'Choosing Costain' to meet national needs

Costain Group PLC Annual Report 2010

Contractor of the Decade

"Extraordinary renaissance"

"the reputation of Costain has been rebuilt to the point that last summer it was named by the industry as "Contractor of the Decade"... in making the award New Civil Engineer magazine was elevating Costain above the likes of Balfour Beatty, Carillion, the McAlpines and the Laings. It also recognised an extraordinary renaissance."

Robert Lea, Industrial Editor The Times, 8 January 2011

Meeting national needs 1

Welcome to the 2010 Costain Group PLC Annual Report. 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 feature the 2010 operational performance. We also show how our strategy – 'Choosing Costain' – is based on meeting national needs in terms of Infrastructure, Environment and Energy & Process. In addition, we demonstrate how innovation is key to Costain's success both now and in the future.

Visit us online www.costain.com

Our Annual Report 2010 is available in both printed form and on the Investors section of the Costain website at www.costain.com/ investors. Effective communication with our shareholders is vital to our wellbeing and we would welcome feedback on either or both versions of this Annual Report – contact us at [email protected]

This section explains the challenges facing society and how investment in upgrading and maintaining the UK's infrastructure will aid economic recovery and growth. It also outlines how Costain many of the challenges.

performance. We also review our

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

1 Meeting national needs

04 The priorities
06 The investment
08 Our strategy
10 Delivering innovation

2 Business & Responsibility review

14 2010 highlights
16 Chairman's statement
18 Chief Executive's review
22 Our vision and values
24 Our sustainable investment proposition
26 Our performance
28 Divisional performance
28 Environment
30 Infrastructure
32 Energy & Process
33 Land Development
34 Performing responsibly
34 Health and Safety
35 Our People
37 Environmental Impacts
38 Relationships
40 Principal risks
42 Key performance indicators
43 Finance Director's review
46 Board of Directors
50 Corporate Governance statement (including Internal controls and Risk management)
57 Directors' report
62 Directors' remuneration report
70 Statement of Directors' responsibilities
71 Independent Auditor's Report to the members of Costain Group PLC

4 Financial statements This section contains the detailed

74 Consolidated income statement
75 Consolidated and Company statements of comprehensive income and expense
76 Consolidated statement of financial position
77 Company statement of financial position
78 Consolidated and Company statements of changes in equity
79 Consolidated cash flow statement
80 Company cash flow statement
81 Notes to the financial statements
115 Five-year financial summary
116 Financial calendar and other shareholder information

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

Meeting national needs The priorities

Energy commitment »

European utility owners are committed to investing in a diverse portfolio of solutions to close the UK's 55GW energy gap across a diverse portfolio of solutions. Major initiatives are under way to deliver energy solutions based on renewable, new nuclear and clean coal technology.

Waste solutions »

Over 300 landfill sites are scheduled to close in the UK by 2020 due to European Union ('EU') and Department for Environment, Food and Rural Affairs ('Defra') legislative waste recycling targets. EU waste exemplar schemes such as our Greater Manchester Waste contract (5% of the UK's municipal waste) are providing valuable solutions to waste resource recovery.

Go online to see this in action www.costain.com/investors

Reducing congestion »

Vehicle kilometres driven have risen from 227 billion in 1980 to 514 billion in 2008. 33% of the public sees congestion on our motorways as a serious issue. Managed motorways and operational efficiencies through innovative maintenance frameworks are strategically important to reducing peak-time congestion, while improving traffic flow by more than 20%.

Vital role for railways »

The Government recognises the important role the railways play in driving economic growth. Up to twice as many passenger kilometres and a doubling of freight by 2035 are predicted. The Association of Train Operating Companies ('ATOC') confirmed that there were 1.32 billion journeys in 2010, a rise of 37% since 2000. Smart infrastructure and construction solutions will deliver railways to meet growing demand.

Water challenges »

more water than 25 years ago. Major investment is being undertaken by the UK water industry to cater for a growing population and compliance with stringent environmental standards. Demand management combined with smart infrastructure will be the solution to deliver sustainable water supplies.

One in six properties is at risk of flooding in the UK, while the latest climate change predictions indicate rising sea levels and increasingly severe and frequent storm events. Smart infrastructure and flood alleviation measures will reduce the

The UK faces unprecedented challenges. A growing population, climate change, stretched carbon and waste disposal targets, the need to ensure a secure, sustainable and balanced portfolio of energy sources, along with ageing and obsolete infrastructure mean that there is a national

need for strategic investment upgrading the UK's infrastructure. For the UK to remain competitive globally and for the economy to flourish, it is essential that reliable infrastructure is in place to achieve this objective and meet the challenges ahead.

Meeting national needs The investment

These market sectors are attractive to Costain because of the major spending plans of the targeted blue-chip customers, which are underpinned by national needs, regulatory commitments or essential maintenance requirements. It is expected that there will be substantial investment in these markets over the next few years.

Why these markets are attractive to Costain

Waste

Water

£10-£20bn ...to 2020

The Environmental Services Association

has estimated that capital expenditure of £10-20 billion will be required over the next 10 years to fund new materials recycling and energy recovery infrastructure.

Education

£6bn ...to 2014

Partnerships for Schools indicate £2 billion capital expenditure for local authority run schools in 2011-12. The Department for Education confirms that this expenditure will remain static during both 2012-13 and 2013-14.

Go online to see this in action www.costain.com/investors

Why these markets are attractive to Costain

Power

New Generation of secure low carbon electricity powered by a mix of renewable energy, new nuclear power and fossil fuel power stations with Carbon Capture and Storage technology. Estimated investment of £110bn+ to 2020.

Highways £10bn+ ...to 2015

Over £10 billion will be spent over the period to 2015 on maintenance and investment in new high-value roads, regional and local transport schemes, while seeking significant cost reductions across the programme.

Marine

Annual investment in upgrading and developing port facilities has been running at £200-£300 million per year and this will increase as several large development projects (which have already received planning approval) are taken forward.

Rail

Over £37 billion will be provided for Network Rail, London Underground ('LUL') and Crossrail: supporting maintenance, capacity enhancement and speed of services, upgrades, capital maintenance supporting growth and improving reliability and reducing journey times.

£1.4 billion capital investment per year for the next five years in a highly regulated market.

Hydrocarbons and Chemicals £70bn ...to 2050

Driven by high level of private sector funding.

Nuclear £44.5bn

The Nuclear Decommissioning Authority has identified £44.5 billion for lifetime decommissioning and clean-up costs.

Costain Group PLC Annual Report 2010 07

Meeting national needs Our strategy

08 Costain Group PLC Annual Report 2010

Go online to see this in action www.costain.com/investors

Our 'Choosing Costain' strategy is focused on providing valuable solutions for blue-chip customers in chosen sectors. The Group continues to develop its scale and resources to meet successfully the increasingly complex delivery programmes and outsourcing needs of those major customers.

Over the next decade, the Board believes that those programmes will be primarily in three growth markets:

Infrastructure

– particularly Highways, Rail and Airports

Environment – particularly Water and Waste

Energy & Process

– particularly Nuclear, Power and Hydrocarbons and Chemicals

Costain's strategy is both to build on the Group's current strengths and to broaden and improve the quality of earnings streams by accelerating the development of an integrated business, providing front-end engineering consultancy, construction and ongoing care and maintenance services.

We will continue to ensure that the appropriate application of innovation and new technology is at the very heart of the services that we provide. It is such effective application that allows us to develop and deliver solutions that save our customers millions of pounds every year through enhanced, technology-led solutions, thus generating high levels of repeat order business.

It is expected that the Company's growth aspirations and ambition for the business will be achieved through a combination of organic growth and by suitable acquisitions in line with strategy.

Meeting national needs Delivering innovation

The Costain Group is well placed to provide solutions to many of the challenges that face society. These solutions will benefit many and also further enhance Costain as a successful business.

Our 'Choosing Costain' strategy is designed to meet national needs by upgrading and maintaining the UK's infrastructure and aiding economic recovery and growth, (ensuring the UK's international competitiveness) and the ability to meet the challenges faced through climate change, directives on carbon and waste reduction, and population growth.

Costain is driving its strategy through innovation. The Company is committed to a constant quest for change and improvement. On these pages, three Costain projects are highlighted which demonstrate how the Company meets the customer's need through innovation and premier performance.

Environment Greater Manchester Waste Disposal Authority's ('GMWDA') PFI Recycling and Waste Contract

The Customer's Need

Over two million people live in Greater Manchester and the region currently produces circa 1.1 million tonnes of waste a year. Taken together with stringent EU Landfill Directive targets, and the need to avoid incurring increasing landfill costs, it became a priority to introduce a new, sustainable waste management solution.

Viridor-Laing (Greater Manchester) Limited ('VLGM') was appointed by the Greater Manchester Waste Disposal Authority in April 2009 and the UK's largest-ever combined recycling, waste and renewable energy project was created, handling 5% of the UK's municipal waste.

The Costain Solution

Costain is designing and building the world-class waste infrastructure to meet Greater Manchester's recycling and waste requirements. This involves the construction of a total of 43 state-of-the-art recycling and waste treatment facilities, based at 27 different locations across

Greater Manchester, providing a solution that maximises material re-use, recycling, composting and energy recovery.

Key Benefits

Costain's recycling and waste treatment facilities will help fulfil the region's obligation to recycle and compost at least 50% of all waste by 2015, and divert more than 75% of Greater Manchester's waste away from landfill. It will also make a significant contribution to reducing Greater Manchester's environmental impact and minimising the region's carbon footprint, delivering up to 400,000 tonnes of CO2 benefits each year.

Facts & Figures

» The project provides waste disposal services to approximately 1,009,815 households across Bolton, Bury, Manchester, Oldham, Rochdale, Salford, Stockport, Tameside and Trafford. It will last 25 years and is the largest municipal waste contract in western Europe.

The Customer's Need

One of the key challenges associated with long-term storage of nuclear waste is to accelerate the reduction in the volume of legacy waste. This reduces safety and environmental risks. Evaporator D will provide concentration (by evaporation) of Highly Active raffinate from THORP and Magnox reprocessing. This reduces the storage volume in the Highly Active Storage Tanks and vitrification operations. Once THORP and Magnox have ceased reprocessing, Evaporator D will support decommissioning operations by processing post-operative clean-out liquor.

The Costain Solution

Costain has been contracted to provide the complete solution and will undertake the front-end engineering, detailed engineering, procurement, construction, installation and inactive commissioning of the new Evaporator. To help address the inherent challenges of constructing and installing equipment on a complex

operational site, Costain employed the innovative approach of using modularisation, which is often used in the hydrocarbons and chemicals industry sector.

Key Benefits

This has the benefit of reducing the amount of on site construction work, minimising site movements and improving delivery assurance. This has resulted in an outstanding safety record, with one million man-hours without a lost time incident.

