charges 19 5.2 4.7 Total current liabilities 320.5 312.1 Total liabilities 432.8 372.7 Total equity and liabilities 429.0 406.3 The financial statements were approved by the Board of Directors on 10 March 2010 and were signed on its behalf by: A Wyllie Director A O Bickerstaff Director

Registered number: 1393773


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Company statement of financial positionAs at 31 December

2009 2008 Notes £m £m

AssetsNon-current assetsInvestments in subsidiaries 13 114.5 113.3 Total non-current assets 114.5 113.3

Current assetsTrade and other receivables 14 1.6 1.9 Cash and cash equivalents 15 26.3 66.7 Total current assets 27.9 68.6 Total assets 142.4 181.9

EquityShare capital 21 31.7 31.7 Share premium 1.9 1.7 Other reserve 2.3 1.2 Retained earnings 44.9 47.7 Total equity attributable to equity holders of the parent 80.8 82.3 LiabilitiesNon-current liabilities Provisions for other liabilities and charges 19 1.5 1.6 Total non-current liabilities 1.5 1.6 Current liabilities Trade and other payables 18 58.0 96.0 Income tax liabilities 8 1.7 1.7 Provisions for other liabilities and charges 19 0.4 0.3 Total current liabilities 60.1 98.0 Total liabilities 61.6 99.6 Total equity and liabilities 142.4 181.9

The financial statements were approved by the Board of Directors on 10 March 2010 and were signed on its behalf by: A Wyllie Director A O Bickerstaff Director

Registered number: 1393773


Consolidated statement of changes in equity

Share Share Translation Hedging Retained Total capital premium reserve reserve earnings equity £m £m £m £m £m £m

At 1 January 2008 31.4 1.1 0.9 (1.8) (4.2) 27.4 Comprehensive income/(expense) – – 9.7 (10.9) 10.7 9.5 Equity-settled share based payments – – – – 0.5 0.5 Shares issued 0.2 0.5 – – – 0.7 Dividends paid 0.1 0.1 – – (4.7) (4.5)At 31 December 2008 31.7 1.7 10.6 (12.7) 2.3 33.6 At 1 January 2009 31.7 1.7 10.6 (12.7) 2.3 33.6 Comprehensive income/(expense) – – (3.6) 3.7 (33.9) (33.8)Equity-settled share based payments – – – – 1.1 1.1 Dividends paid – 0.2 – – (4.9) (4.7)At 31 December 2009 31.7 1.9 7.0 (9.0) (35.4) (3.8)

Company statement of changes in equity Share Share Other Retained Total capital premium reserve earnings equity £m £m £m £m £m

At 1 January 2008 31.4 1.1 0.7 53.2 86.4 Comprehensive expense – – – (0.8) (0.8)Equity-settled share based payments – – 0.5 – 0.5 Shares issued 0.2 0.5 – – 0.7 Dividends paid 0.1 0.1 – (4.7) (4.5)At 31 December 2008 31.7 1.7 1.2 47.7 82.3 At 1 January 2009 31.7 1.7 1.2 47.7 82.3 Comprehensive income – – – 2.1 2.1 Equity-settled share based payments – – 1.1 – 1.1 Dividends paid – 0.2 – (4.9) (4.7)At 31 December 2009 31.7 1.9 2.3 44.9 80.8

There are no significant restrictions on the ability to remit Overseas reserves.

Details of the nature of the above reserves are set out below.

GroupTranslation reserveThe translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations that are not integral to the operations of the Company, as well as from the translation of liabilities that hedge the Group’s net investment in a foreign subsidiary.

Hedging reserveThe hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.

CompanyOther reserveThe Company grants certain of its subsidiaries rights to its equity instruments as part of its share-based payment incentive plans. The impact is recognised within this non-distributable reserve.


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Consolidated cash flow statementYear ended 31 December

2009 2008 Notes £m £m

Cash flows from/(used by) operating activitiesProfit for the year 14.6 18.2 Adjustments for:Depreciation of property, plant and equipment 4 2.7 2.1 Amortisation of intangible assets 4 0.9 1.0 Finance income 7 (26.0) (34.8)Finance expense 7 28.7 30.0 Share-based payments expense 5 1.1 0.6 Income tax 8 3.5 4.9 Profit on sales of interests in joint ventures and associates (2.0) (2.7)Share of results of joint ventures and associates 13 3.2 3.9 Amounts written off equity and loans to associate 13 – 0.4 Cash from operations before changes in working capital and provisions 26.7 23.6

(Increase)/decrease in inventories (0.8) 0.4 Increase in receivables (32.7) (24.7)Increase in payables 9.1 35.5 Movement in provisions and employee benefits (18.4) (11.5)Cash (used by)/from operations (16.1) 23.3 Interest paid (0.5) (0.7)Income tax received 0.1 – Net cash (used by)/from operating activities (16.5) 22.6

Cash flows from/(used by) investing activitiesInterest received 2.6 6.5 Dividends received from joint ventures and associates 13 0.6 0.7 Additions to property, plant and equipment 11 (7.2) (5.8)Additions to intangible assets 12 (0.1) (0.1)Proceeds of disposal of property, plant and equipment 0.4 – Proceeds from sales of interests in joint ventures and associates 8.7 5.0 Additions to investments in joint ventures and associates 13 (0.2) –Loan repayments by joint ventures and associates 13 0.7 –Additions to loans to joint ventures and associates 13 (9.7) (11.7)Net cash used by investing activities (4.2) (5.4)

Cash flows (used by)/from financing activitiesIssue of ordinary share capital – 0.7 Ordinary dividends paid (4.7) (4.5)Repayment of borrowings (0.3) (0.3)Net cash used by financing activities (5.0) (4.1)

Net (decrease)/increase in cash, cash equivalents and overdrafts (25.7) 13.1

Cash, cash equivalents and overdrafts at beginning of the year 15 146.9 133.4 Effect of foreign exchange rate changes (0.7) 0.4 Cash, cash equivalents and overdrafts at end of the year 15 120.5 146.9


Company cash flow statementYear ended 31 December

2009 2008 Notes £m £m

Cash flows from/(used by) operating activitiesProfit/(loss) for the year 2.1 (0.8)Adjustments for:Finance income (4.5) (2.5)Finance expense 0.7 1.1 Income tax (0.8) (0.6)Cash used by operations before changes in working capital and provisions (2.5) (2.8)

Decrease/(increase) in receivables 0.5 (0.6)(Decrease)/increase in payables (37.6) 10.8 Movement in provisions – 0.2 Cash (used by)/from operations (39.6) 7.6 Interest paid (1.1) (2.8)Income tax received 0.6 3.1 Net cash (used by)/from operating activities (40.1) 7.9

Cash flows from/(used by) investing activitiesDividends received 4.0 – Interest received 0.5 2.5 Additions to investment in subsidiaries (0.1) – Net cash from investing activities 4.4 2.5

Cash flows (used by)/from financing activitiesIssue of ordinary share capital – 0.7 Ordinary dividends paid (4.7) (4.5)Net cash used by financing activities (4.7) (3.8)

Net (decrease)/increase in cash and cash equivalents (40.4) 6.6

Cash and cash equivalents at beginning of the year 15 66.7 60.1 Cash and cash equivalents at end of the year 15 26.3 66.7


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Notes to the financial statements

1 General informationCostain Group PLC (‘the Company’) is a public limited company incorporated in the United Kingdom. The address of its registered office and principal place of business is disclosed on the last page of this Annual Report. The principal activities of the Company and its subsidiary undertakings (collectively referred to as ‘the Group’) are described in the Business & Operational review section of these financial statements. The consolidated financial statements of the Company for the year ended 31 December 2009 comprise the Group and the Group’s interests in associates, jointly controlled entities and jointly controlled operations. The parent company financial statements present information about the Company as a separate entity and not about its Group. The financial statements were authorised for issue by the directors on 10 March 2010. 2 Summary of significant accounting policiesBoth the Company financial statements and the Group consolidated financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (‘Adopted IFRS’) and their related interpretations. On publishing the parent Company financial statements here together with the Group financial statements, the Company is taking advantage of the exemption in Section 408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements.

Basis of preparationThese financial statements are presented in Pounds sterling, rounded to the nearest hundred thousand. The financial statements are prepared on the historical cost basis, except that financial assets and derivative financial instruments are stated at their fair value as required by IFRS.

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Judgements made by management in the application of IFRS that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in Note 26.

Going concernThe Group’s business activities and the factors likely to affect its future development, performance and position are set out in the Business & Operational review section of these financial statements. The financial position of the Group, its cash flows, liquidity position, borrowing and bonding facilities, use of financial instruments and hedging activities, exposure to credit risk and its objectives, policies and processes for managing its capital and financial risk are described in the Financial review section of these financial statements and in Note 17.

The Group’s principal business activity involves long-term contracts with a number of customers, mainly across the United Kingdom. To meet its day-to-day working capital requirements, it uses cash balances provided from shareholders’ capital and retained earnings. As part of its contracting operations, it is sometimes required to provide performance and other bonds. It satisfies these requirements by utilising its committed bonding facilities from banks and surety companies. These facilities, which since the year-end have been increased and extended in term, have financial covenants, including a profit-based one, which are tested quarterly.

The directors have acknowledged the guidance ‘Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009’ published by the Financial Reporting Council in October 2009. The Group has negative shareholders’ equity at 31 December 2009 arising from the market movements on the Group’s defined benefit pension scheme. This is a long-term liability and does not adversely impact the short-term financial requirements of the Group. The directors have considered these requirements, the Group’s current order book and future opportunities and its available bonding facilities. Having reviewed the latest projections, including the application of reasonable downside sensitivities, the directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook. Accordingly, they continue to adopt the going concern basis in preparing these financial statements.

Accounting policiesThe accounting policies set out below have, unless otherwise stated, been applied consistently by the Group and the Company to each period presented in these financial statements.

The following IFRSs which are effective for the first time have been applied in these financial statements. Where adoption is material the effect on the financial statements is detailed below.

• IFRS 8 ‘Operating Segments’ is applicable for the Group’s financial statements for the year ending 31 December 2009. The application of IFRS 8 does not impact the primary financial statements. The increased disclosure is set out in Note 3.

• IFRS 2 (Amendment), ‘Share-based payments’. The amended standard deals with vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only. All cancellations, whether by the entity or by other parties, should receive the same accounting treatment. This has had no material impact on the financial statements.

• IAS 23 (Amendment), ‘Borrowing costs’. The amendment requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs has been removed. The adoption of this amendment has had no impact on the financial statements.


Notes to the financial statementscontinued

2 Summary of significant accounting policies – continued• IAS 1 (Revised), ‘Presentation of financial statements’.

All non-owner changes in equity are required to be shown in a performance statement, but entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). The Group has applied IAS 1 (Revised) from 1 January 2009 and both the income statement and statement of comprehensive income have been presented.

• IAS 28 (Amendment), ‘Investments in associates’ (and consequential amendments to IAS 32, ‘Financial Instruments: Presentation’, and IFRS 7, ‘Financial instruments: Disclosures’). An investment in an associate is treated as a single asset for the purposes of impairment testing. Any impairment loss is not allocated to specific assets included within the investment, for example, goodwill. Reversals of impairment are recorded as an adjustment to the investment balance to the extent that the recoverable amount of the associate increases. The adoption of these amendments has had no impact on these financial statements.

• IAS 19 (Amendment), ‘Employee benefits’. The amendment clarifies that a plan amendment that results in a change in the extent to which benefit promises are affected by future salary increases is a curtailment, while an amendment that changes benefits attributable to past service gives rise to a negative past service cost if it results in a reduction in the present value of the defined benefit obligation. The definition of return on plan assets has been amended to state that plan administration costs are deducted in the calculation of return on plan assets only to the extent that such costs have been excluded from measurement of the defined benefit obligation. This amendment has had no effect on these financial statements.

• IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’ was early adopted by the Group in the 2008 financial statements.

