Olympic building boom presents hurdle for construction sector

The potential boom awaiting the UK construction industry in the lead-up to
the 2012 Olympic Games could be exacerbated by accounting difficulties facing
the entire sector.

The Olympic Delivery Authority – the body responsible for construction of the
big-ticket venues – is set to direct much of its £2.75bn budget the construction
industry’s way. Analysts have warned, however, that ongoing revenue recognition
problems at construction company Mowlem are a concern for the entire sector.

Mowlem issued its fourth profit warning in just over a year last month and
was forced to write down profits by £20m after recognising project revenues too
early.

Stephen Rawlinson from Arbuthnot Securities said the sheer size of the
Olympics increased the risks facing the sector. ‘The timing difference between
revenue recognition and costs has always been a problem, but the Olympics in
2012 makes the problem larger,’ Rawlinson said.

Revenue recognition is an issue, said Rachael Waring, a construction analyst
at Numis, that has long been a problem for the industry. ‘Construction is more
exposed because of the length of contracts, which makes it difficult to decide
when to recognise profits,’ she said.

A spokesman for Mowlem said the company’s new FD, Paul Mainwaring, was
working on defining consistent guidance for revenue recognition. The unique
requirements of individual projects, however, made it almost impossible to
devise fixed rules. ‘There is no one law on which all contracts can be judged,’
he said. ‘Contracts are so different that it would be virtually meaningless.’

But Rawlinson said the situation at Mowlem proved that senior management
needed to take responsibility for implementing prudent accounting practices.
‘There are more statements of recommended practice on revenue recognition than
you can shake a stick at, but ultimately what to include as revenue is dependent
on management’s judgement,’ he said.