Facts & Figures

» The Evaporator D project is the biggest nuclear project currently being undertaken in the UK.
» This is the first time in the history of the Sellafield site that large-scale modular construction will be used.

Infrastructure A34 Wolvercote Viaduct Replacement

The Customer's Need

The Highways Agency ('HA') identified a major problem following a condition survey of the A34 Wolvercote viaduct. It had to replace the viaduct – consisting of two independent 250m structures built side-by-side – without affecting peak traffic flows.

The Costain Solution

Costain's innovative solution was to build a new 250m length deck, weighing 5,100 tonnes, alongside the existing decks, and use it to divert temporarily the southbound A34 traffic. By putting the northbound traffic on to the old southbound deck, Costain could demolish the old northbound viaduct and build a new one. This crucial phase in the construction programme required the new deck to be lifted by 20mm and then pushed 16m sideways into its permanent position. This was achieved over a weekend, using eight hydraulic jacks and was completed within less than 21 hours.

Key Benefits

Go online to see this in action www.costain.com/investors

Cost savings of approximately £8 million and time savings of 10 months were made throughout the duration of the project. The cost savings were largely derived through innovation and supply chain integration.

Facts & Figures

» 90% of the waste produced throughout the project was diverted from landfill.
» 100% of the original structure was recycled.
» Costain's capability in having the full skill set from Early Contractor Involvement experience and consultancy, through construction to back-end care and maintenance, has provided the HA with an overarching network solution. Costain, in joint venture now maintains approximately one third of the UK's motorway and trunk road network with a fleet of over 500 specialist vehicles, including gritters and traffic management vehicles.

This section provides greater focus on our strategy and our sustainable investment proposition. We explain how our strategy is underpinned by our commitment to Corporate Responsibility, how our business is organised and how it has developed over the year, and we provide details of our financial performance. We also review our strategic objectives, Key performance indicators, Principal risks and priorities for 2011.

Business & Responsibility review

14 2010 highlights
16 Chairman's statement
18 Chief Executive's review
22 Our vision and values
24 Our sustainable investment proposition
26 Our performance
28 Divisional performance
28 Environment
30 Infrastructure
32 Energy & Process
33 Land Development
34 Performing responsibly
34 Health and Safety
35 Our People
37 Environmental Impacts
38 Relationships
40 Principal risks
42 Key performance indicators
43 Finance Director's review
46 Board of Directors

2010 highlights

Costain has delivered another strong performance, a significant increase in profit before tax, an enhanced cash balance, a robust order book and an increased dividend for the year.

Financial »

Year ended 31 December	2010	2009
Revenue1	£1,022.5m	£1,061.1m
Profit from operations2	£29.4m	£20.8m
Profit before tax2	£27.9m	£18.1m
Net cash	£144.3m	£120.5m
Earnings per share3	36.4p	23.0p
Full year dividend3	9.25p	8.25p

1 Including share of joint ventures and associates.

2 Including profit arising from PFI transfer/sales.

3 Restated for 2009 following 1 for 10 share consolidation.

» Profit from operations² increased by 41% to £29.4 million (2009: £20.8 million)
» Profit before tax² increased by 54% to £27.9 million (2009: £18.1 million)
» Strong net cash position at £144.3 million (2009: £120.5 million)
average month-end cash balance of £116.0 million during the year (2009: £125.3 million)
» Revenue¹ at £1,022.5 million (2009: £1,061.1 million)
» Year-end order book of £2.4 billion maintaining long-term earnings visibility (2009: £2.6 billion)
repeat order customers account for in excess of 80% of order book
includes circa £800 million of secured work for 2011
» In addition, preferred bidder positions at year-end maintained at over £400 million
» Banking and bonding facilities increased in early 2010 by 20% to £345 million and extended to September 2013
» IAS 19 pension scheme deficit reduced to £28.9 million at year-end, net of deferred tax (2009: £75.4 million)
PFI assets of £22.0 million transferred into The Costain Pension Scheme during the year
» Recommended final dividend of 6.25p, increasing total payout for the year by 12% to 9.25p (2009: 8.25p3)
» Implementing 'Choosing Costain' strategy in order to broaden further Costain's market position across the design and engineering, construction, and operations and maintenance spectrum

The Prince's Mayday Network, convened by Business in the Community ('BITC'), is a collaboration of businesses at all stages on the low carbon journey: some leading, some just starting out. Named after the international 'Mayday Mayday' distress signal and founded by HRH The Prince of Wales in 2007, the aim is to inspire, engage, support and challenge as many businesses as possible as they work together towards a sustainable future.

BITC, one of HRH The Prince of Wales Charities', advises, supports and challenges its members to create a sustainable future for people and the planet and to improve business performance. With a membership of more than 850 companies, BITC represents one in five of the UK private sector workforce and convenes a network of global partners.

CRASH is the construction and property industry's charity for homeless people. CRASH is a practical charity that focuses on improving the buildings used by homeless people. This is achieved in three ways: by providing on site professional expertise, supplying free building materials and awarding cash grants.

Environment »

» The development of our climate change strategy. The strategy outlines our ambition to reduce our carbon emissions and to work with our customers and supply chain partners in order to reduce their environmental impacts. As members of The Prince's Mayday Network, the strategy supports our pledge to take action on climate change.
» Reducing our measured carbon emissions by 27%.
» Diverting 84% of the waste that we generated from landfill.
» Receiving CEEQUAL ('Civil Engineering Environmental Quality Assessment and Award Scheme') 'Excellent' awards for the A34 Wolvercote Viaduct Replacement scheme and the A2/A282/M25 project.

Social »

» Costain became a patron of CRASH, the construction and property industry's charity for homeless people.
» Receiving five Gold Awards, five Silver Awards and eight Bronze Awards from the Considerate Constructors Scheme Awards.
» Joining forces with BITC, as part of a working group of like-minded BITC member companies, to develop a Community Footprint tool, an easy-to-use series of practical tools allowing local managers to assess the socio-economic contribution their business makes to the communities they work in.
» The Costain Project Management Academy achieved APM ('Association for Project Managers') corporate accreditation, joining an elite group of 13 organisations including EDF Energy, Rolls-Royce and Shell.
» Supporting over 167 days of work experience and 814 weeks of sponsored placements.

Costain achieved a score of 93.1%, a Gold banding, in the BITC Corporate Responsibility ('CR') Index 2009. The Index helps companies to integrate and improve CR throughout their operations by providing a systematic approach to managing, measuring and reporting on business impacts in society and on the environment.

Costain became the first major UK construction/ engineering company to launch an 'app' for the Apple iPad. The innovative move allows the Group to showcase its technical capabilities and offer an outlet for its views on major issues affecting the construction/engineering sector. The app also includes videos and is updated automatically.

Chairman's statement

Overview & Strategy

I am delighted to report a strong Group performance in 2010, which provides evidence of the continuing significant strides we are making in the delivery of our 'Choosing Costain' strategy which is designed both to build on the Group's current strengths and to broaden its earnings streams in order to achieve our vision of becoming one of the UK's top solutions providers.

The fundamental dynamic driving our marketplace is the fact that, irrespective of the economic environment, the UK urgently requires billions of pounds to be invested in its basic infrastructure. Whether in roads, water, waste or power, investment decisions for our long-term national success have to be – and are being – taken today.

While customers, both in the public and private sectors, continue to place significant contracts they also continue to drive for major cost savings in the process.

Costain has demonstrated that it has the proven ability to meet the exacting needs of its blue-chip customers. This is being achieved through a combination of factors including the outstanding quality of our people, the innovative solutions that Costain provides to meet its customers' demands and the utilisation of technology to facilitate those innovative solutions.

"We have delivered another excellent performance. Once again, the Group has demonstrated its resilience in a continuing 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."

David Allvey Chairman

Last year, we unveiled 'Choosing Costain', the latest stage in our evolving strategic development which is designed to take advantage of new opportunities arising from the ongoing structural changes in the sector through the further expansion of our market position across the design and engineering, construction, and operations and maintenance spectrum.

To expedite the delivery of our strategy, we said that we would look at appropriate acquisition opportunities as well as organic growth. We are actively progressing a number of opportunities ranging from bolt-on to transformational transactions, and all of which must meet a strict set of criteria in the event that they were to be concluded.

Approaches to Mouchel Group plc

The Group is currently in an offer period in relation to Mouchel Group plc. Following completion of comprehensive initial due diligence, including management meetings with Mouchel, the Board of Costain approached the Board of Mouchel on 17 February 2011 with a revised proposal, reflecting our assessment of the valuation of Mouchel. Since then, the Board of Mouchel has entered a 'co-operation agreement' with a third party.

Results

Revenue, including the Group's share of joint ventures and associates, for the year was £1,022.5 million (2009: £1,061.1 million). The slight

decrease reflects the deliberate actions taken to reduce the Group's exposure to the health and education sectors, where we anticipated significant expenditure cuts, while increasing our efforts to secure infrastructure and energy related projects which indeed showed strong revenue growth.

Profit from operations was £29.4 million (2009: £20.8 million), an increase of 41%, including the benefit of the transaction, as announced in November 2010, that transferred the Group's interest in a portfolio of six PFI investments into The Costain Pension Scheme ('CPS').

We actively trade our PFI equity portfolio in order to invest in future opportunities for the Group. In 2010, the equity transfer into the CPS brought forward and realised a profit of £11.2 million from the sale of the six PFI investments (2009: £2.0 million profit generated from sales of PFI investments). By way of comparison, after allowing for an additional accrual of £2.0 million for share-based payments as a result of the overall level of profit achieved by the Group following the transaction, the PFI transfer generated an additional profit of £7.2 million compared to the profit from PFI equity sales in 2009.

Net financing expense amounted to £1.5 million (2009: £2.7 million) which incorporated net interest income of £0.1 million (2009: £2.1 million) and a pension scheme related net interest cost of £1.6 million (2009: £4.8 million).

Business & Responsibility review 2

Profit before tax was £27.9 million (2009: £18.1 million), an increase of 54%.

Basic earnings per share were 36.4 pence (2009: 23.0 pence3).

As a consequence of continuing to secure major contracts during the year, despite the prevailing economic conditions, the Group finished the year with an order book of £2.4 billion (2009: £2.6 billion).

The Group has no significant borrowings and net cash balances at the year-end totalled £144.3 million (2009: £120.5 million), including the Group's share of cash held by construction joint venture arrangements of £33.8 million (2009: £36.0 million). The average month-end net cash balance during the year was £116.0 million (2009: £125.3 million).

Dividend

The Board is recommending the payment of a final dividend for the year of 6.25 pence per share (2009: 5.5 pence3). If approved at the forthcoming Annual General Meeting, the dividend will be paid on 20 May 2011 to shareholders on the register, as at 15 April 2011. This would bring the total for the full year to 9.25 pence per share (2009: 8.25 pence3), an increase of 12% over the prior year.