• IFRIC 15, ‘Agreements for construction of real estates’. The interpretation clarifies whether IAS 18, ‘Revenue’, or IAS 11, ‘Construction contracts’, should be applied to particular transactions and is likely to result in IAS 18 being applied to a wider range of transactions. As most of the Group’s operations account for revenue under IAS 11, the adoption of IFRIC 15 has not had any significant impact on these financial statements.

Basis of consolidation(a) The Group’s financial statements include the financial

statements of the Company and subsidiaries controlled by the Company. Control exists where the Company or one of its subsidiaries has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

(b) Associates are operations over which power exists to exercise significant influence but not control, generally accompanied by a share of between 20% and 50% of the voting rights. Associates are accounted for using the equity method. If the share of losses equals its investment, the Group does not recognise further losses, except to the extent that there are

amounts receivable that may not be recoverable or there are further commitments to provide funding.

(c) Jointly controlled entities are those joint ventures where control is shared with another entity, established by contractual agreement. Jointly controlled entities are accounted for using the equity method from the date that the jointly controlled entity commences until the date that joint control of the entity ceases. The share of profits or losses are recognised in the income statement. If the share of losses equals the investment in the entity, no further losses are recognised, except to the extent that there is an amount receivable that may not be recoverable or there are further commitments to provide funding.

(d) Jointly controlled operations are those joint ventures over which joint control exists, established by contractual agreement, which are not legal entities. Where a jointly controlled operation exists, then the Group entity involved records the assets it controls, the liabilities and expenses it incurs and its share of income. Such jointly controlled operations are reported in the consolidated financial statements on the same basis. Transactions between Group companies and jointly controlled operations eliminate on consolidation.

(e) Intra-group balances and transactions together with any unrealised gains arising from intra-group transactions are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with jointly controlled entities and jointly controlled operations are eliminated to the extent of the interest in the entity or operation. The share of unrealised gains arising from transactions with associates and joint ventures is eliminated against the investment in the associate or joint venture. The share of unrealised losses is eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

Currency translationTransactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the statement of financial position date are translated to Pounds sterling at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. The assets and liabilities of foreign operations, including goodwill and fair value adjustments, are translated to Pounds sterling at foreign exchange rates ruling at the statement of financial position date. The revenues and expenses of foreign operations are translated to Pounds sterling at rates approximating to the foreign exchange rates ruling at the dates of these transactions. Exchange differences arising from the translation of the net investment in foreign operations and of related hedges are recognised directly in equity and those that have arisen since 1 January 2004, the date of transition to IFRS, are presented as a separate component of equity. Cumulative exchange differences are released into the income statement upon disposal. Translation differences that arose before the date of transition to IFRS in respect of all foreign operations are not presented as a separate component.


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2 Summary of significant accounting policies – continuedRevenue recognitionRevenue is measured at the fair value of the consideration received or receivable, net of value added tax and Group revenue includes the share of revenue of jointly controlled operations. Most of the revenue arises from construction contracts.

Construction contractsRevenue arises from increases in valuations on contracts. Where the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, revenue and costs are recognised by reference to the stage of completion of the contract activity at the statement of financial position date. Stage of completion is assessed by reference to the proportion of contract costs incurred for the work performed to date relative to the estimated total costs, except where this would not be representative of the stage of completion. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. Variations and claims are included in revenue where it is probable that the amount, which can be measured reliably, will be recovered from the customer. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred where it is probable those costs will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. Construction work in progress is stated at cost plus profit recognised to date less a provision for foreseeable losses and less amounts billed and is included in amounts due from customers for contract work. Cost includes all expenditure related directly to specific projects and an appropriate allocation of fixed and variable overheads based on normal operating capacity. Amounts valued and billed to customers are included in trade receivables. Where cash received from customers exceeds the value of work performed, the amount is included in credit balances on long-term contracts.

Other revenueRevenue from the sale of goods is recognised when the significant risks and rewards of ownership of the goods have been transferred to the buyer, the amount of revenue can be measured reliably and it is probable that the economic benefits associated with the transaction will flow to the Group.

Revenue from services is recognised when the service is provided.

Revenue in respect of property development sales is recognised on the transfer to the buyer of the significant risks and rewards of ownership. This is typically achieved when the legal title is transferred. If at the time that the sale reaches legal completion there remain infrastructure works to complete, the nature and extent of the Group’s continuing involvement is assessed to determine whether it is appropriate to recognise revenue. Where the conditions for revenue recognition are met, an appropriate amount is recognised. Amounts deferred in respect of infrastructure works are only recognised when such works are substantially complete.

Rental income is recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives are recognised as an integral part of the total rental income on a straight-line basis over the term of the lease.

Pre-contract costs Costs associated with bidding for contracts are written off as incurred. When it is probable that a contract will be awarded, usually when preferred bidder status is secured, costs incurred from that date to the date of financial close are carried forward in the statement of financial position and included in amounts due from customers for contract work. When financial close is achieved on PFI contracts, costs are recovered from the special purpose vehicle and pre-contract costs within this recovery that were not previously capitalised are credited to the income statement. When an interest in a special purpose vehicle is retained and that interest is accounted for as an associate or joint venture, the credit is recognised over the life of the construction contract to which the costs relate.

Intangible assetsIntangible assets are carried at cost less accumulated amortisation and impairment losses. Amortisation begins when an asset is available for use and is calculated on a straight-line basis to allocate the cost of the assets over their estimated useful lives (computer software – generally 3 to 5 years). Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.

Property, plant and equipmentProperty, plant and equipment is carried at cost less accumulated depreciation and impairment losses. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items. Cost comprises purchase price and directly attributable costs. Freehold land is not depreciated. For all other property, plant and equipment, depreciation is calculated on a straight-line basis to allocate cost less residual values of the assets over their estimated useful lives as follows:

Freehold buildings 50 years Leasehold buildings Shorter of 50 years or lease termPlant and equipment Remaining useful life

(generally 3 to 10 years)

The assets’ residual values and useful lives are reviewed, and adjusted, if appropriate, at each statement of financial position date.

Investments – CompanyCompany investments in subsidiaries are carried at cost less impairment losses less any pre-acquisition dividends received.



2 Summary of significant accounting policies – continuedPFI investmentsAs IFRIC 12 is not yet mandatory, the Group has opted to continue to apply elements of the approach set out in UK Financial Reporting Standard 5, ‘Reporting the substance of transactions’ (‘FRS 5’) in accounting for its interests in PFI projects, which are all undertaken by jointly controlled entities or associates. The investments recognise the FRS 5 finance debtors relating to concession arrangements at amortised cost, as defined by IAS 39. FRS 5 fixed assets relating to concession arrangements are accounted for in accordance with IAS 16 property, plant and equipment. The impact of adopting IFRIC 12 is not expected to be significant. The PFI associates and jointly controlled entities use derivatives to manage the financial risks to which they are exposed in relation to changes in interest rates and the Retail Price Index (‘RPI’). Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised directly in equity and the ineffective portion is recognised immediately in the income statement. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise. The presentation in the statement of financial position in respect of the investments in joint ventures and associates restricts the minimum carrying value to £Nil. Where the cost of investment is negative, due to losses incurred, then an amount equal to the negative position is applied to any outstanding loan balance with the investment or, where future funding commitments exist, a provision is made up to the value of the commitment. These transfers are shown within reclassifications in Note 13. Impairment of non-financial assets The carrying amounts of assets, other than inventories and deferred tax assets, are reviewed at each statement of financial position date to determine whether there is any indication of impairment. If any such indication exists, that asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset, or its cash-generating unit, is less than the recoverable amount. Impairment losses are recognised in the income statement. An impairment loss is reversed if there has been a change in the estimates resulting in the recoverable amount rising above the impaired carrying value of the asset. An impairment loss is reversed only to the extent that the carrying amount of the assets does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

ProvisionsA provision is recognised in the statement of financial position when there is a legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

A provision for onerous contracts is recognised when the expected benefits to be derived from a contract are lower than the unavoidable cost of meeting the obligations under the contract.

TaxationThe tax expense represents the sum of United Kingdom corporation tax and Overseas tax currently payable and Deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from profit before tax as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The liability for current tax is calculated using tax rates and laws that have been enacted or substantively enacted by the statement of financial position date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the statement of financial position liability method. Deferred tax liabilities are generally recognised for all temporary differences except for those specific exemptions set out below and deferred taxation assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each statement of financial position date. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or other assets and liabilities, other than in a business combination, in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for temporary differences arising on investments in subsidiaries and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is calculated at the tax rates based on those enacted or substantially enacted at the statement of financial position date. Deferred tax is charged or credited in the income statement except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Additional taxes arising from the distribution of dividends are recognised at the same time as the liability to pay the related dividend.


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2 Summary of significant accounting policies – continuedLeasesPayments made under operating leases are recognised as an expense in the income statement on a straight-line basis over the lease term. Any incentives to enter into operating leases are recognised as a reduction of rental expense over the lease term on a straight-line basis. Operating lease income is credited to the income statement as it is earned.

Financial guarantee contractsWhere the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within the Group, the Company considers these to be insurance arrangements and accounts for them as such. In this respect, the guarantee contract is treated as a contingent liability until such time as it becomes probable that a payment under the guarantee will be required.

Share capitalOrdinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

DividendsDividends are recognised as distributions in the period in which they are declared. Dividends proposed but not declared are not recognised but are disclosed in the note 10 to the financial statements.

Share-based paymentsThese comprise equity-settled and cash-settled share-based compensation plans.

Equity-settled share-based payments are measured at fair value at the date of grant and the fair value is expensed over the vesting period, based on the estimate of awards that will eventually vest. For cash-settled share-based payments, a liability equal to the portion of the services received is recognised at its current fair value determined at each statement of financial position date. Fair value is measured by the use of a Black-Scholes option pricing model.

IFRS 2 has been applied, in accordance with IFRS 1, to equity settled share options granted after 7 November 2002 and not vested at 1 January 2005.

Where options are granted over shares in the Company to employees of subsidiaries, the Company recognises in its financial statements an increase in the cost of investment in its subsidiaries equivalent to the equity-settled share-based payment charge recognised in its subsidiaries’ financial statements, with the corresponding credit being recognised directly in equity.

Retirement benefit obligationsA pension scheme is operated in the United Kingdom providing benefits based on pensionable salary. The assets of the scheme are held separately from those of the Group.

Pension scheme assets are measured using market values. Pension scheme liabilities are measured using a projected unit method and discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liability. The liability recognised in the statement of financial position in respect of the defined benefit pension scheme is the present value of the defined benefit obligations less the fair value of scheme assets at the statement of financial position date.

The increase in the present value of the liabilities of the defined benefit pension scheme expected to arise from employee service is charged to profit from operations in the period. The expected return on the scheme’s assets and the increase during the period in the present value of the scheme’s liabilities arising from the passage of time are included in finance income and finance expense respectively. Actuarial gains and losses are recognised in the consolidated statement of comprehensive income.

Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred. Financial assets and liabilitiesFinancial assets and financial liabilities are recognised in the Group’s statement of financial position when they become a party to the contractual provisions of the instrument.

(a) Financial assetsFinancial assets are classified as available-for-sale financial assets, loans and receivables and financial assets classified as at fair value through profit and loss. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. De-recognition of financial assets A financial asset is de-recognised only when the contractual rights to the cash flows from that asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. Effective interest method The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period. Income is recognised on an effective interest basis for debt instruments.

Loans and receivablesLoans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.



2 Summary of significant accounting policies – continuedTrade and other receivables Trade and other receivables do not carry interest and are stated at their initial value less impairment losses.

Impairment of financial assetsEstimated recoverable amounts are based on the ageing of the outstanding receivable and individual receivables are provided against when management deem amounts are not collectable.

Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Investments Investments are recognised and de-recognised on the trade date where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned. Investments are measured initially at fair value, plus transaction costs, except financial assets classified as at fair value through profit or loss, which are measured initially at fair value. (b) Financial liabilities Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. Where borrowings are the hedged item in an effective fair value hedge relationship, the carrying value is adjusted to reflect the fair value movements associated with the hedged risk.