Pension

Costain now only offers a defined contribution scheme for employees.

As indicated above, the Board agreed with the Trustee of the CPS a transaction to reduce significantly the Group's pension deficit through the transfer of the Group's interest in a portfolio of six PFI investments into the CPS at an agreed valuation of £22.0 million.

During the year, the pension scheme assets also increased in value as a result of a recovery in the global equities markets. However, this was partially

offset by an increase in liabilities due to an increase in longevity assumptions and a reduction in the liability discount rate.

Consequently, as at 31 December 2010, the deficit in the CPS recorded in the Group's balance sheet in accordance with IAS 19 was £28.9 million, net of deferred tax (31 December 2009: £75.4 million).

An agreement was also finalised last year with the Trustee of the CPS regarding the actuarial valuation as at 31 March 2010, and the associated deficit recovery plan. This agreement, which incorporates the £22.0 million transfer of the PFI investments, will result in a corresponding reduction in the Group's future annual cash contributions into the CPS over a thirty-nine month period starting with effect from 1 January 2011.

Share Consolidation

At last year's Annual General Meeting of the Company, shareholders approved a 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.

Staff

On 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.

Clive Franks, the Group's Company Secretary, who has been with Costain for thirty years, is to retire with effect from 31 May 2011. Clive has been an outstanding member of the Costain team. He has shown skill, knowledge and commitment throughout and demonstrated a deep understanding of the Costain culture and the values which we all embrace. We wish him a long and happy retirement.

Tracey Wood, HR and Legal Director, will also become Group Company Secretary with effect from 1 June 2011.

Summary & Outlook

We have delivered another excellent performance. Once again, the Group has demonstrated its resilience in a continuing 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.

Through our 'Choosing Costain' strategy, we are making good progress in achieving our vision of building Costain into 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. Our strategy of growing the business through a combination of organic growth and targeted acquisitions is providing a number of exciting options for us to consider.

We therefore look to the future with confidence, reinforced by our robust year-end order book, enhanced cash balance and the ongoing support of our customers committed to long-term capital investment programmes. That confidence is reflected in the Board's recommendation to increase the total dividend for the year.

David Allvey Chairman

9 March 2011

3 Restated for 2009 following 1 for 10 share consolidation.

Chief Executive's review

"As a result of implementing our 'Choosing Costain' strategy, we made good progress towards achieving our vision to be one of the UK's top solutions providers..."

Andrew Wyllie Chief Executive

Overview

Costain delivered another strong performance in 2010, reinforcing the Group's position as one of the UK's premier engineering and construction businesses.

In what continued to be challenging economic conditions, we are pleased to report a significant growth in profit before tax, a robust order book, a strong net cash position and a recommendation to increase the dividend for the year.

Our performance was widely recognised during the year, and we were delighted to receive the 'Contractor of the Decade' award from New Civil Engineer magazine.

As a result of implementing our 'Choosing Costain' strategy, we made good progress towards achieving our vision to be one of the UK's top solutions providers with the scale and capability to meet successfully the increasingly complex and challenging needs of major customers.

Our growth aspirations and ambition for the business will be achieved by organic growth and by suitable acquisitions in line with strategy and we are progressing a number of options in this respect.

Over the next decade there will be substantial investment in the UK's critical transport, energy, water and waste infrastructures. We believe that spending will be prioritised on meeting a number of identified essential national needs, including ensuring energy security, the provision of a sustainable water supply, meeting the demanding requirements of European waste legislation and creating key transport infrastructure capable of supporting necessary economic growth.

The sheer scale of the investment required, and the time in which it needs to be delivered, is driving a reshaping of the UK's engineering and construction sector landscape. Customers require suppliers of broad capability and scale with whom they can have the confidence to place large, multi-year contracts.

Costain is changing rapidly, and our ongoing commitment to providing our customers with the increasingly full-service offering they are demanding, from front-end engineering consultancy and design, through construction to back-end care and maintenance, ensures that we are well placed to provide valuable and cost-effective solutions to meeting those national needs.

2010: another strong performance

There have been a number of key achievements during the year, which have been delivered despite an environment of economic recession and considerable market uncertainty. Of particular note:

» Operating profits increased by 41%, and profit before tax increased by 54% to £27.9 million, including profit resulting from the transfer of PFI assets into the pension fund
» Revenue (including share of joint ventures and associates) was maintained in excess of £1.0 billion
» Following major contract awards during the year, the order book at the year-end was £2.4 billion, providing long-term earnings visibility
» Our balance sheet was strengthened further, with the net cash position increasing to £144.3 million
» An actuarial review of the pension scheme was completed and the deficit significantly reduced
» Earnings per share increased by 58% to 36.4 pence

The Board is consequently recommending an increased final dividend.

Progress in Operations

In line with our strategy during the year, we integrated the scaled-back Community division into an enlarged Environment division which, together with the Infrastructure and Energy & Process divisions, form the core focus for the development of the Group's operations.

The enlarged Environment division focuses on the water and waste markets as well as the specific requirements of a number of long-term customers. Costain is a leading player in the provision of services to the water utilities under their Asset Management Programme ('AMP5') and is currently progressing well on the delivery of the Greater Manchester Waste scheme, Europe's largest waste project. The division has a £1.2 billion order book, and we expect further opportunities in sectors where investment is driven largely by legislation and regulatory requirements.

Our Infrastructure division, which incorporates activities in the highways, rail, nuclear and airports sectors, had another good year with increased revenue, upper-quartile margins and an order book increased to £1.1 billion. In line with our strategy, we also increased our highways maintenance activity and our joint venture now maintains around one in three motorway miles in the UK. The division has a substantial pipeline of future work.

The Energy & Process division, which undertakes work in the hydrocarbons and chemicals, nuclear processing and power sectors, had another excellent year. Progress has been good on the Evaporator D contract at Sellafield, the UK's largest nuclear decommissioning project. There is a clear need to invest

in UK energy infrastructure, and we see potential for further growth in this sector.

Our Land Development activity in Spain, which is a joint venture with a subsidiary of Santander Bank, continued to be subject to very difficult market conditions. As anticipated, no land sales were completed in the year. Activity has been scaled back until the market improves and maximum shareholder value can be secured for the assets. Separately, the first phase of the 600-berth yacht marina was completed and the first sales have been achieved.

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

Order book providing long-term earnings visibility

As a direct result of the implementation of our customer focused strategy, we continued to secure major contract awards throughout the year. At 31 December the order book stood at £2.4 billion (2009: £2.6 billion) providing good long-term earnings visibility.

In addition, we ended the year with preferred bidder positions on contracts with an aggregate value in excess of £400 million.

During the year, we secured over £900 million of new orders across the business, reflecting the breadth of our operations. Of particular note was the Highways Agency Managed Motorway framework, Welsh Water AMP5 contract, a 10-year nuclear framework for Magnox South, Bond Street station upgrade for London Underground and cable tunnel infrastructure for National Grid. We also

secured from the Highways Agency the 5-year MAC 14 highways maintenance contract, our fourth such award making our joint venture the market leader.

Some 14% of the total Group order book is now in maintenance related activities.

Our strategy focuses on providing valuable solutions for major customers who have long-term or multi project investment programmes. We are delighted that major customers continue to reappoint Costain for their investment plans: our repeat order level has remained above the 80% level. We were also delighted to secure a number of new customers during the year, including National Grid.

The year-end order book included circa £800 million of work secured for 2011.

Since the year-end, we have continued to secure major new contracts and preferred bidder positions, including work at London Heathrow for BAA, runway refurbishment for Manchester Airports, our third contract on Crossrail and a new bridge across the River Thames for Surrey County Council.

While economic conditions are expected to remain challenging, the level of tendering and estimating remains high. We have a good pipeline of opportunities and our bidding teams remain fully occupied.

Chief Executive's review continued

Strong finances

We have further enhanced our financial position during the year. Given our strategic focus on major customers and their increasingly large and longer-term contracts, being able to demonstrate a strong financial covenant is an important requirement for the stakeholders in the business.

We maintained a strong net cash position, which at the end of the year had increased to £144.3 million. The average month-end cash position was down slightly to £116.0 million. The Group has no significant borrowings.

Our banking and bonding facilities were extended early in the year to 2013 and increased by 20% to £345 million. Consequently, we have the necessary headroom available to capitalise on major market opportunities as they arise and achieve our longer-term strategic objectives.

During the year, as previously announced, the parent company group of our customer, AE & E Inova AG, entered insolvency proceedings. As a result, there was some uncertainty regarding future payments on the Belvedere waste contract on which we have a subcontract to AE & E Inova AG. On 20 December 2010, Hitachi Zosen Corporation purchased AE & E Inova AG. The project is proceeding as usual and there are no outstanding payments on the contract.

Enhancing our Safety, Health and Environmental performance

Costain places the highest priority on the effective management of Safety, Health and Environment.

Further progress was made in the year and we recorded an improved Group Accident Frequency Rate ('AFR') reducing from 0.16 to 0.15, which continues to compare favourably with our major contractor peer group.

We received a total of 56 RoSPA safety awards, including the prestigious Order of Distinction for our Energy & Process operations recognising 15 consecutive annual Gold awards.

Notwithstanding our industry-leading safety performance, there was a fatal accident involving an employee of a subcontractor on the East & South-East Asset Management Framework project. This reinforces the need for continuous vigilance and focus on our safety performance.

Our proactive commitment to mitigating the environmental and social impacts of our operations resulted in the receipt of our first Gold award following an external assessment by Business in the Community.

Developing our people

We can only achieve our strong business performance by ensuring that we employ and retain a highly talented and motivated team of people.

We are investing across the organisation to ensure that we continue to have the skills and resources necessary to deliver exceptional business performance.

We place particular emphasis on skills training and during the year received the Best Graduate Development award from the Association of Graduate Recruiters.

There were a number of changes to the Executive Board, including the appointment of Alan Kay as Managing Director of the Environment division following the retirement of David Jenkins, and the appointment of Alex Vaughan in the new role of Corporate Development Director.

Tracey Wood, who will become Group Company Secretary on 1 June 2011, will also continue to be responsible for HR and legal matters on the Executive Board. Christina Wade, who has nearly 20 years experience in HR, has joined Costain from Centrica as the new Group HR Director.

'Choosing Costain': meeting national needs

Turning now to the future, we are in a situation where the UK faces unprecedented challenges.

We have a growing population, the impact of climate change, finite waste disposal capacity, and the need to ensure a secure, sustainable and balanced portfolio of energy sources. An ageing and increasingly obsolete infrastructure means that there is a clear national need for strategic investment.