De-recognition of financial liabilitiesFinancial liabilities are de-recognised only when the obligations are discharged, cancelled or expire. Trade payables Trade payables are non-interest bearing and valued at their nominal value. (c) Derivative financial instrumentsDerivative financial instruments are used in order to manage risks arising from changes in foreign exchange rates, interest rates and inflation.

Derivative financial instruments are measured at their fair value and those utilised include interest rate and RPI swaps and forward foreign exchange contracts. The fair value of forward exchange contracts is their quoted market value at the statement of financial position date. The fair value of interest rate and RPI swaps is the estimated amount that would be received or paid to terminate the swap at the statement of financial position date. Valuations for forward exchange contracts and interest rate and RPI swaps are determined using valuation techniques supported by reference to market values for similar transactions. Certain derivative financial instruments are designated as hedges in line with established risk management policies.

Hedges are classified as follows:

• Fair value hedges that hedge the exposure to changes in the fair value of a recognised asset or liability; and

• Cash flow hedges that hedge exposure to variability in cash flows that is attributable to either a particular risk associated with a recognised asset or liability or a forecast transaction.

For fair value hedges, any gain or loss from re-measuring the hedging instrument at fair value is recognised in the income statement and any gain or loss on the hedged item is adjusted against the carrying amount of the hedged item and similarly recognised in the income statement.

For cash flow hedges, the portion of the gain or the loss on the hedging instrument that is determined to be an effective hedge is recognised in equity, with any ineffective portion in the income statement. When hedged cash flows result in the recognition of a non-financial asset or liability, the associated gains or losses previously recognised in equity are included in the initial measurement of the asset or liability. For all other cash flow hedges, the gains or losses that are recognised in equity are transferred to the income statement in the same period in which the hedged cash flow affects the income statement.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss on the hedging instrument previously recognised in equity is retained in equity until the hedged transaction occurs. If the hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement.

Any gains or losses arising from changes in fair value of derivative financial instruments not designated as hedges are recognised in the income statement.

IFRSs endorsed but not appliedThe following Adopted IFRSs have been endorsed but are not mandatory and have not been applied by the Group in these financial statements. Their adoption is not expected to have a material affect on the financial statements unless otherwise indicated:

• Revised IFRS 3 ‘Business Combinations’ (mandatory for year commencing on or after 1 July 2009).

• Amendments to IAS 27 ‘Consolidated and Separate Financial Statements’ (mandatory for year commencing on or after 1 July 2009).

• IFRIC 12 ‘Service Concession Arrangements’ (mandatory for EU adopters for year commencing on or after 29 March 2009).

• IFRIC 15 ‘Agreements for the Construction of Real Estate’ (mandatory for year commencing on or after 1 January 2010).

• IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’ (mandatory for EU adopters for the year commencing on or after 30 June 2009).

• Amendments to IAS 39 ‘Financial Instruments: Recognition and Measurement: Eligible Hedged Items’ (mandatory for year commencing on or after 1 July 2009).

• Amendments to IAS 39 ‘Reclassification of Financial Assets: Effective Date and Transition’ (mandatory for year commencing on or after 1 July 2009).


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2 Summary of significant accounting policies – continued• IFRIC 17 ‘Distributions of Non-cash Assets to Owners’ (mandatory for year commencing on or after 1 November 2009).• IFRIC 18 ‘Transfer of Assets from Customers’ (mandatory for year commencing on or after 1 November 2009). • Amendments to IAS 32 ‘Financial Instruments: Presentation – Classification of rights issue’ (mandatory for year commencing

on or after 1 February 2010). • Improvements to IFRSs (issued 16 April 2009) (adoption dates varies but certain improvements are mandatory for year

commencing on or after 1 July 2009).

3 Business and geographical segment information by originFrom 1 January 2009, segment information is based on the information provided to the Chief Executive who is the chief operating decision maker. The segments are strategic business units with separate management and have different core customers or offer different services. The segments are discussed in the Business & Operational review section of these financial statements. Previously segments were determined and presented in accordance with IAS 14 ‘Segment Reporting’. Comparative segment information has been restated accordingly.

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The Group evaluates segment performance on the basis of profit or loss from operations before interest and income tax expense. The segment results that are reported to the Chief Executive include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

Intersegment sales and transfers are not material.

Land

Environ- Infra- Energy & Develop- Central

ment structure Community Process ment costs Total

Year ended 31 December 2009 £m £m £m £m £m £m £m

Segment revenue External revenue 376.2 364.8 155.7 96.7 – – 993.4 Share of revenue of joint ventures and associates 49.9 – 12.1 4.5 1.2 – 67.7 Total segment revenue 426.1 364.8 167.8 101.2 1.2 – 1,061.1

Segment profit Group operating profit/(loss) 13.1 16.9 (11.0) 9.1 – (6.1) 22.0 Profit on sales of joint ventures and associates – – 2.0 – – – 2.0 Share of results of joint ventures and associates (1.4) – 0.6 0.2 (2.6) – (3.2)Reportable segment profit/(loss) 11.7 16.9 (8.4) 9.3 (2.6) (6.1) 20.8 Net finance expense (2.7)Profit before tax 18.1 Reportable segment profit/(loss) is stated after charging the following:

Depreciation 0.8 1.1 – 0.8 – – 2.7 Amortisation 0.3 0.3 0.1 0.2 – – 0.9



3 Business and geographical segment information by origin – continuedSegment assets and liabilities Land

Environ- Infra- Energy & Develop- Central

ment structure Community Process ment costs Total

Segment assets £m £m £m £m £m £m £m

Reportable segment assets 99.7 76.8 19.1 42.3 35.4 0.3 273.6Unallocated assets: Deferred tax 34.6Cash and cash equivalents 120.8Total assets 429.0

Expenditure on non-current assets Property, plant and equipment – 6.4 0.2 0.6 – – 7.2 Intangible assets – – – 0.1 – – 0.1 Investments in joint ventures and associates – – 0.2 – – – 0.2 Loans to joint ventures and associates – – 4.0 – 5.7 – 9.7 Segment liabilities Reportable segment liabilities 125.7 92.8 61.1 46.0 – 0.5 326.1Unallocated liabilities: Retirement benefit obligations 104.7 Overdraft and loans 0.3 Income tax liabilities 1.7 Total liabilities 432.8

Land Environ- Infra- Energy & Develop- Central ment structure Community Process ment costs Total Year ended 31 December 2008 £m £m £m £m £m £m £m

Segment revenueExternal revenue 346.5 208.7 267.7 79.7 – – 902.6 Share of revenue of joint ventures and associates 70.5 – 17.9 3.9 1.1 – 93.4 Total segment revenue 417.0 208.7 285.6 83.6 1.1 – 996.0 Segment profit Group operating profit/(loss) 13.8 14.4 (8.5) 5.5 – (5.7) 19.5 Profit on sales of joint ventures and associates – – 2.7 – – – 2.7 Share of results of joint ventures and associates (2.2) – 0.6 – (2.3) – (3.9)Reportable segment profit/(loss) 11.6 14.4 (5.2) 5.5 (2.3) (5.7) 18.3 Net finance income 4.8 Profit before tax 23.1

Reportable segment profit/(loss) is stated after charging the following:

Depreciation 0.6 0.9 – 0.6 – – 2.1 Amortisation 0.4 0.3 0.1 0.2 – – 1.0


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3 Business and geographical segment information by origin – continuedSegment assets and liabilities Land Environ- Infra- Energy & Develop- Central ment structure Community Process ment costs Total Segment assets £m £m £m £m £m £m £m

Reportable segment assets 101.7 48.1 28.8 26.3 35.2 – 240.1Unallocated assets: Deferred tax 18.9Cash and cash equivalents 147.3Total assets 406.3

Expenditure on non-current assets Property, plant and equipment – 4.7 – 1.1 – – 5.8 Intangible assets – – – 0.1 – – 0.1 Loans to joint ventures and associates 4.0 – 4.9 – 2.8 – 11.7

Segment liabilities Reportable segment liabilities 142.4 70.8 71.4 35.0 – 0.5 320.1 Unallocated liabilities: Retirement benefit obligations 50.2 Overdraft and loans 0.7 Income tax liabilities 1.7 Total liabilities 372.7

Geographical informationIn presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets. Revenue Non-current assets 2009 2008 2009 2008 £m £m £m £m

United Kingdom 1,025.8 969.6 62.9 36.1 Spain 1.2 1.1 35.4 35.2 Rest of the World 34.1 25.3 5.6 5.8 1,061.1 996.0 103.9 77.1

Customers accounting for more than 10% of revenueOne customer (2008: one) in the Infrastructure segment accounted for revenue of £145.8 million (2008: £135.1 million) and one customer (2008: Nil) in the Environment segment accounted for revenue of £121.0 million.

4 Other operating expenses and income 2009 2008 £m £m

Profit before tax is stated after charging: Depreciation of property, plant and equipment (Note 11) 2.7 2.1 Amortisation of intangible assets (Note 12) 0.9 1.0 Hire of plant and machinery 36.5 30.1 Rent of land and buildings 3.3 4.2 and after crediting:Income from rent of land and buildings 1.9 1.7

2009 2008Auditors’ remuneration £m £m

Fees payable to the Group’s auditor for the audit of the annual financial statements 0.1 0.1 Fees payable to the Group’s auditor and its associates for other services– Audit of the Company’s subsidiaries, pursuant to legislation 0.4 0.4 – Other services relating to taxation advice (2008: Corporate finance transactions) 0.1 0.1 0.6 0.6

Amounts paid to the Company’s auditors and their associates in respect of services to the Company, other than the audit of the Company’s financial statements, have not been disclosed as the information is required to be disclosed on a consolidated basis.



5 Employee benefit expense 2009 2008Group £m £m

Wages and salaries 124.9 113.1 Social security costs 11.8 10.5 Pension costs (Note 20) 6.7 7.4 Share-based payments expense (Note 20) 1.1 0.6 144.5 131.6

2009 2008Average number of persons employed Number Number

Environment 1,248 1,543 Infrastructure 948 619 Community 374 570 Energy & Process 1,410 1,074 Central 23 23 4,003 3,829Company The Company does not employ any personnel, except for the directors considered in Note 6.

6 Remuneration of directorsDetails of the directors’ remuneration, pension entitlements, interest in the long term incentive plans, contingent awards and share options are included in the Directors’ remuneration report.

7 Net (finance expense)/finance income 2009 2008 £m £m

Interest income from bank deposits 1.2 5.6 Interest income on loans to related parties 1.4 0.9 Expected return on defined benefit pension scheme assets 23.4 28.3 Finance income 26.0 34.8 Interest payable on bank overdrafts and loans (0.5) (0.7)Interest cost on the present value of the defined benefit obligations (28.2) (29.3)Finance expense (28.7) (30.0) Net finance (expense)/income (2.7) 4.8

Interest income on loans to related parties relates to shareholder loan interest receivable from investments in equity accounted joint ventures and associates.


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8 Income tax 2009 2008 £m £m

On profit for the yearUnited Kingdom corporation tax at 28.0% (2008: 28.5%) – –Adjustments in respect of prior years 0.1 0.1 Current tax credit for the year 0.1 0.1 Deferred tax charge for the current year (3.4) (5.0)Adjustments in respect of prior years (0.2) –Deferred tax charge for the year (3.6) (5.0) Income tax expense in the consolidated income statement (3.5) (4.9)

2009 2008 £m £m

Tax reconciliationProfit before tax 18.1 23.1 Income tax at 28.0% (2008: 28.5%) (5.1) (6.6)Rate adjustments relating to overseas profits 0.2 0.5 Share of results of joint ventures and associates at 28.0% (2008: 28.5%) (0.9) (1.1)Disallowed provisions and expenses (0.5) (0.8)Non-taxable gains and profits relieved by capital losses 0.6 0.8 Utilisation of previously unrecognised temporary differences 2.3 2.1 Rate adjustment relating to deferred tax – 0.1 Adjustments in respect of prior years (0.1) 0.1 Income tax expense in the consolidated income statement (3.5) (4.9)

The income tax above does not include any amounts for equity accounted joint ventures and associates, whose results are disclosed in the consolidated income statement net of tax.