For the UK to remain competitive globally and for the economy to flourish, it is essential that reliable infrastructure is in place to achieve this objective and to meet the challenges ahead. To give one example, the UK Government

identified in its 2010 Budget that the UK requires up to £200 billion of investment by 2020, much of which will come from the private sector, to secure a low carbon energy future.

These pressing national needs also have to be weighed against the economic realities of uncertainty, a reduced ability of the public sector to invest, macroeconomic constraints and customers who are increasingly seeking value-driven solutions.

Such a challenging market environment also provides major opportunity for businesses able to create and deliver those solutions.

Our 'Choosing Costain' strategy is focused on targeting the blue-chip customers in chosen sectors whose major spending plans are underpinned by strategic national needs, regulatory commitments or essential maintenance requirements. Through 'Choosing Costain', the Group continues to develop its scale and resources to meet successfully the increasingly complex delivery programmes and outsourcing needs of major customers.

Over the next decade, the Board believes that those programmes will be primarily in three growth markets: Infrastructure – particularly

	Highways, Rail and Airports
Environment	– particularly Water and Waste
	Energy & Process – particularly Nuclear, Power and Hydrocarbons and Chemicals

Therefore, Costain's strategy is both to build on the Group's current strengths and to broaden and improve the quality of earnings streams by accelerating the development of an integrated business, providing front-end engineering consultancy, construction and ongoing care and maintenance services.

As previously announced, it is expected that the Company's growth aspirations and ambition for the business will be achieved through a combination of organic growth and by suitable acquisitions in line with strategy.

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

The Costain values represent the essence of the business and set the benchmark of performance for our people. They give direction and structure to everything that 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.

Summary

We have again delivered a strong performance despite the continuation of very challenging operating conditions.

Costain has been transformed in recent years as a result of the robust implementation of our focused strategy, and is establishing itself as one of the UK's leading solutions providers.

While economic conditions are expected to remain challenging, we continue to benefit from our strategy of focusing on major customers in chosen sectors whose spending plans are underpinned by strategic national needs, regulatory commitments or essential maintenance requirements.

We are approaching the future with confidence, and I look forward to reporting on further progress during the year.

Andrew Wyllie Chief Executive

Our values

We look to our Corporate Responsibility ('CR') programme and the Business in the Community third party assessment of our CR activities to ensure we remain on course.

Developing the 'Customer Focused' Value has enabled us to see clearly what our customers want and this has led us to develop the 'Choosing Costain' strategy, which is based on meeting national needs.

the...

Costain Values »

Our Vision »

To be one of the UK's top solutions providers

Our Strategy »

'Choosing Costain' provides significant opportunity for growth by meeting national needs

Underpinned by our CR commitment »

A clear framework to address new challenges, improve business performance and benefit society

Our Strategic focus »

Meeting national needs

Our Business Objectives »

Improve the quality of our earnings streams by:

1. Focusing on growth markets
1. Targeting blue-chip customers
1. Developing core strengths

Our Capability »

Developing our capability across the full 'life cycle' of products for our customers:

Consulting 2. Construction 3. Care

Our sustainable investment proposition...

1	Targeting blue-chip customers	We continue to benefit from focusing on targeted blue-chip customers, whose major spending plans are underpinned by regulation, legislation and strategic national needs. We have won significant new contracts including Managed Motorways MAC 14, Crossrail Portals and Welsh Water AMP5.
2	'Choosing Costain' strategy	The 'Choosing Costain' strategy defines our commitment to deliver Consulting, Construction and Care as a total service offering. This strategy will help to position us within the industry premiership and our key objective is to double the Group's profit by 2014.
3	Focus on UK market	For the UK to remain competitive globally and for the economy to flourish, it is essential that reliable infrastructure is in place to achieve this and to meet the needs of a growing population. More cars, more waste, more rail passengers, risks of flooding, access to available water and increasing demand for energy put considerable pressure on ageing and obsolete infrastructure, so there is a vital need for strategic investment in upgrading the UK's assets. In the Coalition Government's Spending Review, it was announced that projects with significant economic return to the UK will be prioritised. Customers are requiring 'more for less' solutions and Costain is very well positioned to meet these changing customers' needs.
4	Organic and acquisitional growth	In order for us to achieve this ambitious growth forecast, we will be focusing on incremental organic growth, strategic partnerships and suitable acquisitions that align closely with our strategy.
5	Accelerated development	Part of the 'Choosing Costain' strategy is repositioning the business as a full service solutions provider in Infrastructure, Environment and Energy & Process markets. There will be accelerated development in shaping Costain to achieve a balance of revenue growth across Consulting, Construction and Care in the ratio 15%, 60% and 25% respectively.
6	Exemplary CR	Corporate Responsibility ('CR') lies at the very heart of our company and we believe it is intrinsic to business success. Our CR programme is core to the Company in terms of culture, operations and overall performance. It is our firm belief that we cannot build strong foundations for a future Costain without ensuring that 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 that tackles the issues of creating wealth, building confidence and addressing social and environmental needs. We believe these areas are very important to all corporate concerns and we focus on improvements in each to enable us to continue to improve further our standing as a member of the community and a pursuer of business excellence.

...to deliver value

Key contract wins in target markets

During the year we secured a number of significant contracts from a variety of customers.

Bidding activity remains high

We entered 2011 with high tendering activity across all of our target markets, confirmation of the prioritisation being given to essential infrastructure investment.

Operational success

Our 'Choosing Costain' strategy is delivering year-on-year progress… Costain is well placed to enjoy further success and deliver increased value to its shareholders.

Strong cash position

Costain had in excess of £144 million of cash at the year-end. A strong cash position is an essential prerequisite to bid for the largest contracts.

order book maintained

Costain's forward order book has remained at a near all-time high and comprises 80% of repeat orders from existing

Business & Responsibility review

High quality forward

blue-chip customers.

Delivering value through innovation

Costain is acknowledged as a leader in the deployment of cutting-edge hi-tech solutions to meet its customers' increasingly complex value-driven requirements.

Long-term visibility of earnings

The forward order book also includes a significant number of multi-year contracts, some running for up to 10 years, providing an excellent long-term visibility of earnings.

Our performance

Performing responsibly is integral to our success and sustainability. This is the third year we have combined our financial and Corporate Responsibility ('CR') reporting, demonstrating that responsible business is core to our Company. Our aim is to deliver a totally integrated approach to our reporting.

We are committed to delivering projects and services responsibly and sustainably, ensuring that we meet our customers' and society's needs while managing the social, environmental and economic impacts of our business. We recognise that by working with our customers, supply chain partners, employees and other stakeholders we can make a greater contribution to a more sustainable society.

The Board is responsible and the Executive Board of Costain is accountable for all aspects of CR, including setting policy and strategy and providing leadership to drive our CR programme. We have an established CR committee consisting of directors and senior managers with direct responsibilities for key aspects of our CR performance. The Committee is responsible for implementing and delivering policy and reports to the Executive Board. We believe every employee is responsible for working in a responsible and sustainable way.

Listening to our Stakeholders

We 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. The views of our stakeholders inform and guide our policies and reporting.

For more information on how we engage and respond to our stakeholders, please see our website www.costain.com

Your comments are important to us, please visit our website and complete a short on-line survey at: www.costain.com/responsibility or email us at corporate.responsibility @costain.com

Key Responsibilities

There are a wide range of social, environmental and economic issues that impact our business, either directly or through our supply chain. Through stakeholder engagement and by assessing our impacts and level of influence, we have identified issues that are material to our business: our key responsibilities. These key responsibilities are directly linked to our business strategy 'Choosing Costain'.

Within this report, we have highlighted our performance in areas that we believe to be of most interest to our stakeholders. For further information, please visit our website.

Measuring our Performance

We benchmark ourselves against our peers and other companies in the wider marketplace, by participating in Business in the Community's ('BITC's') CR Index. The CR Index illustrates how companies integrate responsible business at a strategic and operational level.

In June 2010, we were pleased to receive the results of the BITC CR Index 2009, achieving a score of 93.1% – a Gold banding. In June 2011, we will receive the results of our fifth assessment and hope to achieve Platinum status. Our CR Index feedback report is available to download on our website.

BITC CR Index Performance

Our CR reporting framework » Health and Safety

– promote a positive safety culture (Safety, Health and wellbeing).

Our People

– attract, retain and develop the best people for the Costain Group (diversity and inclusion, talent and training, human rights, reward and recognition, culture and ethics).

Environmental Impacts

– protect the local and global environment through responsible management (climate change, waste, water, materials, biodiversity).

Relationships

– encourage open, honest and respectful communication (communities, customers and supply chain).

Our operational reporting framework »

Environment

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

Infrastructure

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

Energy & Process

The Energy & Process division includes our operations in Nuclear, Power and Hydrocarbons and Chemicals. Costain is currently operating on five nuclear facilities in the UK.

Land Development

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

Our performance continued Divisional performance

Environment »

The Environment division includes Costain's water, waste, marine and education activities.

In 2010, the Environment and Community business units were combined into a single, enlarged Environment division. Accounting for approximately 50% of the Group's forward order book, the Environment division is focused on delivering solutions that meet the needs of long-term customers and particularly in the water and waste markets.

Revenue (including share of joint ventures and associates) for the year was £489.8 million (2009: £593.9 million), with an operating profit of £17.2 million (2009: £3.3 million), including profit of £11.2 million arising from the transfer of six PFI investments into The Costain Pension Scheme ('CPS'). As previously

reported, the profit – pre-PFI transfer – was impacted by costs associated with the amalgamation of the enlarged division, bidding activity particularly for waste PFI opportunities, and additional costs on a marine project.

The division's year-end order book was £1.2 billion (2009: £1.4 billion).

The UK water market is core to Costain. Ofwat's five-year, £22 billion Asset Management Programme ('AMP5') commenced in 2010. Following outstanding performance on its AMP4 contracts, Costain was reappointed on AMP5 frameworks with Southern Water, United Utilities and Welsh Water. The Group was also successful in securing a new ten-year £400 million contract with Severn Trent and has been chosen for Northumbrian Water's preferred contractor and consultant select list to carry out its major water infrastructure upgrade and maintenance framework.

Energy & Process

Relat

^Healt^h ^an^d ^Safet^y

Environment

In addition to long-term asset management contracts, Costain has continued successfully to design, secure and deliver major complex capital works infrastructure. Construction commenced on the Brighton & Hove waste water treatment works for Southern Water while in a further expansion of its Operations and Maintenance ('O&M') activities, Costain secured the contract to deliver Severn Trent's minor works O&M services.

The UK waste market in 2010 continued to offer significant long-term growth opportunities for Costain.

An example of the current major investment in this sector is the Greater Manchester Waste contract, the UK's largest ever combined recycling, waste and renewable energy project managing approximately 1.1 million tonnes of waste per year. Under the five-year contract secured with Viridor-Laing, Costain is responsible for the construction of a total of 43 state-of-the-art recycling and waste treatment facilities, based at 27 different

locations across Greater Manchester. To date, the Company has successfully handed over 33 different facilities.

Delivery of the UK's largest Energy from Waste ('EfW') plant, the Riverside Resource Recovery Facility ('RRRF'), is entering its final phase with testing and commissioning under way. A strategic river-served waste management facility for London, the first waste has been delivered using the jetty in readiness for the start of thermal treatment. Generating energy from a renewable resource, the RRRF will help London manage its own waste and also make a significant contribution to helping the capital meet its plan to be 85% self-sufficient in energy by 2020.

The UK urgently needs to increase significantly and enhance its ports capacity. Costain's position as a leader in specialist maritime engineering significantly enhances its competitive advantage in this market.

The Felixstowe South Reconfiguration Phase One is nearing completion with final handover in early 2011. This project for a 730 metre long, deep-water container quay, will enable the Port of Felixstowe to handle the world's largest and most advanced container ships – a unique capability in the current UK market.

In our Local Education Partnership with Lewisham, under the Building Schools for the Future ('BSF') programme, we achieved financial close on four PFI schools with a combined value of £82 million and one, under a design-and-build contract, with a value of £18 million.

The final phase of the Bradford BSF Programme has progressed with four secondary schools currently due for completion and ready for occupation in 2011.

Water

Cleaner Seas for Sussex waste water treatment scheme, Brighton & Hove

This scheme, which requires the design, construction and commissioning of a major treatment facility, includes two underground pumping stations to help move waste water to the new treatment works, as well as 11 kilometres of new sewer tunnel. When complete it will treat approximately 95 million litres of water each day.

Waste

Riverside Resource Recovery Facility ('RRRF'), Belvedere

The RRRF Energy from Waste facility at Belvedere, on the River Thames, is a strategic river-served waste management facility for London. Costain was commissioned to design and construct the large civil engineering component, including the major process equipment building and the waste delivery jetty. The plant will process an annual average capacity of 585,000 tonnes of London's residual waste.

Education

Lewisham, Building Schools for the Future ('BSF')

Costain is part of the Learning21 consortium, delivering the London Borough of Lewisham's BSF programme. This is designed to modernise the Borough's education infrastructure. Learning21 was established in response to the Building Schools for the Future programme, that aims to enhance education standards and the role of schools in the local communities. Costain is also the design and build contractor for the Lewisham BSF programme.

Our performance continued Divisional performance

Infrastructure »

The Infrastructure division includes Costain's highways, rail and airports activities.

Revenue (including share of joint ventures and associates) for the year was £395.3 million (2009: £364.8 million), with an operating profit of £12.2 million (2009: £16.9 million).

While the division continued to record upper-quartile margin performance, profitability was impacted by a high level of bidding costs and, as previously announced, a high level of project bonuses in 2009.

The division's year-end order book was £1.1 billion (2009: £1.0 billion), an increase of 10%.

Costain's appointment in joint venture as Managing Agent Contractor ('MAC') for the Highways Agency Area 14 further strengthened Costain's position as a leading provider of highways maintenance services. Together with MAC Areas 10, 7 and 12, this means that Costain's joint venture is responsible for a third of the Highways Agency network.

The award of the contract for the Major Project framework in early 2010 to develop, construct and commission Managed Motorways for the Highways Agency provides a significant boost to the Group's strategy of focusing on providing solutions that deliver value and the savings required by customers today. Our ongoing projects such as M1 J10 to 13 and the A40 for the Welsh Assembly Government are progressing ahead of schedule and budget.

The Company's capability in the Highways sector was underlined further with the successful completion of the Bell Common Tunnel, for the Highways Agency and the Church Village Bypass for Rhonnda Cynon Taf. Both projects were ahead of programme and under budget.

In Rail, Costain is engaged on two of the UK's largest rail projects including Crossrail, Europe's largest infrastructure project, and Network Rail's Thameslink programme. On Crossrail, Costain secured two portal contracts during the year while on Thameslink, the Group is working on the key Farringdon station project, a major component in the overall programme providing 'twelve car' capability at the station.

On London Underground, Costain, in joint venture was awarded the Bond Street station redevelopment contract. The Company also successfully completed the Victoria Mid-Tunnel Vent Shafts contract.

The Group's framework contract with the Manchester Airports Group continues to perform well and the recent award of the runway renewal at Manchester reinforces Costain's capability in this sector. The year also saw the

completion of the impressive new North Terminal Interchange and Forecourt at Gatwick for Gatwick Airport Ltd together with the award of a role on BAA's Heathrow Local Project Integrator framework.

The Company was awarded a contract from National Grid for its London Cable Replacement Tunnel. The contract is worth approximately £200 million and forms part of National Grid's investment plans in the capital to ensure a continued safe and reliable electricity transmission network. The work will involve building a new high voltage electricity cable tunnel between Hackney and Willesden (via Kensal Green) and Kensal Green and Wimbledon.

Highways

M53 Bidston Moss viaduct strengthening The Bidston Moss viaduct on the Wirral carries the M53 over a railway and roundabout towards the Kingsway Tunnel and Liverpool. The 730m long, 37-span steel box-girder structure dates back to 1969. Like many bridges of that construction method and vintage, structural deterioration has set in. The strengthening that Costain is undertaking will bring the whole viaduct back to highway standards and will restore full network capacity for road users.

Rail

Farringdon station redevelopment

Costain, in joint venture, is rebuilding Farringdon station as part of the Thameslink programme. The station is being transformed and will become a unique point on the network – the only station where Thameslink, Crossrail and London Underground will meet. With improvements including a new ticket hall and extended platforms, the station will have more space for passengers using the longer, more frequent, trains through London and between Bedford and Brighton.

Airports

Redeveloping Gatwick's North Terminal Gatwick Airport Limited ('GAL') are increasing the annual capacity of the North Terminal ('NT') by four million passengers by 2012. They envisaged several projects, including a major extension to the NT, a new multi-storey car park, new forecourts and interchange areas, and a refurbished inter-terminal transit system. Costain is developing co-ordinated solutions having been appointed as a Complex Build Integrator ('CBI') in April 2008. Costain has also delivered the North Terminal Interchange and Forecourt projects.

Our performance continued Divisional performance

Energy & Process »

The Energy & Process division includes Costain's hydrocarbons and chemicals, nuclear process and power activities.

Revenue (including share of joint ventures and associates) for the year was £136.6 million (2009: £101.2 million), with an operating profit of £8.2 million (2009: £9.3 million including a specific a provision release).

The division's year-end order book was £127 million (2009: £180 million).

With the decline of North Sea gas, the UK is urgently investing in underground gas storage capacity as a safeguard against interruptions in supplies from overseas. With several projects planned in various locations around the UK, Costain is well advanced in constructing E.ON's underground gas storage facility at Holford in Cheshire. This facility will have a capacity to store 156 million cubic metres of gas and is due to go into commercial operation in autumn 2011.

Costain successfully completed its work with Eni in Pakistan associated with the engineering and procurement of gas

processing facilities linked with the Bhit and Badra fields. In the Middle East, Costain has developed its operations in Abu Dhabi with a continued focus on Das Island.

In the Nuclear sector, the high profile Sellafield Evaporator D Project made significant progress. Complex process plant modules are being fabricated off site and will be delivered to Sellafield by sea barge.

Costain has a number of projects under way for Magnox at various sites around the UK. In September 2010, Costain was awarded a ten-year decommissioning framework contract centred on the delivery of Fuel Element Debris dissolution.

Land Development »

Revenue for the year was £0.8 million (2009: £1.2 million) with a loss after tax of £1.8 million (2009: loss of £2.6 million). The reduced loss reflects a significant reduction in the cost base during the year.

As previously reported, the real estate market in Spain has remained very challenging with little activity in the land development market. Such conditions are expected to prevail for some time. As well as continuing to reduce its cost base, the Group's joint venture development company, Alcaidesa, continues to manage and bring forward planning consent to add long-term value to the land bank to ensure there are attractive land sales opportunities when market conditions improve.

Efforts during the year were also focused on completing the 600-berth yacht marina, adjacent to Gibraltar, which was successfully opened in August 2010. The marina has been well received and has generated a good level of early occupancy. Further investment is being undertaken to increase the value-added services available, including a repair yard and dry dock with travel lift which are expected to open in summer 2011.

Hydrocarbons

Holford underground gas storage project

Costain is currently constructing a gas processing plant for E.ON's salt cavern gas storage facility, to store gas when demand is low and then release it during peak demand. Once completed, the facility will be one of the fastest natural gas delivery systems in the UK, allowing rapid response to changes in gas demand. The facility comprises eight separate underground salt caverns, with a daily withdrawal capacity to supply 3.5 million homes.

Nuclear

Trawsfynydd Strategic Integrated Framework ('TSIF')

The TSIF consists of Costain and three strategic partners, working as an integrated team, along with the customer. The team is responsible for delivering several separate projects within the framework agreement, activities include – recovery of low and intermediate level waste streams and the future demolition of the ponds complex buildings. In addition, Costain is constructing a new internal capping roof on both reactor buildings.

Our performance continued Performing responsibly

Health and Safety »

The Health and Safety of our people is fundamental to our business. Our shared vision is to provide an environment free from harm by promoting a positive safety culture and improving the health and wellbeing of our workforce. Our commitment to our people and stakeholders is demonstrated by our management of Health and Safety and our continual drive towards zero accidents and incidents. We are focused on creating a safe working environment where our workforce feel empowered to be responsible for their own health and safety and that of others.

Tragically, in August 2010, an employee of a subcontractor suffered a fatal injury while at work. This had a profound effect on everyone at Costain and our supply chain. A thorough investigation was undertaken.

We actively promote a fit and healthy workforce, offering voluntary medicals to employees and mandatory medicals for all safety critical workers. In 2010, we conducted over 2,268 medicals and ran two targeted campaigns to raise awareness of two health issues which affect our industry, namely musculoskeletal disorders and noise induced hearing loss.

Trendline

48%

...reduction in AFR in the last seven years

We continue to deliver a reduction in our AFR, achieving a 48% reduction in the last seven years. In 2011, we will launch our Costain Cares Programme which aims to deliver a step-change in our culture and introduce our vision for Safety, Health and Environment ('SHE') in Costain.

Group average score in monthly SHE scored inspection (Score)

7.9 Group average SHE performance score,

a 14% improvement in the last three years

We monitor compliance to our systems and benchmark our performance through an established audit and inspection regime. Over the last three years, we have achieved consistently high standards of SHE performance across all of our projects. We continually strive to improve our performance, raise our standards and are dedicated to promoting best practice across our business and industry.