The current tax liabilities of £1.7 million (2008: £1.7 million) for the Group and Company represent the amount of income taxes in respect of all outstanding periods.

Accumulated tax losses carried forward, mainly in the United Kingdom, are estimated at £8.6 million (2008: £14.2 million).

2009 2008 £m £m

Deferred tax asset recognised:Accelerated capital allowances 2.5 2.3 Short-term temporary differences 2.8 2.5 Retirement benefit obligations 29.3 14.1 Deferred tax asset 34.6 18.9

The Company had no deferred tax asset at either year end. 2009 2008 £m £m

Movements in deferred tax asset:At 1 January 18.9 21.2 Amount charged in consolidated income statement (3.6) (5.0)Amount credited to consolidated statement of changes in equity 19.3 2.7 At 31 December 34.6 18.9



8 Income tax – continuedDeferred tax charge recognised in the consolidated income statement 2009 2008 £m £m

Accelerated capital allowances 0.2 0.4 Short-term temporary differences (0.2) (2.3)Retirement benefit obligations (3.6) (3.1) (3.6) (5.0)

Deferred tax recognised directly in the consolidated statement of changes in equity 2009 2008 £m £m

Retirement benefit obligations 18.9 3.0 Cash flow hedges 0.4 (0.3) 19.3 2.7

Factors that may affect future tax chargesThe Group and Company have potential deferred tax assets in their United Kingdom operations that have not been recognised at the year end on the basis that their future economic benefits were not assured at the statement of financial position date.

Deferred tax assets not recognised Group Company 2009 2008 2009 2008 £m £m £m £m

Accelerated capital allowances 1.0 1.0 – – Short-term temporary differences 3.4 4.3 0.1 0.1 Trading tax losses 2.4 4.8 – – Management expenses and charges 15.9 15.9 15.9 15.9 Temporary differences 22.7 26.0 16.0 16.0

In addition to the above temporary differences, the following deferred tax assets are available:Surplus Advance Corporation Tax 9.7 9.7 – – Capital losses 77.1 77.3 67.3 67.5

The current year tax effect, at 28.0%, of using the above short-term temporary differences and trading tax losses was £2.3 million (2008: £2.1 million) as detailed in the tax reconciliation above.

There are no expiry dates associated with the deferred tax assets, recognised and not recognised, and tax relief will be obtained if suitable profits arise in the future.

9 Earnings per shareThe calculation of earnings per share is based on profit of £14.6 million (2008: £18.2 million) and the number of shares set out below.

2009 2008 Number Number (millions) (millions)

Weighted average number of ordinary shares in issue for basic earnings per share calculation 633.7 631.9 Dilutive potential ordinary shares arising from employee share schemes 12.7 2.1 Weighted average number of ordinary shares in issue for diluted earnings per share calculation 646.4 634.0

At 31 December 2009, 2.8 million options (2008: 6.3 million) were excluded from the diluted weighted average number of ordinary shares calculation as their effect would have been anti-dilutive.


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10 DividendsDuring the year, the 2008 final dividend of 0.5p (2008: 0.5p) per share was paid to shareholders (£3.1 million in cash and £0.1 million via scrip alternative (2008: £3.0 million in cash and £0.1 million via scrip alternative)). An interim 2009 dividend of 0.275p (2008: 0.25p) per share (£1.7 million in cash and £0.1 million via scrip alternative (2008: £1.5 million in cash and £0.1 million via scrip alternative)) was also paid.

A final dividend in respect of the year ended 31 December 2009 of 0.55p per share, amounting to a dividend of £3.5 million, is to be proposed at the Annual General Meeting. If approved, the dividend is expected to be paid on 21 May 2010 to shareholders registered at the close of business on 23 April 2010 and a scrip dividend alternative will be offered. These financial statements do not reflect the final dividend payable.

11 Property, plant and equipment – Group Plant and Land and buildings equipment Total Freehold Leasehold Over 50 years 50 years and under £m £m £m £m £m

Cost At 1 January 2008 1.2 0.3 0.2 13.5 15.2 Currency realignment – – 0.1 0.6 0.7 Additions – – 0.1 5.7 5.8 Disposals – – – (0.9) (0.9)At 31 December 2008 1.2 0.3 0.4 18.9 20.8 At 1 January 2009 1.2 0.3 0.4 18.9 20.8 Currency realignment – – (0.1) (0.3) (0.4)Additions – – 0.2 7.0 7.2 Disposals – – – (4.2) (4.2)At 31 December 2009 1.2 0.3 0.5 21.4 23.4

Depreciation At 1 January 2008 0.1 0.1 – 11.5 11.7 Currency realignment – – – 0.2 0.2 Provided in year – – 0.1 2.0 2.1 Disposals – – – (0.9) (0.9)At 31 December 2008 0.1 0.1 0.1 12.8 13.1 At 1 January 2009 0.1 0.1 0.1 12.8 13.1 Currency realignment – – – (0.1) (0.1)Provided in year – – 0.1 2.6 2.7 Disposals – – – (3.8) (3.8)At 31 December 2009 0.1 0.1 0.2 11.5 11.9

Net book value At 31 December 2009 1.1 0.2 0.3 9.9 11.5 At 31 December 2008 1.1 0.2 0.3 6.1 7.7 At 1 January 2008 1.1 0.2 0.2 2.0 3.5

Freehold land and buildings includes land of £0.7 million (2008: £0.7 million) on which no depreciation has been charged.



12 Intangible assets – Group

Software development costs and licences £m

CostAt 1 January 2008 5.0 Additions 0.1 Disposals (0.2)At 31 December 2008 4.9 At 1 January 2009 4.9 Additions 0.1 At 31 December 2009 5.0

Amortisation At 1 January 2008 2.3 Provided in year 1.0 Disposals (0.2)At 31 December 2008 3.1 At 1 January 2009 3.1 Provided in year 0.9 At 31 December 2009 4.0

Net book value At 31 December 2009 1.0 At 31 December 2008 1.8 At 1 January 2008 2.7

The net book value of intangible assets comprises £0.9 million (2008: £1.7 million) relating to software development costs and £0.1 million (2008: £0.1 million) relating to software licences.


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13 Investments Investments Loans Joint Joint ventures Associates ventures Associates Total Group £m £m £m £m £m

Cost or fair valueAt 1 January 2008 22.8 0.3 17.2 2.0 42.3 Currency realignment 7.3 0.1 0.5 – 7.9 Additions – – 6.0 5.7 11.7 Disposals – – (2.5) (2.7) (5.2)At 31 December 2008 30.1 0.4 21.2 5.0 56.7 At 1 January 2009 30.1 0.4 21.2 5.0 56.7 Currency realignment (2.7) – (0.3) – (3.0)Additions – 0.2 5.7 4.0 9.9 Repayments – – (0.7) – (0.7)Disposals (0.1) – (2.0) (0.1) (2.2)At 31 December 2009 27.3 0.6 23.9 8.9 60.7

Share of post-acquisition reservesAt 1 January 2008 (8.1) 0.7 – – (7.4)Currency realignment 0.4 – – – 0.4 Disposals (0.5) (0.7) – – (1.2)Dividends (0.7) – – – (0.7)Loss for the year (3.7) (0.2) – – (3.9)Cash flow hedges (3.5) (8.1) – – (11.6)At 31 December 2008 (16.1) (8.3) – – (24.4)At 1 January 2009 (16.1) (8.3) – – (24.4)Disposals (0.3) – – – (0.3)Dividends (0.3) (0.3) – – (0.6)(Loss)/profit for the year (3.6) 0.4 – – (3.2)Cash flow hedges – change in fair value – 2.7 – – 2.7Cash flow hedges – disposals 1.9 – – – 1.9 At 31 December 2009 (18.4) (5.5) – – (23.9)

Amounts written off At 1 January 2008 – – – – – Additions – (0.2) – (0.2) (0.4)At 31 December 2008 – (0.2) – (0.2) (0.4)At 1 January 2009 and 31 December 2009 – (0.2) – (0.2) (0.4)

Reclassifications At 1 January 2008 14.3 1.2 (9.9) (0.4) 5.2 Arising in the year 3.9 7.0 (1.8) (3.5) 5.6 At 31 December 2008 18.2 8.2 (11.7) (3.9) 10.8 At 1 January 2009 18.2 8.2 (11.7) (3.9) 10.8 Arising in the year 0.1 (1.5) 0.6 (2.3) (3.1)At 31 December 2009 18.3 6.7 (11.1) (6.2) 7.7

Net book value At 31 December 2009 27.2 1.6 12.8 2.5 44.1 At 31 December 2008 32.2 0.1 9.5 0.9 42.7 At 1 January 2008 29.0 2.2 7.3 1.6 40.1



13 Investments – continued Analysis of Group’s share of joint ventures and associates revenue, income and assets and liabilities

2009 2008 Alcaidesa Other joint Alcaidesa Other joint Holding SA ventures Associates Total Holding SA ventures Associates Total £m £m £m £m £m £m £m £m

Revenue 1.2 49.0 17.5 67.7 1.1 71.8 20.5 93.4

(Loss)/profit before tax (3.7) (0.8) 0.9 (3.6) (3.3) (1.3) (0.1) (4.7)Income tax 1.1 (0.2) (0.5) 0.4 1.0 (0.1) (0.1) 0.8 (Loss)/profit for the year (2.6) (1.0) 0.4 (3.2) (2.3) (1.4) (0.2) (3.9)

Non-current assets 21.7 36.8 114.5 173.0 13.3 73.9 71.8 159.0 Current assets 35.3 16.4 17.0 68.7 40.6 21.1 15.2 76.9 Current liabilities (2.9) (14.6) (13.8) (31.3) (2.9) (41.5) (7.8) (52.2)Non-current liabilities (27.5) (38.0) (116.1) (181.6) (19.2) (53.1) (79.1) (151.4)Investments in joint ventures and associates 26.6 0.6 1.6 28.8 31.8 0.4 0.1 32.3 Financial commitments 2.2 3.5 11.6 17.3 5.8 3.5 4.7 14.0 Capital commitments 2.2 – 28.3 30.5 – 0.2 10.5 10.7

Net interest payable by joint ventures and associates in 2009 was £1.6 million (2008: £2.8 million payable). The applicable interest rates are income of 0.5% to 5.4% per annum (2008: 0.5% to 5.0%) and expense of 1.3% to 12.5% per annum (2008: 4.5% to 12.5%).

The financial commitments relate to Alcaidesa Holding SA and joint ventures and associates involved in PFI schemes and the capital commitments to ongoing construction works. All figures are the Group’s share.

Analysis of the total revenue, income, assets and liabilities of joint ventures and associates

2009 2008 Alcaidesa Other joint Alcaidesa Other joint Holding SA ventures Associates Total Holding SA ventures Associates Total £m £m £m £m £m £m £m £m

Revenue 2.4 110.4 60.9 173.7 2.1 173.7 65.5 241.3 (Loss)/profit before tax (7.4) (1.4) 3.5 (5.3) (6.6) (2.6) (0.8) (10.0)Income tax 2.2 (0.4) (2.2) (0.4) 2.1 (0.2) (0.4) 1.5 (Loss)/profit for the year (5.2) (1.8) 1.3 (5.7) (4.5) (2.8) (1.2) (8.5) Non-current assets 38.5 73.5 288.7 400.7 26.7 147.6 226.1 400.4 Current assets 70.7 36.8 133.3 240.8 81.1 48.4 55.2 184.7 Current liabilities (5.8) (33.4) (48.5) (87.7) (5.8) (88.9) (29.5) (124.2)Non-current liabilities (50.2) (75.3) (366.9) (492.4) (38.4) (106.1) (251.5) (396.0)Equity 53.2 1.6 6.6 61.4 63.6 1.0 0.3 64.9

Details of the principal subsidiary undertakings, joint ventures, jointly controlled operations and associates are shown in Note 24.