Prosecutions/cautions

	2002	2004	2005	2006
Number of prosecutions by HSE	0	1	1	0
Number of prohibition notices by HSE	1	0	0	2
Number of improvement notices by HSE	1	0	0	0

0 ...prosecutions, cautions or fines in the last four years

Costain Group has received no prosecutions, cautions or fines relating to Health and Safety in the last four years.

We are committed to operating a fully competent workforce and to providing ongoing training and development for all our employees and subcontractors.

In 2009, we introduced our competence card compliance policy, which outlines our expectation that all employees and subcontractors must be able to demonstrate appropriate competence in Health and Safety management, supervisory and technical skills. We conduct regular audits to ensure compliance with our policy.

Our People »

We employ over 2,200 people in the UK. Our people are core to the success of Costain. We focus on enhancing Costain's reputation as an employer of choice by providing a wide range of career opportunities and the scope for our people to grow. The economic environment remains challenging but with motivated and highly skilled people, we continue to deliver on our promises.

The Association of Graduate Recruiters ('AGR') named Costain the winner of the Best Graduate Development title in its 2010 awards.

Employee (voluntary) turnover rate

5.1%

...our employee (voluntary) turnover rate, an 11% reduction in the last three years

In 2010, 246 people joined Costain. 166 employees moved between our divisions in order to develop and transfer their skills and knowledge for the benefit of the individuals and our customers. While our voluntary employee turnover rate increased in 2010 to 5.1%, it remains low compared to the industry average.

37% of our employees have been with the Company for over five years and 18% over ten years, demonstrating the stability of the Company and the commitment and loyalty of our employees.

Our performance continued Performing responsibly

Diversity profile (% employees)

21.1% ...of our people are female and 6.4% are BAME

We recognise the value in a diverse workforce. We ensure that all people activities continue to be inclusive and that we provide fair access and participation in training, promotions, reward and recognition. We have monitored our diversity profile over the last five years which indicates a fairly consistent profile of female and Black, Asian and Minority Ethnic ('BAME') employees, at 21.1% and 6.4% respectively. In 2011, we intend to pilot a networking and mentoring scheme for our female employees. We are also working with industry partners to explore the benefits of diversity in the construction industry, namely through the UK Contractors Group diversity task group.

Talent and training

(Number of employees receiving training)

% employees participating in performance reviews

166 ...employees promoted in 2010, compared to 116 in 2009

All our employees are encouraged to participate in annual performance and career development reviews. During these reviews, employees and their managers discuss levels of performance, competency and future aspirations, resulting in the development of personal development plans. These plans identify targeted training to ensure employees can achieve their aspirations and potential.

We invest significantly in training and developing our employees. In 2010, 1,937 employees participated in training and 6,113 training days were delivered. While the number of employees participating in training has reduced slightly, this is a result of more focused and targeted training for individuals.

Apprenticeships

(Number of Costain apprentices)

46

...our target number of apprentices on our apprenticeship programme by 2011

We continue to encourage new entrants into the construction industry. In 2009, we launched our apprenticeship programme, employing 16 apprentices across the Group. We support and encourage our apprentices to achieve their BTEC and NVQ qualifications, a step towards ensuring the next generation of qualified employees. In 2010, we added a further eight apprentices to our programme and target a further 22 in 2011.

Environmental Impacts »

We recognise the environmental impact of our business and are dedicated to protecting our local and global environment through responsible management. Our goal, to prevent environmental damage and to conserve our natural resources, will be achieved by targeting and minimising our impact on:

» climate change
» waste
» water
» materials
» biodiversity

The Brighton & Hove water treatment works scheme has diverted over 95% of waste generated on site from landfill.

Carbon dioxide emissions

(Tonnes of CO2/Tonnes per £m turnover)

27% ...reduction in our measured emissions, compared to 2009

In 2008, we defined the initial scope of our carbon footprint and successfully measured emissions from our UK operations. Throughout 2009 and 2010, we have concentrated on establishing an accurate baseline, from which we have set targets to reduce our emissions.

We are pleased to report a significant reduction in our 2010 carbon emissions. While we have achieved reductions in emissions related to business mileage and air travel, our most notable reduction relates to energy (electricity and gas). This reduction is attributed to both a physical reduction in consumption and significant improvements in data collection.

In 2010, we developed and launched our climate change strategy and have set a long-term target of 35% reduction in our measured emissions by 2020, compared to our 2008 baseline. In 2011, we will target a 10% reduction in our measured emissions.

Total waste removed from site (Tonnes/Tonnes per £100,000 turnover)

22%

...reduction in waste removed from site, compared to 2009

Waste diverted from landfill (%)

84%

...diverted from landfill

Through our internal management processes and our waste minimisation campaign 'SAVE IT', we continue to focus on reducing the waste we generate and diverting the waste we produce from landfill. The Group has pledged its support to the Waste & Resources Action Programme ('WRAP') 'Halving Waste to Landfill' commitment.

In 2010, we reduced the total waste we removed from site by 22%, compared to 2009. 84% of the waste we generated was diverted from landfill through recovery, recycling and re-use. This has been achieved by significant improvements in waste management processes and in the accuracy of our

Our performance continued Performing responsibly

reporting. In line with WRAP guidelines for measuring and reporting construction, demolition and excavated waste, we have improved our scope of reporting. On joint venture projects we now only include the percentage of waste that is equivalent to our share in the joint venture.

0 2006 2007 2008 2009 2010

8 5

Environmental incidents (Number of incidents)

...reduction in major environmental incidents, compared to 2009

We 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. Although we have seen an increase

Major Minor

38%

Relationships In the Community »

Our impact on the local communities in which we work is extremely important to us. While we strive to minimise the negative aspects, such as noise and disruption, our goal is to have a greater positive impact on our communities, through our contribution to the local economy, our involvement in education and community group projects.

Costain employees from the Church Village Bypass project volunteered their construction skills by providing a makeover to the garden at the Littlefolk Playgroup in Church Village in support of Give & Gain Day, organised by Business in the Community.

Considerate Constructors Scheme performance

(Group average scores)

35.0

Group average score in the Considerate Constructors Scheme, compared to 32.3 – the average of all sites registered with the scheme

As 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 all our projects, achieving an average score, in 2010, of 35 out of 40 (the average total score of all sites registered with the scheme is 32.3). In addition, our performance was also recognised by the receipt of five Gold Awards, five Silver Awards and eight Bronze Awards.

of 38%, compared to 2009. Over the past four years, we have received no environment related prosecutions, cautions or notices and there have been no environmental incidents that resulted in irreversible impact on the environment.

during the last four years, we attribute

In 2011, we will develop an Environmental Incident Frequency Rate ('EIFR') to enable us to track environmental incidents, normalised against working hours. This will provide an environmental indicator similar to that of the Safety Accident Frequency Rate ('AFR').

£95k ...donated to charitable causes in 2010

We continue to support various charities both corporately and through local donations given by our project teams. In 2010, we donated £94,565 to worthy causes, including our patronage of CRASH, the construction and property industry's charity for homeless people.

Employee volunteering

In August 2010, we launched our employee volunteering policy. In January 2011, 35 people applied to undertake voluntary activities. We will monitor the number of hours our employees undertake voluntary work and the benefits that this has to our employees and our business.

Customers

We 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.

82%

Average customer satisfaction score in 2010. We continue to achieve consistently high customer satisfaction scores

Our customers' needs are at the core of our business. Our aim is to provide the best quality service to our customers. We constantly strive to improve our performance and actively seek feedback from our customers. We undertake regular customer satisfaction surveys, where we ask our customers to rate our performance against core values such as health, safety and environment, quality, delivery, subcontract management, and relationships. Over the past five years, we have received consistently high scores and, in 2010, achieved an average score of 82%.

Working with our supply chain

In recognition of the social, environmental and economic impacts within our supply chain, we have developed a responsible procurement policy. This policy reflects the high standards we set for ourselves and expect from our suppliers. In 2011, we will develop additional guidance to support this policy for our procurement teams and our supply chain partners, to ensure compliance and continual improvement.

Supply chain performance

14%

...increase in supply chain performance in the last three years

During 2010, our relationship managers and supply chain sponsors have continued to develop relationships with our supply chain partners, holding regular business to business meetings and encouraging openness and transparency in 180 and 360 degree feedback. We undertake regular performance reviews with our supply chain partners, discussing performance in areas such as supervision; competency; communication and teamwork; cost; quality and innovation; and health, safety and environment. In 2010, we achieved an average score across the Group of 63% and have set a target to reach 75% in 2011.

In November 2010, over 137 representatives from our supply chain partners attended our third annual supply chain conference. The conference, titled 'Choosing Costain – Future Opportunities', focused on delivering a clear understanding of our 'Choosing Costain' strategy, emphasising our active business sectors and future opportunities.

Principal risks

Strategy and Finance

Risk and Impact Mitigation

Economic Outlook

Uncertain outlook for the UK and global economy, including the extent of any changes to government and international regulation, taxation and interest rates, may impact the Company's ability to win work and deliver forecast returns.

Change of Government Policy on spending

Certain of the Group's operations are dependent on government policy with regard to improving public infrastructure and services. Any reduction in government investment and funding would be likely to adversely affect the Group's future revenues and profitability.

Competition

The failure by the Group to compete effectively resulting in a failure to win work in a competitive market could reduce the Group's revenue, profitability and cash flow.

Pension Liabilities

The Group operates a defined benefit scheme which was closed to new members from 1 June 2005 and was closed to future accrual on 30 September 2009. The current deficit on the scheme is £28.9 million net of deferred tax. If the market value of the scheme's assets decline in relation to its assessed liabilities, the Group may be required to increase its cash contributions to cover funding shortfalls which could have an adverse impact on the Group's operational results. The annual contribution requirement of the Pension Protection Fund increases the costs borne by the Group.

The Group monitors regularly the pipeline of opportunities available and develops relationships with customers across a range of markets in both the private and public sectors. A review of risks at various levels within the business helps to ensure that the areas of risk are identified properly and appropriate mitigation is in place. Management reviews risks regularly.

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

A contractor's reputation, prior experience with the client and pricing will all have a bearing on gaining new work. 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. In addition, the Company seeks to solve problems by innovation as a means of competitive advantage.

The valuation under IAS 19 for the scheme as at 31 December 2010 valued the scheme's assets at £537.1 million and liabilities of £576.7 million. An Actuarial Valuation of the scheme as at 31 March 2010 was concluded during the financial year and Costain agreed a plan with the Trustee to reduce the deficit by:

» transferring PFI investments of the Group to the scheme, such investments being valued at £22 million. In consideration of that transfer of investments the Trustee agreed that the Group would not be required to make a cash contribution to the scheme during the period 1 January 2011 to 31 March 2014, save for dividend matching payments which will continue to be paid. In 2010, the dividend matching payments paid by the Group to the scheme amounted to £5.5 million.
» contributing £8 million per annum and dividend matching payments from 1 April 2014 to 31 March 2025.

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, pension increases, investment returns and inflation and is likely to vary from year to year.

The Company reviews the options regarding what actions Costain can take to mitigate its long-term risk and consults professional advisors, as necessary.

Operational Risk

Risk and Impact Mitigation

Operational Delivery

Failure to follow Best Practice: Projects are not delivered to time, cost, quality or appropriate health and safety and environmental standards and therefore do not meet clients' expectations. Failure to follow Company Standards, Policies, Procedures and Guidelines could adversely affect the Group's reputation and/or expose the Group to financial liabilities and adversely affect the operational, financial and share price performance.

» To mitigate the cost risk, experienced and qualified staff are used to prepare bids and these are subject to internal review and approval 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 the contract, regular Project Manager's Report ('PMR') meetings and end forecast meetings take place to discuss safety, progress, quality, cost, financial performance, risk, etc.
» Work on site is audited by in-house specialists and reports prepared so that corrective action can be taken. Quality is also one of the key areas that the Project Performance Assessment concentrates on in order to identify any shortcomings in project performance. These checking systems have resulted in a marked decrease in failures in quality.
» Regular Health & Safety 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. Employees 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.
» All subsidiaries, employees, suppliers and subcontractors are required to comply with all applicable laws, regulations and standards relating to the protection of the environment and the handling of hazardous substances and waste materials. Regular auditing of environmental compliance takes place together with environmental training.

Loss of IT systems

Failure of IT systems could cause financial loss to the Group and expose the Company to breaches of legislation and fines.

Supply chain and Customer failure

If a subcontractor or supplier of goods or services fails financially or is responsible for late or inadequate delivery or below quality work it could damage the Group's reputation and/or cause it to suffer financial losses. If a customer fails financially, the Group could suffer financial losses.

People

Failure to attract, develop and retain highly skilled management or personnel may limit the Group's ability to grow the business as anticipated.

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.

The list of preferred subcontractors and suppliers is reviewed regularly and amended where appropriate and includes more than one subcontractor or supplier under each major key category trade. 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. The Company also undertakes financial monitoring of subcontractors and suppliers and endeavours to maintain a dialogue with subcontractors or suppliers in order to identify any issues or cause for concern. The Company aims to restrict its customer list to blue-chip companies and checks the customer's financial strength as part of the evaluation for all projects.

The Company monitors employee turnover closely, especially the reasons for leaving. Pay and conditions of employment are reviewed regularly, against the prevailing market and benchmarked against competitors to ensure that the Company remains competitive for all levels. Leadership and development programmes are promoted throughout the Group.

Key performance indicators

The 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 that 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 2010 for the Group was 0.15 (2009: 0.16). The decrease reflects the continued attention given to all areas of safety and represents upper-quartile safety performance in the construction sector.

» Staff retention

The 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 5.1% for 2010, compared to 2.9% in 2009 when there were greater concerns in the UK concerning job security.

» Supply Chain performance

The 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, if appropriate, reduce the amount of work performed using that supplier. In 2010, the average key supplier performance score was 63%, which is an improvement from the 59% average in 2009. The objective is to ensure that all key suppliers have a performance of at least 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 & Responsibility review section of the Annual Report. The Group's profit from operations in 2010 increased by 41% to £29.4 million as compared to 2009.

» 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 in 2010 increased by 54% to £27.9 million as compared to 2009.

» 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 2010, the order book for the Group was £2.4 billion, which was marginally down on the £2.6 billion level as at 31 December 2009.

» 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 2010, the net cash balance of the Group was £144.3 million, compared to £120.5 million as at 31 December 2009. The increase results from the timing of cash flows at the balance sheet date. The average month-end cash balance for the Group during 2010 was £116.0 million compared to £125.3 million in 2009.

Finance Director's review

"In March 2010, the Group renegotiated its contract bonding and banking facilities with its relationship banks and surety companies. The facilities were increased to £345.0 million and extended to a maturity date of 30 September 2013."

Tony Bickerstaff Finance Director

Results

Profit before tax for the year ended 31 December 2010 was £27.9 million (2009: £18.1 million) on revenue (including the Group's share of joint ventures and associates) of £1,022.5 million (2009: £1,061.1 million).

Basic earnings per share amounted to 36.4 pence (2009 restated: 23.0 pence per share). Share numbers included in the earnings per share calculation for 2009 have been restated for the 1 for 10 share consolidation which became effective on 10 May 2010.

Profit from operations for the year was £29.4 million (2009: £20.8 million), an increase of 41.3%.

During the year, a profit of £11.2 million was realised on the transfer of the Group's interest in a portfolio of six PFI investments into The Costain Pension Scheme at an agreed valuation of £22.0 million.

Order book reduced during the year to £2.4 billion (2009: £2.6 billion).

The Chairman's statement, Chief Executive's review and Business & Responsibility review provide further information on the key aspects of the Group's results for 2010.

Interest

Net finance expense amounted to £1.5 million (2009: £2.7 million).

Interest income from bank deposits and other loans and receivables amounted to £0.1 million (2009: £2.1 million). In addition, the net finance expense included the difference between the expected return on the pension scheme's assets of £29.7 million (2009: £23.4 million) and the interest cost on the present value of the pension scheme's liabilities of £31.3 million (2009: £28.2 million) being a net expense of £1.6 million (2009: £4.8 million).

Tax

The Group's effective rate of tax was 17.2% of profit before tax (2009: 19.3%). 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.

Dividend

The Board has recommended a final dividend for the year of 6.25 pence per share (2009 restated: 5.5 pence per share) to bring the total for the year to 9.25 pence per share (2009 restated: 8.25 pence per share), an increase of 12%.

As in previous years, the Group will 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 5 May 2011, the dividend will be paid on 20 May 2011 to shareholders on the register at the close of business on 15 April 2011.

Shareholders' Equity

Shareholders' equity increased in the year to a positive £37.6 million (2009: £3.8 million negative). The profit for the year amounted to £23.1 million and other comprehensive income to £22.2 million. The movements are detailed in the consolidated statements of comprehensive income and expense and changes in equity in the financial statements.

The most significant element was the reduction in the Group's pension scheme deficit, detailed overleaf.

Finance Director's review continued

Pensions

At 31 December 2010, the Group's pension scheme deficit, net of deferred tax, under IAS 19 was £28.9 million (2009: £75.4 million).

The pension scheme asset value has increased as a result of a recovery in the global equity markets and the transfer of Group's interest in a portfolio of six PFI investments into the Scheme. This was partially offset by an increase in liabilities due to a reduction in the liability discount rate and an increase in the life expectancy assumption.

During the year, a full actuarial valuation of the Scheme was performed by the Scheme Actuary as at 31 March 2010 and a recovery plan that is expected to eliminate the deficit over a period of less than ten years was agreed with the Trustee of the Scheme. This agreement, which incorporates the £22.0 million transfer of the PFI investments, will result in a corresponding reduction in the Group's future annual cash contributions into the scheme over a thirty-nine month period starting with effect from 1 January 2011. The agreement also incorporates the ongoing commitment to match dividend payments with an equivalent cash contribution to the Scheme.

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 Borrowings

The Group has a strong positive net cash balance, which was £144.3 million as at 31 December 2010 (2009: £120.5 million) and included £1.7 million of borrowings (2009: £0.3 million) and cash held by jointly controlled operations of £33.8 million (2009: £36.0 million).

The increase 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 2010 was £116.0 million (2009: £125.3 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.

Accounting policies and significant areas of judgment and estimation

A summary of the significant accounting policies of the Group is set out in Note 2 to the financial statements. There has been no significant change to the accounting policies in the year and there is no material effect on the financial statements of new accounting standards adopted in the period.

Note 26 to the financial statements sets out the significant areas of judgment and estimation used in preparation of the financial statements.

The most critical accounting policies and significant areas of judgment 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 and assessments of the carrying value of land.

Liquidity Risk

The 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 Facilities

The 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 £345.0 million and extended to a maturity date of 30 September 2013.

+41%

Profit from operations for the year was £29.4 million

Going Concern

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 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

Dividends per share (Pence per share)

^* Restated following 1 for 10 share consolidation.

within clearly defined objectives and controls and is subject to periodic review by internal audit.

Foreign Currency Exposure

Translation 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 Exposure

The 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's cash 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 Director

Board of Directors

The Board »

David Allvey FCA, ATII 3 Chairman (2008)

Age 66. 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, a Non-Executive Director of Thomas Cook Group plc and Senior Independent Director of Friends Provident Group. He is a former board member of the UK Accounting Standards Board.

Andrew Wyllie FREng, BSc, MBA, FICE, CEng Chief Executive (2005)

Age 48. Non-Executive Director, Scottish Water. Formerly Managing Director of Taylor Woodrow Construction Limited (2001-2005) and a member of the Taylor Woodrow plc Executive Committee. Joined Taylor Woodrow in 1984 and worked on major contracts in Africa, the Middle East, the Far East and the UK.

Tony Bickerstaff FCCA Finance Director (2006)

Age 46. 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.

James Morley BSc, FCA 1 2 3 4 Non-Executive Director (2008)

Age 62. Non-Executive Director, the Innovation Group PLC, Clarkson PLC, Speedy Hire plc and BMS Associates Limited. 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); WS Atkins PLC (2001-2009); and Trade Indemnity Group plc (1991-1996).

Michael Alexander BSc, MSc, FIChem.E, FIET, FIGM, CEng, CSci 1 2 3 4 Non-Executive Director (2007)

Age 63. Independent Non-Executive Director of the UK Payments Council; Executive Director of Lexican Limited; European Advisory Board member, Landis & Gyr. Chair Elect, EGS Energy Limited. Formerly Chief Executive, British Energy PLC (2003-2005); Executive Director, Managing Director British Gas Trading and Chief Operating Officer, Centrica PLC (1994-2003); Non-Executive Chairman, Goldfish Bank Limited (2002-2003); Chairman, TGE Marine AG (2007-2010); Association of Train Operators (2008-2009); and Non-Executive Director of the Energy Savings Trust Limited (1994-2001).

Notes

1 Member of Remuneration Committee
2 Member of Audit Committee
Member of Nomination Committee
4 Independent Non-Executive Director
5 Senior Independent Director

Samer G. Younis BSc, Commander of the Knights – Italian Solidarity Star 3 Non-Executive Director (2009)

Age 49. 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.

John Bryant MA (Cantab), FREng, FIM, CEng, DSc (Hon) 1 2 3 4 5 Senior Independent Director (2002)

Age 67. Non-Executive Director, Welsh Water Plc and Glas Cymru Limited since 2001; Chairman, Actoris Group. 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).