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13 Investments – continued Company

Investments in subsidiaries £m

Cost At 1 January 2008 388.3 Additions 0.5 At 31 December 2008 388.8 At 1 January 2009 388.8 Additions 1.2 At 31 December 2009 390.0

Amounts written offAt 1 January 2008, 31 December 2008 and 31 December 2009 275.5

Net book value At 31 December 2009 114.5 At 31 December 2008 113.3 At 1 January 2008 112.8

Additions principally relate to the increase in the cost of investment in subsidiaries by the equivalent amount of the share-based payment charge included in the consolidated income statement.

Details of the subsidiaries in which the Company has an interest are set out in Note 24.

14 Trade and other receivables Group Company 2009 2008 2009 2008 £m £m £m £m

Amounts included in current assetsTrade receivables 98.1 94.3 – –Other receivables 9.8 9.5 – –Amounts due from customers for contract work 84.5 68.5 – – Prepayments and accrued income 6.8 4.9 0.2 0.6 Amounts owed by joint ventures and associates 2.7 3.1 – –Amounts owed by subsidiary undertakings – – 1.4 1.3 201.9 180.3 1.6 1.9 Amounts included in non-current assetsOther receivables 12.7 6.0 – –

At 31 December 2009, amounts due from customers for contract work falling due within one year and other receivables falling due after more than one year included retentions of £21.1 million (2008: £16.3 million) relating to construction contracts in progress.

The directors consider that the carrying amount of trade, other receivables and amounts owed by joint ventures and associates approximates to their fair value. Based on prior experience, the directors believe that the trade receivables are recoverable and, other than as disclosed in Note 25, there is no allowance for bad or doubtful debts (2008: £Nil).

The average credit period within trade receivables on amounts billed for construction work and on sales of goods is 36 days (2008: 38 days). The analysis of the due dates of the trade receivables was £76.5 million (2008: £50.9 million) due within 30 days, £16.4 million (2008: £42.8 million) due between 30 and 60 days and £5.2 (2008: £Nil million) due after 60 days.

Included in the trade receivables balance are debtors, with a carrying amount of £5.7 million (2008: £1.6 million), which are past due at the reporting date for which no provision has been made as there has been no significant change in credit quality and the amounts are considered recoverable. No collateral is held over these balances.

The aggregate amount of costs incurred plus recognised profits, less recognised losses, for all contracts in progress at the statement of financial position date was £2,423.4 million (2008: £2,090.1 million). Progress billings and advances received from customers under open construction contracts amounted to £2,375.1 million (2008: £2,061.1 million). Advances for which work has not started, and billings in excess of costs incurred and recognised profits are included in credit balances on long-term contracts (Note 18).



15 Cash and cash equivalentsCash and cash equivalents are analysed below, and include the Group’s share of cash held by jointly controlled operations of £36.0 million (2008: £34.2 million). Group Company 2009 2008 2009 2008 £m £m £m £m

Cash and cash equivalents 120.8 147.3 26.3 66.7 Bank overdrafts (0.3) (0.4) – –Cash, cash equivalents and overdrafts in the cash flow statement 120.5 146.9 26.3 66.7

16 Interest bearing loans and borrowings Group 2009 2008 £m £m

Current liabilities – Bank loans – 0.3 Total interest bearing loans and borrowings – 0.3

17 Financial instruments and risk managementThe Group’s centralised treasury function manages financial risk, principally arising from movements in foreign currency rates, interest rates and inflation rates and liquidity and funding risks, in accordance with policies agreed by the directors. To manage these risks, forward foreign currency sale and purchase contracts are used in respect of foreign currency requirements and interest rate and RPI swaps are used for PFI investments.

The Group does not enter into speculative transactions.

The Company does not have any forward foreign currency contracts or other derivatives.

Capital managementThe capital base of the Group is driven by shareholder financing with very little in terms of external loans. The Board of directors (‘Board’) monitors the overall strength of the balance sheet, which is dependent on underlying contract performance and most significantly by changes arising from market movements in the Group’s defined benefit pension scheme. As a result of increases in the pension obligations during the year, at 31 December 2009, the Group had negative shareholders’ equity of £3.8 million. The Board’s policies include exploring options to manage the pension liability, the scheme was closed to future accrual during the year, and working to strengthen the Group by growing the business and improving profitability and the Business & Operational review describes the strategy for the Group and its operations. The Board seeks to maintain a significant level of cash balances. The Board also monitors the level of dividends to equity shareholders.

The Group operates Long-Term Incentive Plans and Save-As-You-Earn schemes, which offer management and participating employees the opportunity to acquire equity in the Company. Details of existing schemes are set out in note 20. The Board intends to continue these arrangements but has no plans to change their scale or participation significantly.

There were no changes to the Board’s approach to capital management during the year.

Liquidity and funding riskUltimate responsibility for liquidity and funding risk rests with the Board, which has put in place a monitoring and reporting framework to manage funding requirements.

Liquidity risk is managed by monitoring actual and forecast short and medium term cash flows and the maturity profile of financial assets and liabilities and by maintaining adequate cash reserves. The nature and timing of the contract cash flows causes the cash balances to vary over the month with the balance usually highest at the month end.

The average month end cash balance during the year was £125.3 million (2008: £117.4 million).

Long-term contracting requires facilities to be in place to provide performance and other bonds, where necessary, to customers. Therefore, the Group is reliant on its ability to secure bank and surety bonds and monitors usage and regularly updates forecast usage of its banking and surety bonding facilities.


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17 Financial instruments and risk management – continuedLiquidity and funding risk (continued)

Unsecured bonding facilities available Group and Company 2009 2008 £m £m

Expiring within one year – 15.0 Expiring between two and five years* 290.0 285.0 290.0 300.0 * Element of above facilities available for borrowings 5.0 5.0

The facilities have financial covenants based on profit, tangible net worth and the level of cash balances, which are measured quarterly. Since the year end, the unsecured bonding facilities have been increased by £55 million to £345 million and their term extended to 30 September 2013.

Credit riskThe Group uses an external credit scoring system to assess a potential customer’s credit quality and will enter into a contract only if that assessment is satisfactory. Deposits in the United Kingdom are placed with the bank facility providers or, in jointly controlled operations, with banks agreed by the partners. Overseas deposits are placed with major banks operating in those countries. Transactions involving derivative financial instruments are with bank or insurance company counter-parties with high credit ratings, that are monitored regularly and with whom there are signed netting agreements. Given the high credit ratings of the banks and insurance companies used, management does not expect any counter-party will fail to meet its obligations.

At the year end date, there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the statement of financial position. Further information on the exposure to credit risk is set out in Note 14.

Interest rate risk The Group has cash balances in the United Kingdom and Overseas and bank borrowings Overseas. The largest constituent are United Kingdom balances denominated in pounds sterling. A 1% rise in interest rates would have increased the annual net interest income on cash balances by £1.3 million (2008: £1.2 million).

The only interest rate hedging currently undertaken by the Group is within PFI investments, where interest rate derivatives have been used as a means of hedging interest rate risk. The policy is to fix the interest cost on variable rate financing on specific projects by taking out floating to fixed interest rate swaps; these swaps are designated to the underlying debt obligations and are expected to be effective for cash flow hedge accounting purposes.

Inflation riskThe Group’s PFI investments have entered into RPI derivatives as a means of hedging inflation risk over the concession period. An element of the unitary payment received as revenue is RPI linked and derivatives are used to hedge this potential movement in order to match the underlying fixed cost within the project. The proportion of revenue that is fixed will vary from project to project but will ensure that neither debt servicing nor shareholder returns vary too widely.

Foreign currency riskTransactional currency exposures arise from sales or purchases by operating companies in currencies other than their functional currency. The current strategy is to hedge both committed and forecast foreign currency exposures, where applicable, and where the transaction timing and amount can be determined reliably and no natural hedge exists. Forward contracts are only entered into when a contractual commitment exists in respect of the foreign currency transaction and it is the policy to negotiate the terms of the hedge derivatives to match the terms of the hedged item to maximise hedge effectiveness.

At 31 December 2009, the net monetary assets denominated in currencies other than the functional currency of the operation involved were Hong Kong dollar denominated net liabilities of £0.1 million (2008: £0.1 million), US Dollar denominated net assets of £4.8 million (2008: £9.0 million) and Euro denominated net assets of £11.8 million (2008: £3.4 million) in members of the Group with sterling as their functional currency.

A 10% strengthening in the US Dollar would have worsened the results by £0.1 million (2008: improved by £0.1 million). A 10% strengthening in the Euro would have adversely impacted the results by £0.3 million (2008: adversely impacted by £0.3 million).



17 Financial instruments and risk management – continued Cash flow hedges (continued)At 31 December 2009, the Group held foreign currency contracts (84 purchase contracts (2008: 7) and 19 sale contracts (2008: 1)) designated as hedges of committed future purchases. The Group also held 3 foreign currency sale contracts (2008: Nil) as a hedge of a future receivable.

Forward exchange contracts, which hedge forecast transactions are classified as cash flow hedges and stated at fair value. These amounts were recognised as fair value derivatives. The terms of the foreign currency contracts match the terms of the commitments. There were no ineffective hedges at the year end (2008: Nil).

Foreign currency sale and purchase contracts outstanding at 31 December 2009 are summarised below. The carrying value represents the fair value of the contract; the contractual cash flows the sterling commitment.

2009 2008 Between Between Carrying Contractual Within one and Carrying Contractual Within one and 5 Amount cash flows one year 5 years Amount cash flows one year years £m £m £m £m £m £m £m £m

Purchases (0.2) (98.5) (68.0) (30.5) 1.0 (6.0) (6.0) –Sales (0.2) 21.2 11.8 9.4 (0.1) 2.0 2.0 – (0.4) (77.3) (56.2) (21.1) 0.9 (4.0) (4.0) –

The expected impact on the income statement of the foreign exchange contracts is: 2010 loss £0.6 million, 2011 profit £0.4 million, 2012 and 2013 loss £0.1 million.

At 31 December 2009, the investment in PFI projects had entered into the following swaps, which are classified as cash flow hedges and are stated at fair value. There were no ineffective hedges at the year end (2008: Nil).

2009 2008 Between Between Within one and After 5 Within one and After 5 Total one year 5 years years Total one year 5 years years £m £m £m £m £m £m £m £m

Interest rate swaps 10.3 0.4 1.5 8.4 16.6 0.6 2.5 13.5 RPI swaps 1.7 0.1 0.2 1.4 1.8 0.1 0.3 1.4 12.0 0.5 1.7 9.8 18.4 0.7 2.8 14.9 Less tax (3.4) (0.1) (0.5) (2.8) (5.1) (0.2) (0.8) (4.1) 8.6 0.4 1.2 7.0 13.3 0.5 2.0 10.8

These amounts (net of tax) were recognised within the value of the investment or within provisions, as appropriate, as fair value derivatives.


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17 Financial instruments and risk management – continued Financial liabilities and assets

Currency and maturity of financial assets 2009 2008 Between Between Within one and After 5 Within one and After 5 Total one year 5 years years Total one year 5 years years £m £m £m £m £m £m £m £m

Cash and cash equivalents: Pounds sterling 112.8 112.8 – – 140.8 140.8 – –UAE Dirham 3.8 3.8 – – 4.2 4.2 – –US Dollar 0.6 0.6 – – 1.5 1.5 – –Euro 3.0 3.0 – – 0.1 0.1 – –Other 0.6 0.6 – – 0.7 0.7 – – 120.8 120.8 – – 147.3 147.3 – –Loans to joint ventures and associates: Pounds sterling 2.5 0.5 1.9 0.1 1.4 – – 1.4 US Dollar 4.0 4.0 – – 5.6 5.6 – – Euro 8.8 – 8.8 – 3.4 – 3.4 – 15.3 4.5 10.7 0.1 10.4 5.6 3.4 1.4 Trade, other receivables and amounts owed by joint ventures and associates: Pounds sterling 122.2 109.5 12.7 – 111.1 105.1 6.0 – Other 1.1 1.1 – – 1.8 1.8 – – 123.3 110.6 12.7 – 112.9 106.9 6.0 –Total financial assets 259.4 235.9 23.4 0.1 270.6 259.8 9.4 1.4

Currency and maturity of financial liabilities 2009 2008 Between Between Within one and Within one and Total one year five years Total one year five years £m £m £m £m £m £m

Bank overdraft – Hong Kong Dollar 0.3 0.3 – 0.4 0.4 – Bank loan – Hong Kong Dollar – – – 0.3 0.3 – 0.3 0.3 – 0.7 0.7 –Trade and other payables: Pounds sterling 155.2 150.7 4.5 166.1 163.7 2.4 Other 6.9 6.9 – 6.6 6.6 – 162.1 157.6 4.5 172.7 170.3 2.4 Total financial liabilities 162.4 157.9 4.5 173.4 171.0 2.4

The bank loans and overdrafts are at a floating rate and are unsecured.



17 Financial instruments and risk management – continued Reconciliation of trade and other receivables and trade and other payables to the balance sheet.

2009 2008 Current Non-current Current Non-current £m £m £m £m

Trade and other receivables (as above) 110.6 12.7 106.9 6.0 Amounts due from customers 84.5 – 68.5 – Prepayments and accrued income 6.8 – 4.9 – 201.9 12.7 180.3 6.0

2009 2008 Current Non-current Current Non-current £m £m £m £m

Trade and other payables (as above) 157.6 4.5 170.3 2.4 Credit balances on long-term contracts 19.9 – 29.2 –Accruals and deferred income 135.8 – 105.5 – 313.3 4.5 305.0 2.4

Certain of the comparative figures in this note have been revised to ensure consistency with the current year.

Effective interest rates of financial assets and liabilities 2009 2008

Financial assets:Cash and cash equivalents 0.0% to 4.0% 0.0% to 6.1%Loans to joint ventures and associates 9.0% to 11.5% 8.4% to 12.0%

Financial liabilities:Bank overdrafts 6.0% 6.0%Bank loans – 6.7%

The Company’s financial assets comprised cash at bank of £26.3 million (2008: £66.7 million) denominated in Pounds sterling and maturing within one year.

There are no significant differences between the carrying values of the Group’s and Company’s financial assets and liabilities and their fair values, except the fair value of loans carrying interest rates above 10% may be higher than their carrying values of £1.7 million (2008: £0.6 million).


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18 Trade and other payables Group Company 2009 2008 2009 2008 £m £m £m £m

Current liabilities Trade payables 129.4 144.3 – – Other payables 23.9 22.0 – –Social security 4.0 3.7 – –Credit balances on long-term contracts 19.9 29.2 – –Accruals and deferred income 135.8 105.5 0.1 0.1 Amounts owed to joint ventures and associates 0.3 0.3 – –Amounts owed to subsidiary undertakings – – 57.9 95.9 313.3 305.0 58.0 96.0 Non-current liabilitiesOther payables 4.5 2.4 – –

At 31 December 2009, credit balances on long-term contracts included advance payments from customers of £12.6 million (2008: £23.8 million).

The directors consider that the carrying amount of trade payables, other payables, social security and amounts owed to joint ventures and associates approximates to their fair value.

Financial risk management policies are in place that seek to ensure that all payables are paid within their credit timeframes.

19 Provisions for other liabilities and charges Engineering & Void PFI Construction space investments Other Total Group £m £m £m £m £m

Current At 1 January 2008 1.0 0.2 0.8 0.7 2.7 Provided – 1.4 2.2 0.4 4.0 Utilised – (1.0) – (0.2) (1.2)Transfer (0.8) – – – (0.8)At 31 December 2008 0.2 0.6 3.0 0.9 4.7 At 1 January 2009 0.2 0.6 3.0 0.9 4.7 Provided – 0.7 – 0.4 1.1 Utilised – (0.6) (3.1) (0.4) (4.1)Transfer – – 3.5 – 3.5At 31 December 2009 0.2 0.7 3.4 0.9 5.2



19 Provisions for other liabilities and charges – continued Engineering & Void PFI Construction space investments Other Total Group (continued) £m £m £m £m £m

Non-currentAt 1 January 2008 0.7 0.4 2.9 1.0 5.0 Currency alignment – – – 0.5 0.5 Provided – – 1.9 0.4 2.3 Utilised (0.6) – – – (0.6)Transfer 0.8 – – – 0.8 At 31 December 2008 0.9 0.4 4.8 1.9 8.0 At 1 January 2009 0.9 0.4 4.8 1.9 8.0 Currency alignment – – – (0.2) (0.2)Provided – 0.1 0.6 0.3 1.0Utilised (0.9) – (1.3) – (2.2)Transfer – – (3.5) – (3.5)At 31 December 2009 – 0.5 0.6 2.0 3.1

Funding obligations Other Total Company £m £m £m

Current At 1 January 2008 0.3 0.2 0.5 Utilised – (0.2) (0.2)At 31 December 2008 0.3 – 0.3 At 1 January 2009 0.3 – 0.3 Transfer (0.2) 0.3 0.1 At 31 December 2009 0.1 0.3 0.4

Non-currentAt 1 January 2008 0.9 0.3 1.2 Provided 0.4 – 0.4 At 31 December 2008 1.3 0.3 1.6 At 1 January 2009 1.3 0.3 1.6 Transfer 0.2 (0.3) (0.1)At 31 December 2009 1.5 – 1.5

GroupEngineering & Construction provisions were in respect of liabilities incurred on long-term contracts and should be utilised over the next year.

Void space provisions relate to costs of vacant properties and will be utilised over the next three years.

PFI investment provisions relate to interest rate and other swaps entered into, where the resulting carrying value of the investment is negative and an obligation exists to provide further funding. The provisions are expected to reverse over the lives of the concessions, which can extend up to twenty-nine years.

Other provisions, mainly comprise remedial costs and litigation provisions, most of which will be utilised over the next year and a provision for staff benefits payable to the staff of an overseas subsidiary company, which will be utilised over the next five years.

CompanyProvisions in the Company principally relate to funding obligations to a non-trading overseas subsidiary, which eliminates on consolidation.


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20 Employee benefits(a) PensionsA defined benefit pension scheme is operated in the United Kingdom and a number of defined contribution pension schemes are in place in the United Kingdom and Overseas. Contributions are paid by subsidiary undertakings and employees. The total pension charge in the income statement was £11.5 million, comprising £6.7 million included in operating costs and £4.8 million included in net finance expense (2008: £8.4 million, comprising £7.4 million in operating costs and £1.0 million in net finance expense); £7.7 million (2008: £6.9 million) was in respect of the defined benefit scheme and £3.8 million (2008: £1.5 million) was in respect of the defined contribution schemes.

The Company does not operate a pension scheme.

Defined benefit schemeThe defined benefit scheme was closed to new members on 31 May 2005 and from 1 April 2006 future benefits were calculated on a Career Average Revalued Earnings basis. The scheme was closed to future accrual of benefits to members on 30 September 2009. A full actuarial valuation of the scheme was carried out at 31 March 2007 and was updated to 31 December 2009 by a qualified independent actuary.

2009 2008 2007 £m £m £m

Present value of defined benefit obligations (560.5) (435.8) (511.1)Fair value of scheme assets 455.8 385.6 460.5 Recognised liability for defined benefit obligations (104.7) (50.2) (50.6)

Movements in present value of defined benefit obligations: 2009 2008 2007 £m £m £m

At 1 January 435.8 511.1 509.4 Current service cost 1.7 4.7 5.8 Past service cost 1.2 1.2 1.2 Interest cost 28.2 29.3 25.8 Actuarial losses/(gains) 113.7 (94.6) (15.9)Benefits paid (23.1) (19.8) (19.5)Contributions by members 3.0 3.9 4.3 At 31 December 560.5 435.8 511.1

Movements in fair value of scheme assets: 2009 2008 2007 £m £m £m

At 1 January 385.6 460.5 440.7 Expected return on scheme assets 23.4 28.3 26.7 Actuarial gains/(losses) 46.3 (105.1) (4.2)Contributions by employer 20.6 17.8 12.5 Contributions by members 3.0 3.9 4.3 Benefits paid (23.1) (19.8) (19.5)At 31 December 455.8 385.6 460.5

Expense recognised in the income statement: 2009 2008 2007 £m £m £m

Current service cost 1.7 4.7 5.8 Past service cost 1.2 1.2 1.2 Interest cost on defined benefit obligations 28.2 29.3 25.8 Expected return on scheme assets (23.4) (28.3) (26.7)Total 7.7 6.9 6.1



20 Employee benefits – continued (a) Pensions (continued)

Income statement classification of expense: 2009 2008 2007 £m £m £m

Cost of sales 2.6 5.2 6.2 Administrative expenses 0.3 0.7 0.8 Finance income (23.4) (28.3) (26.7)Finance expense 28.2 29.3 25.8 Total 7.7 6.9 6.1

History of the scheme for the last five years: 2009 2008 2007 2006 2005

Experience gain/(loss) on scheme liabilities (£m) – – 6.5 – 10.2 0% 0% 1% 0% 2%Change in assumptions on scheme liabilities (£m) (113.7) 94.6 9.4 8.5 (48.3) 20% 19% 2% 2% (11%)Experience adjustments on scheme assets (£m) 46.3 (105.1) (4.2) 17.5 38.3 10% (27%) (1%) 4% 10%Total (loss)/gain (£m) (67.4) (10.5) 11.7 26.0 0.2 Cumulative (loss)/gain (£m) (62.8) 4.6 15.1 3.4 (22.6)

Fair value of scheme assets: 2009 2008 2007 £m £m £m

Equities 211.5 201.1 262.2 High yield bonds 50.6 – –Government bonds 99.9 112.4 118.7 Corporate bonds 61.5 47.5 49.3 Absolute return funds and cash 32.3 24.6 30.3 Total 455.8 385.6 460.5

The pension scheme does not have any assets invested in the Group’s financial instruments or in property, or other assets, used by the Group.

Principal actuarial assumptions (expressed as weighted averages): 2009 2008 2007 % % %

Discount rate 5.70 6.60 5.80 Expected rate of return on scheme assets 6.51 6.07 6.14 Future salary increases 3.50 2.85 3.40 Future pension increases 3.50 2.85 3.40 Inflation assumption 3.50 2.85 3.40

The expected rate of return on scheme assets is determined by reference to relevant indices. The overall expected rate of return is calculated by weighting the individual rates in accordance with the anticipated balance in the scheme’s investment portfolio.

Weighted average life expectancy from age 65 as per mortality tables used to determine benefits at 31 December 2009 and 31 December 2008 is: 2009 2008 Male Female Male Female (years) (years) (years) (years)

Currently aged 65 20.3 23.2 20.3 23.1 Non-retirees 21.3 24.1 21.3 24.0


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20 Employee benefits – continued (a) Pensions (continued)The discount rate, inflation and pension increase and mortality assumptions have a significant effect on the amounts reported. Changes in these assumptions would have the following effects on the defined benefit scheme:

Pension Pension liability cost £m £m

Increase discount rate by 0.25%, decreases pension liability and increases pension cost by 21.2 0.1Decrease inflation and pension increases by 0.25%, decreases pension liability and pension cost by 18.2 1.0Increase life expectancy by one year, increases pension liability and pension cost by 15.5 0.9

The Group expects to contribute approximately £19.0 million (2008: £16.7 million) to its defined benefit scheme in the next financial year.

Defined contribution schemesSeveral defined contribution pension are operated. The total expense relating to these plans was £3.8 million (2008: £1.5 million).

(b) Share-based paymentsThe amounts recognised in the income statement, before income tax, for share-based payment transactions with employees is £1.1 million (2008: £0.6 million).

Long-term incentive plans (‘LTIP’)The following outstanding grants arrange for the grant of shares to executive directors and senior management at an exercise price of £1 per individual grant. They have been valued using a Black-Scholes valuation model assuming a 2% dividend yield on the 2009 schemes (2% on the 2008 schemes, 0% pre-2008) and 20% volatility. The expected volatility for the share option arrangements uses historical volatility, determined by the analysis of daily share price movements over the past three years, as a basis for estimating the future volatility. In 2007, the EPS targets and entitlements in respect of all the outstanding grants were adjusted to take account of the capital raised in that year and the increased number of shares in issue.

Deferred share bonus plan (‘DSBP’)The following outstanding grant arranges for the grant of shares to executive directors and senior management. A nil-cost option will be granted to participants on a sliding scale between 0% and 100% pro rata to achieving Group Earnings before Interest and Tax (EBIT) of £19.0 million – £21.5 million for the year ended 31 December 2009. The number of shares to which a participant will be entitled will be calculated on the basis of the monetary value of the deferred bonus divided by the average closing share price for the Group during the month of December 2009. The deferred bonus award will vest on the second anniversary of the date of grant provided participants are in employment with the Company and not under notice of termination (either given or received) on the date of vesting.

Arrangement LTIP 2007 LTIP 2007 LTIP 2008 LTIP 2008 LTIP 2009 DSBP 2009

Date of grant 18 April 2007 14 June 2007 21 April 2008 21 April 2008 7 April 2009 7 April 2009Number of instruments initially granted 1,054,901 4,139,642 2,453,607 10,489,905 7,583,743 4,619,202Share price at date of grant 51.0p 48.8p 25.0p 25.0p 23.0p 23.0pContractual life 4 Years 4 Years 2.5 Years 2.5 Years 2.75 Years Vesting conditions:– Period of service 3 Years 3 Years 3 Years 3 Years 3 Years 3 Years– EPS targets 3.27p to 3.27p to 3.09p to 3.09p to 2.10p to n/a 3.71p 3.71p 3.43p 3.43p 2.75p (see above)– Year shares issued 2010 2010 2010 2010 2011 2012Settlement Shares Cash Shares Cash Shares SharesNormally exercisable in periods to 17 April 2017 13 June 2017 20 April 2018 20 April 2018 6 April 2019 6 April 2019Expected option life at grant date 4 Years 4 Years 3 Years 3 Years 3 Years 3 YearsRisk-free interest rate 4.50% 4.50% 3.85% 3.85% 4.31% 4.31%Fair value per granted instrument determined at the grant date 8.4p 7.1p 23.7p 18.7p 21.8p 21.8pNumber of ordinary shares – 2008 1,210,107 4,369,058 2,453,607 10,030,937 – – Number of ordinary shares – 2009 1,210,107 4,083,295 2,453,607 8,789,220 7,339,788 4,468,462



20 Employee benefits – continued (b) Share-based payments (continued)During the year, five participants in the LTIP’s left the employ of the Group and ceased to participate in the 2009 LTIP, the 2009 DSBP, the 2007 cash LTIP and the 2008 cash LTIP (2008: two participants left the employ of the Group). The only new grants in the year were the 2009 LTIP and the 2009 DSBP.

The options outstanding at the year end have a weighted average contractual life of 1.7 years (2008: two years).

Save As You Earn Plans (‘SAYE’)The following outstanding SAYE plans, have been valued using a Black-Scholes valuation model assuming 2% dividend yield on the 2009 schemes (2% on the 2008 schemes, 0% pre-2008) and 20% volatility. The expected volatility for the share option arrangements uses historical volatility, determined by the analysis of daily share price movements over the past three years, as a basis for estimating the future volatility. In 2007, the exercise price and entitlements in respect of all then outstanding grants were adjusted to take account for the capital raised in that year and the increased number of shares in issue.

SAYE 2007 SAYE 2007 SAYE 2008 SAYE 2008

Arrangement 3 Year 5 Year 3 Year 5 Year

Date of grant 18 May 2007 18 May 2007 23 May 2008 23 May 2008Number of instruments initially granted 5,854,721 4,132,235 12,838,252 7,594,368Exercise price 33.3p 33.3p 19.6p 19.6pShare price at date of grant 47.75p 47.75p 24.50p 24.50pContractual life 3 Years 5 Years 3 Years 5 YearsVesting conditions:– Service period 3 years 5 years 3 years 5 years– Savings requirements Yes Yes Yes Yes– Settlement Shares Shares Shares SharesNormally exercisable in periods to 31 December 31 December 31 December 31 December 2010 2012 2011 2013Expected option life at grant date 3 Years 5 Years 3 Years 5 YearsRisk-free interest rate 4.50% 4.50% 3.85% 3.85%Fair value per granted instrument determined at the grant date 11.27p 12.63p 6.40p 7.08pNumber of ordinary shares – 2008 3,175,048 1,910,779 12,293,449 7,318,692Number of ordinary shares – 2009 2,727,848 1,640,339 11,155,875 6,755,716

Summary of LTIP and SAYE PlansNumber and weighted average exercise prices of share options issued under all LTIP (including DSBP) and SAYE Plans

LTIP SAYE Total Price Number Price Number Price Number

(p) (million) (p) (million) (p) (million)

Outstanding at 1 January 2008 39.8 12.6 29.5 18.7 33.6 31.3 Forfeited during the year 38.1 (3.1) 30.8 (8.9) 32.7 (12.0)Exercised during the year – – 17.8 (3.7) 17.8 (3.7)Granted during the year 20.7 12.9 19.6 20.4 20.0 33.3 Outstanding at 31 December 2008 28.6 22.4 22.9 26.5 25.5 48.9 Forfeited during the year 44.4 (6.3) 24.5 (2.6) 38.6 (8.9)Exercised during the year – – 21.2 (0.1) 21.2 (0.1)Granted during the year 23.0 12.6 – – 23.0 12.6 Outstanding at 31 December 2009 24.9 28.7 22.7 23.8 23.9 52.5

Exercisable at the end of the period – – 29.3 1.5 29.3 1.5

The share options exercised during the year related to the SAYE 2004 5 year Plan, which matured in December 2009.


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21 Share capital 2009 2008 Nominal Nominal Number value Number value (millions) £m (millions) £

Authorised share capital – Ordinary shares of 5p each 1,014.8 50.7 1,014.8 50.7 Shares in issue at beginning of year – Ordinary shares of 5p each, fully paid 633.4 31.7 628.9 31.4Issued in year (see below) 0.9 – 4.5 0.3Shares in issue at end of year – Ordinary shares of 5p each, fully paid 634.3 31.7 633.4 31.7

During the year, the Company issued 22,566 ordinary shares under the five-year 2004 Save As You Earn plan which matured in December 2009. The Company also issued 330,328 ordinary shares in May 2009 and 529,756 ordinary shares in October 2009 under the scrip dividend scheme.

All shares rank pari passu regarding entitlement to capital and dividends.

The share options outstanding at the year end are detailed in Note 20. Details of the performance conditions and the options granted to executive directors are given in the Directors’ remuneration report.

22 Contingent liabilities Group Company 2009 2008 2009 2008 £m £m £m £m

Under guarantees of bank overdrafts and loans to subsidiary companies – – 0.3 0.7

GroupCertain subsidiary undertakings have entered into cross-guarantees for overdraft facilities made available to the Group. At 31 December 2009, these liabilities amounted to £Nil (2008: £Nil).

There are also contingent liabilities in respect of:• creditors of jointly controlled operations, which are less than the book value of their assets;• performance bonds and other undertakings entered into in the ordinary course of business; and• legal claims arising in the ordinary course of business.

It is not anticipated that any material liabilities will arise from the contingent liabilities other than those provided for in these financial statements.

CompanyThe Company has guaranteed the obligations of the subsidiary companies that are participating employers of The Costain Pension Scheme, the defined benefit pension scheme in the United Kingdom. At 31 December 2009, the total potential liability was £104.7 million (2008: £50.2 million) as disclosed in Note 20.



23 Other financial commitmentsGroupCapital commitments 2009 2008 £m £m

Property, plant and equipment – 1.8

The capital commitments in 2008 related to the purchase of tunnelling machinery.

Operating lease commitmentsLeases as lessee 2009 2008 Other Other Land and operating Land and operating buildings leases buildings leases £m £m £m £m

Future aggregate minimum lease payments under non-cancellable leases are as follows:No later than one year 4.8 2.1 5.0 2.0 Between one and five years 14.2 2.1 15.5 1.5 Later than five years 11.5 – 12.9 – 30.5 4.2 33.4 3.5

Leases as lessor Land and buildings 2009 2008 £m £m

Future aggregate minimum lease income under non-cancellable leases expiring:No later than one year 1.4 1.6 Between one and five years 3.5 5.2 Later than five years 0.2 0.4 5.1 7.2

CompanyThe Company does not have any other financial commitments (2008: £Nil).


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24 Principal subsidiary undertakings, jointly controlled entities, associates and jointly controlled operations

Percentage of Country of Activity equity held incorporation

Subsidiary undertakingsCostain Ltd Engineering, Construction and Maintenance 100 UKCostain Abu Dhabi Co WLL Process Engineering 49 UAECostain Building & Civil Engineering Ltd Engineering and Construction 100 UKCostain Engineering & Construction Ltd Holding and Service Company 100 UKCostain Oil, Gas & Process Ltd Process Engineering 100 UKRichard Costain Ltd Service Company 100 UK

Issued share Percentage capital of equity Country of Reporting Activity £m held incorporation date

Jointly controlled entitiesAlcaidesa Holding SA Land Development 11.2 50 Spain 31 DecArden Partnership (Derby) Holdings Ltd Operation of Hospital – 50 UK 31 DecArden Partnership (Leicester) Holdings Ltd Operation of Hospital – 50 UK 31 DecArden Partnership (Lincolnshire) Holdings Ltd Operation of Hospital – 50 UK 31 DecBrighton & Hove 4Delivery Ltd Civil Engineering – 40 UK 31 MarChina Harbour-Costain Mexico S de RL de CV Civil Engineering – 50 Mexico 31 DecCostain Petrofac Ltd Process Engineering – 50 UK 31 Dec4Delivery Ltd Civil Engineering – 40 UK 31 Mar

AssociatesCoast to Coast Holdings Ltd Asset Management 0.5 20 UK 31 MarC2C Services Ltd Asset Management – 20 UK 31 MarIntegrated Bradford LEP Ltd Construction and Operation of Schools – 40 UK 31 DecIntegrated Bradford SPV One Ltd Construction and Operation of Schools 0.1 29 UK 31 DecIntegrated Bradford SPV Two Ltd Construction and Operation of Schools 0.1 44 UK 31 DecLewisham Schools for the Future LEP Ltd Construction and Operation of Schools 0.1 40 UK 31 MarLewisham Schools for the Future SPV Ltd Construction and Operation of Schools – 40 UK 31 MarLewisham Schools for the Future SPV 2 Ltd Construction and Operation of Schools – 40 UK 31 MarPrime Care Solutions (Kingston) Holdings Ltd Operation of Hospital – 40 UK 31 Dec

The equity capital of the above are held by subsidiary undertakings with the exception of Richard Costain Ltd and Costain Engineering & Construction Ltd.

Costain Abu Dhabi Co WLL has been treated as a subsidiary undertaking due to Costain having power to influence and control the composition of the board of directors.

All undertakings operate mainly in the country of incorporation, with the exception of Costain Building & Civil Engineering Ltd, which operates outside the United Kingdom.

All holdings are of ordinary shares except Richard Costain Ltd, where Costain Group PLC holds 100% of the ordinary and preference shares.

A full list of Group companies will be included in the Company’s annual return.



24 Principal subsidiary undertakings, jointly controlled entities, associates and jointly controlled operations – continued

Percentage of Country of Activity equity held incorporation

Major jointly controlled operationsA-one+ Integrated Highway Services – MAC 7 Engineering & Maintenance 33 UKA-one+ Integrated Highway Services – MAC 10 Engineering & Maintenance 25 UKA-one+ Integrated Highway Services – MAC 12 Engineering & Maintenance 33 UKCostain-Carillion Joint Venture – M1 Widening and A5/M1 Link Civil Engineering 50 UKEduco UK Joint Venture – Bradford Schools Construction 50 UKGalliford-Costain-Atkins Joint Venture – United Utilities Civil Engineering 42 UKCostain-Skanska Joint Venture – A14 Civil Engineering 50 UKCostain-Laing O’Rourke Joint Venture – Farringdon Civil Engineering 50 UKCostain-Laing O’Rourke Joint Venture – Kings Cross Eastern Range Civil Engineering 50 UKLafarge-Costain Joint Venture Civil Engineering 50 UKStream Three Joint Venture – Costain-VWS (UK) Ltd Civil Engineering 50 UK

25 Related party transactionsGroupA related party relationship exists with its major shareholders, subsidiaries, joint ventures and associates, jointly controlled operations and with its directors and executive officers.

Sales of goods and services 2009 2008 Joint Joint ventures Jointly ventures Jointly and controlled and controlled associates operations Total associates operations Total2009 £m £m £m £m £m £m

Services of Group employees 18.9 37.0 55.9 15.9 26.5 42.4 Construction services and materials 59.2 0.1 59.3 94.8 0.5 95.3 78.1 37.1 115.2 110.7 27.0 137.7

There were no sales of goods and services to major shareholders during the year (2008: £Nil).

The amount due from a major shareholder of £6.7 million has been fully provided against since 2006. It relates to work carried out under a subcontract. Discussions among all the parties continue but recovery is uncertain.

Balances with joint ventures and associates are disclosed in Notes 14 and 18. Balances with jointly controlled operations are eliminated on consolidation.

Major shareholdersMohammed Abdulmohsin Al-Kharafi & Sons WLL and York Place Limited are regarded as related parties of the Company.

Transactions with key management personnelThe Directors of the Company and their immediate relatives control 0.1% (2008: 0.1%) of the voting shares of the Company.

In addition to their salaries, in respect of the executive directors and executive officers, the Group provides non-cash benefits and contributes to defined contribution pension plans. Until 30 September 2009, the Group contributed to a defined benefit plan in respect of the majority of the executive officers.

Executive officers also participate in the Group’s LTIP and SAYE plans, which are detailed in Note 20.


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25 Related party transactions – continuedThe compensation of key management personnel, including the directors, is as follows: Group 2009 2008 £m £m

Directors’ emoluments 1.6 1.5 Executive officers’ emoluments 2.8 2.6 Post retirement benefits 0.3 0.2 Share-based payments 0.2 0.1 4.9 4.4

The above amounts are included in employee benefit expense (Note 5).

CompanyThe Company has no transactions with related parties other than the charge in relation to share-based payments (Note 20) (2008: Nil).

26 Significant areas of judgement and estimationThe estimates and underlying assumptions used in the preparation of these financial statements are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

The Group believes the most critical accounting policies and significant areas of judgement and estimation arise from the accounting for defined benefit pension schemes under IAS 19 Employee benefits, the accounting for long-term contracts under IAS 11 Construction contracts and assessments of the carrying value of land.

Defined benefit pension schemes require significant judgements in relation to the assumptions for inflation, future pension increases, investment returns and member longevity that underpin the valuation. Each year in selecting the appropriate assumptions, the directors take advice from an independent qualified actuary. The assumptions and resultant sensitivities are set out in Note 20.

The majority of the Group’s activities are undertaken via long-term contracts and these contracts are accounted for in accordance with IAS 11, which requires estimates to be made for contract costs and revenues. In many cases, these contractual obligations span more than one reporting period. Also, the costs and revenues may be affected by a number of uncertainties that depend on the outcome of future events and often need to be revised as events unfold and uncertainties are resolved.

Management bases its judgements of costs and revenues and its assessment of the expected outcome of each long-term contractual obligation on the latest available information, this includes detailed contract valuations and forecasts of the costs to complete. The estimates of the contract position and the profit earned to date or the forecast loss are updated regularly and significant changes are highlighted through established internal review procedures. The impact of any changes in accounting estimates is then reflected in the ongoing results.

The construction contracts undertaken by the Group may require it to perform extra or change order work and this can result in negotiations over the extent to which the work is outside the scope of the original contract or the price for the extra work. In addition, many contracts specify the completion schedule requirements and allow liquidated damages to be charged in the event of failure to achieve that schedule; on these contracts, this could result in the Group incurring liquidated damages. In assessing the result to be included in the financial statements for each contract, the directors consider the status of negotiations with the customer and the reliability with which the estimated recoverable amounts can be measured.

Alcaidesa Holding SA, one of the Group’s equity accounted joint ventures, operates in the Spanish real estate market and holds land and property within current and non-current assets. At 31 December 2009, a review of the net realisable value of each of the company’s land holdings was undertaken, including the use of external valuations, and provisions, if considered necessary, have been reflected in these financial statements.


2009 2008 2007 2006 2005 £m £m £m £m £m

Summarised consolidated income statementRevenue (Group and share of joint ventures and associates) 1,061.1 996.0 877.9 886.3 773.2 Less: Share of joint ventures and associates (67.7) (93.4) (130.3) (137.9) (95.1)Group revenue 993.4 902.6 747.6 748.4 678.1 Group operating profit/(loss) 22.0 19.5 9.7 (58.4) 8.7 Profit on sales of investments – – 2.7 3.6 – Profit on sales of interests in joint ventures and associates 2.0 2.7 3.2 – 3.5 Amounts written off loans to associate – – – (2.7) – Share of results of joint ventures and associates (3.2) (3.9) 0.9 (7.0) 13.4 Profit/(loss) from operations 20.8 18.3 16.5 (64.5) 25.6 Finance income 26.0 34.8 29.6 26.7 23.5 Finance expense (28.7) (30.0) (26.3) (23.9) (24.1)Net finance income/(expense) (2.7) 4.8 3.3 2.8 (0.6)Profit/(loss) before tax 18.1 23.1 19.8 (61.7) 25.0 Income tax (3.5) (4.9) (3.8) 7.7 (1.4)Profit/(loss) for the year attributable to equity holders of the parent 14.6 18.2 16.0 (54.0) 23.6

Earnings/(loss) per share – basic 2.3p 2.9p 3.6p (13.2)p 5.8pEarnings/(loss) per share – diluted 2.3p 2.9p 3.5p (13.2)p 5.7p

Dividends per ordinary shareFinal 0.55p 0.50p 0.50p – –Interim 0.275p 0.25p – – – Summarised consolidated statement of financial positionProperty, plant and equipment 11.5 7.7 3.5 5.7 5.9 Intangible assets 1.0 1.8 2.7 3.4 3.5 Investments in equity accounted joint ventures and associates 44.1 42.7 40.1 35.1 35.4 Other non-current assets 47.3 24.9 27.9 40.7 41.3 Total non-current assets 103.9 77.1 74.2 84.9 86.1 Current assets 325.1 329.2 285.7 219.4 243.7 Total assets 429.0 406.3 359.9 304.3 329.8 Current liabilities 320.5 312.1 273.2 280.1 238.8 Pension liability 104.7 50.2 50.6 68.7 99.3 Other non-current liabilities 7.6 10.4 8.7 10.7 14.2 Total liabilities 432.8 372.7 332.5 359.5 352.3 Equity attributable to equity holders of the parent (3.8) 33.6 27.4 (55.2) (22.5)

Five-year financial summary

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Costain photographers Mike Doherty: pages 15, 19 (‘Blue Hat’ scheme), 21 (Apprentices and trainees), 27, and 38. Phil Starling: pages 10/11, 17, 23 (‘Friends of Felixstowe’) and 37 (Highways). Ian Routledge: pages 04/05, 06/07, 17, 21 (Academy of excellence), 30, 32 and 46/47. Additional photography Alastair Fyfe Photography: pages 08/09 and 17. www.webbaviation.co.uk: pages 12/13, 17 and 39 (Hydrocarbons & Chemicals). Venture Wales: page 23 (‘Cooking up Success’). www.aerial-images.co.uk: page 19 (Awareness days). Beaumont & Cowling (Sheffield) Ltd: page 25 (Reducing carbon emissions). Veena Cornish www.veenacornish.co.uk: page 33. Gavin Stacey: page 36 (Water). Philip Lane Photography: page 36 (Waste). www.airshots.co.uk: page 36 (Marine). Image courtesy of Network Rail: page 37 (Rail). Michael Metherell/Costain: page 37 (Airports). © NDA: page 39 (Nuclear). Gustavo Ferrari, Pro Light Studio: page 46 (Samer G. Younis). All other images provided by the Costain Group PLC.

The Annual Report is printed by an FSC (Forest Stewardship Council),ISO 14001 and Carbon Neutral certified printer using vegetable oil based inks. (ISO 14001 is a pattern of control for an environmental management system against which an organisation can be credited by a third party. FSC ensures there is an audited chain of custody from the tree in the well-managed forest through to the finished document in the printing factory.)

This Report has been printed on Revive 50:50 gloss paper and Soporset Premium Offset Paper. Revive uses 25% de-inked post-consumer waste, 25% unprinted pre-consumer waste and 50% virgin fibre and Soporset, wood fibre from fully sustainable forests. Both papers haveFSC certification.

If you have finished reading the Annual Report and no longer wish to retain it, please pass it on to other interested readers or return itto Costain Group PLC or dispose of it in your recycled paper waste. Thank you.

This Annual Report is available at: www.costain.com

Financial calendar and other shareholder information

Financial calendar*Full year results 10 March 2010Annual Report mailing 1 April 2010Ex-dividend date for final dividend 21 April 2010Final dividend record date 23 April 2010Interim Management Statement 6 May 2010Annual General Meeting 6 May 2010Final dividend payment(subject to shareholder approval) 21 May 2010

Half-year end 30 June 2010Half-year results 2010 25 August 2010Interim Management Statement October 2010Financial year-end 31 December 2010

* The financial calendar may be updated from time to time throughout the year. Please refer to our website www.costain.com for up-to-date details.

Scrip dividend schemeA scrip dividend scheme will be offered in respect of the dividend. Those shareholders who have already elected to join the scheme will automatically have their dividend sent to them in this form.

Shareholders wishing to join the scheme for the dividend (and all future dividends) should return a completed mandate form to the Registrar, Equiniti by 29 April 2010. Copies of the mandate form and the scrip dividend brochure can be downloaded from the Company’s website www.costain.com or obtained from Equiniti by telephoning 0871 384 2268.

Analysis of ShareholdersAccounts Shares %

Institutions, companies,individuals and nominees:Shareholdings 100,000 and more 236 582,714,762 91.87Shareholdings 50,000-99,999 200 13,995,172 2.21Shareholdings 25,000-49,999 328 11,282,972 1.78Shareholdings 5,000-24,999 1,689 18,499,780 2.92Shareholdings 1-4,999 10,545 7,756,027 1.22

12,998 634,248,713 100.00

SecretaryClive L Franks

Registered OfficeCostain House, Vanwall Business Park, Maidenhead,Berkshire SL6 4UB

Telephone 01628 [email protected] Number 1393773

RegistrarEquiniti, Aspect House, Spencer Road, Lancing,West Sussex BN99 6DA

Telephone 0871 384 2250Calls to this number are currently charged at 8 pence per minute from a BT landline. Other telephony provider costs may vary.

Unsolicited mailThe Company is legally obliged to make its share register available to the general public. Consequently some shareholders may receive unsolicited mail, including correspondence from unauthorised investment firms. Shareholders who wish to limit the amount of unsolicited mail they receive can contact:

The Mailing Preference ServiceFreepost (LON20771)London W1E 0ZT

Shareholder informationThe Company’s Registrar is Equiniti, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA. For enquiries regarding your shareholding, please telephone 0871 384 2250. You can also view up to date information about your holdings by visiting the shareholder website at www.shareview.co.uk. Please ensure that you advise Equiniti promptly of a change of name or address.

ShareGiftThe Orr Macintosh Foundation (ShareGift) operates a charity share donation scheme for shareholders with small parcels of shares whose value makes it uneconomic to sell them. Details of the scheme are available on the ShareGift website www.sharegift.org. Equiniti can provide stock transfer forms on request. Donating shares to charity in this way gives rise neither to a gain nor a loss for Capital Gains Tax purposes. This service is completely free of charge.

Costain Group PLC Annual Report 2009 / www.costain.com IBC

Costain Group PLCCostain HouseVanwall Business ParkMaidenheadBerkshireSL6 4UB www.costain.com

‘Choosing Costain’

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