The Executive Board »

The Executive Board has primary authority for the day-to-day management of the Group's operations, following policies laid down by the PLC 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

Alan Kay Managing Director – Environment

Charles Sweeney Managing Director – Energy & Process

Alex Vaughan Corporate Development Director

Tracey Wood HR and Legal Director This section explains our Corporate Governance and decision-making processes. We detail the Board of Directors and its committees, and our accountability and audit procedures.

Governance

50 Corporate Governance statement
(including Internal controls and Risk management)
57 Directors' report
62 Directors' remuneration report
70 Statement of Directors' responsibilities
71 Independent Auditor's Report to the members of Costain Group PLC

Corporate Governance statement

Throughout the year to 31 December 2010, except where indicated within this report, the Company complied with the provisions of the Combined Code on Corporate Governance published in June 2008 (the 'Combined Code'). The Company is committed to the principles of corporate governance contained in the Combined Code and in the UK Corporate Governance Code published in May 2010 (the 'Corporate Governance Code') and aims to comply with established best practice, wherever possible and where it is in the Company's interests. Copies of the Combined Code and the Corporate Governance Code are available on the website of the Financial Reporting Council. The Company is aware of the new disclosure requirements set out in the Corporate Governance Code which apply to financial years beginning on or after 29 June 2010 and intends to comply with the new disclosure requirements in its Annual Report to be published in 2012.

The Board and Committees

The Board currently comprises two executive directors and five non-executive directors of whom one is the Chairman, three are independent non-executive directors (one being the Senior Independent Director) and one is a nominee non-executive director. The Board considers each of its independent non-executive directors to be independent in character and judgment and there are no relationships or circumstances which are likely to affect (or could appear to affect) the judgment of such non-executive directors, notwithstanding that in the case of Mr Bryant, the Senior Independent director, he has served on the Board for more than nine years.

The Corporate Governance Code requires under provision A3.1 that the Chairman of the Company should meet the independence criteria on appointment, and the current Chairman did, and the Corporate Governance Code further states that thereafter the test of independence is not appropriate in relation to the Chairman. The Chairman of the Company has also served on the Board for more than nine years but the Board takes the view that the Board would benefit from the Chairman remaining on the Board.

The nominee non-executive director is nominated by major shareholder, Mohammed Abdulmohsin Al-Kharafi & Sons WLL.

The Company complies with the requirement under provision B1.2 of the Corporate Governance 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 Chairman and 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. Mohammed Abdulmohsin Al-Kharafi & Sons WLL and the other major shareholder York Place Limited, a subsidiary of UEM Builders Berhad, 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. York Place Limited has not taken advantage of this option since 4 December 2009. 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 B7.1 of the Corporate Governance Code. When a non-executive director has served on the Board for more than nine years, the Company's Articles of Association require that such director be subject thereafter to annual re-election. The Company will not be complying with the requirement that a director should be put forward for re-election every year as required by the UK Corporate Governance Code as the requirement is restricted to FTSE 350 companies and the Company is a member of the FTSE small cap.

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.

The Board holds scheduled meetings throughout the year and meets on an ad hoc basis both physically and by telephone conference as required. The attendance record of each director is shown in the table on the next page. During 2010, the Board met formally on seven occasions.

	Board	Audit	Remuneration	Nomination
Number of meetings held in the year	7	5	4	3
D P Allvey	7 (Chairman)	5*	3*	3 (Chairman)
A Wyllie	7	5*	4*	3*
A O Bickerstaff	7	5*	1*	3*
J M Bryant	7	5	4	3
M R Alexander	7	5	4 (Chairman)	3
J Morley	7	5 (Chairman)	4	3
S G Younis	3	1*	0	1

* By invitation.

S G Younis attended only three out of the seven scheduled Board meetings throughout the year due to other work commitments. S G Younis regularly attended board meetings held on an ad hoc basis.

With effect from 1 October 2008, a director has a duty to avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the Company. The Board has satisfied itself that there is no compromise to the independence of the directors who have appointments on the boards of, or relationships with, other companies. The Board requires directors to declare all appointments which could result in a possible conflict of interests and has adopted appropriate processes to manage and, if appropriate, approve any such conflict.

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 operating and capital expenditure budgets and medium-term projections; supervision of the Group's operations and financial performance; approving major acquisitions and divestments; 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 and health and safety performance of the Group; approving appointments to the Board and Executive 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 was reviewed in 2010.

The Company complied with provision A3.3 of the Combined Code by appointing John Bryant as Senior Independent Director.

The Board has 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.

The Board has decided that Mr Bryant should remain Senior Independent Director, notwithstanding that he has served on the Board for more than nine years.

As required by provision B5.2 of the Corporate Governance 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 B5.1 of the Corporate Governance Code. In the year ended 31 December 2010, 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 business. The non-executive directors also receive a weekly report from the Chief Executive, 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.

Corporate Governance statement Continued

On appointment, the directors, as required by provision B4.1 of the Corporate Governance 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 are generated internally. The performance evaluation was undertaken by an independent advisor in 2009 and the Board have reviewed the key findings of that review throughout 2010 and measured the progress made in achieving improvement in Board efficiencies against these key findings. In 2010, the evaluation was led internally by the Chairman but with the evaluation of the Chairman being dealt with by the Senior Independent Director. Board members were invited to complete a questionnaire on the performance of the Chairman, the leadership of the Company by the Board, its effectiveness and accountability and relations with shareholders and so covered the majority of the main principles of the UK Corporate Governance Code and finally an evaluation of the Committees. The questionnaire on the performance of the Chairman was reviewed by the Senior Independent Director and he reported back to the Board members, other than the Chairman, and subsequent feedback was given by the Senior Independent Director to the Chairman. The remaining questionnaires on the Board and Committees were reviewed by the Chairman and then reported on to the Board and discussed by the Board. The Board sets objectives based on the results of the evaluation process to improve the effectiveness of the Board.

The Company did not comply with parts of provision A6.1 of the Combined Code in that the Chairman, during 2010, did not undertake a formal individual appraisal of each director. 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, as reported above, 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 2010 are disclosed in the Chairman's biographical details (provision A4.3 of the Combined Code). In the last twelve months, the Chairman has taken on the additional role of Senior Independent Director of the Friends Provident Group but this has not had any material impact upon the discharge of his duties as Chairman of the Company.

In accordance with provision A1.3 of the Corporate Governance 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 2010. The Audit Committee comprises three independent non-executive directors and so the Company complies with provision C3.1 of the Corporate Governance Code. The Audit Committee has established written terms of reference, which were last reviewed, revised and re-issued on 6 October 2010. Details of the attendance at Audit Committee meetings in 2010 are given in the table on page 51. The executive directors, the external auditors, the Head of Internal Audit and the Group Financial Controller attend all meetings by invitation. The Chairman of the Board also attends meetings of the Audit Committee by invitation. The Audit Committee regularly meets privately with the external auditors and Head of Internal Audit. 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 2010, 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 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 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. In 2010, the non-audit services related to tax and pensions, which after consideration, based on their thorough understanding of the Group and their particular expertise, KPMG were selected as the most cost effective and efficient supplier to undertake this service. The Audit Committee were satisfied that the non-audit services provided did not impact on KPMG's objectivity and independence.

Full particulars of the Remuneration Committee are given in the Directors' remuneration report, which appears on pages 62 to 69. The Company complies with that element of provision D2.1 of the Corporate Governance 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 15 December 2010. 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.

The Nomination Committee comprises the Chairman and all non-executive directors. The Chairman is the Chairman of the Committee. The Corporate Governance 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 15 December 2010. 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 2010, the Nomination Committee met formally on three occasions. Details of the attendance at the Nomination Committee meetings in 2010 are given in the table on page 51.

Corporate Governance statement

Continued

Relationship with institutional investors and private investors

The 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 12,000 other shareholders. The majority of shareholders receive the Annual Report, Interim Report and other communications from the Company, such as circulars and prospectuses, electronically. 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 E2.4 of the Corporate Governance 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 2010. 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 controls

The 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 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 management

The Company formalised its risk evaluation processes many years ago and at the same time introduced new procedures to assist in the identification and management of risk. These procedures include a prequalification and pre-tender review in order to submit a project bid to the Executive Investment Panel for approval to bid, 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 five broad categories: commercial; 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 reports on the risks and opportunities faced by their respective Sectors to the Group Commercial Director for analysis and the production of lessons learnt guidance. The Group Commercial Director submits a Corporate Risk/Opportunity Register, which encompasses the Site and Sector Risk Reports, to each Executive Board meeting together with a summary of the main corporate risks

Governance

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. As recommended by the UK Corporate Governance Code, the Board has determined the nature and extent of the significant risks it is willing to take in achieving its strategic objectives.

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 Divisional Managing Director, Divisional 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.

The Group Commercial Director and the Head of Internal Audit meet regularly to review the strategy regarding risk management and compare and benchmark the Group's risks and opportunities against blue chip companies.

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 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 focusing 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 in place a project management process, focusing on raising minimum standards in project delivery. This Project Performance Assessment ('PPA') 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 2010, Internal Audit conducted project and departmental reviews 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.

The Head of Internal Audit and members of the Internal Audit team meet monthly with the Chief Executive, Finance Director and Group Financial Controller. In addition to reviewing the risk based audit plan, these meetings enable the Internal Audit team 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.

The Internal Audit team also meets with the Business Systems Group on a quarterly basis. These forums allow the Internal Audit team 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. The Internal Audit team has developed a 'lessons learnt' 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.

Corporate Governance statement

Continued

Operational

Controls 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. These procedures are regularly updated. In 2010, the Commercial Procedures were updated and a Group Commercial Expectations document was rolled out to the business.

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 Divisional 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 on the completion of the PMRs are included on iCosnet.

The Company through the Commercial department sends out on a regular basis Commercial Alerts on changes in law and legislation, insolvency issues, reminders of matters of best practice etc.

In the summer of 2010, Costain achieved certification to ISO 27001: 2005, which defines the requirements for establishing, implementing, operating, monitoring, reviewing, maintaining and improving a documented Information Security Management System within the context of Costain's overall business risks. ISO 27001 certification means that both customers and Costain personnel can now be further assured that information held both electronically and on paper is secure because systems and processes are now in place to protect the business against loss of information – either accidentally or through attacks by computer viruses and other means.

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.

Financial

There is a comprehensive annual budgeting system for each business within the Group, which is linked to the annual review of strategy which commences at the beginning of the second half of the year. The preparation of the new 3-year Business Plan proceeds over the summer months and involves a number of meetings of the Executive Board. A first draft of the Business Plan is produced in September and reviewed by the Executive Board before a directional strategic review meeting with the Board in October. Following review by the Board, amendments are made to the 3-year Business Plan to reflect the comments of the Board and the budget for the following year is produced. There is a further meeting between the Board and the Executive Board in November to review the amended 3-year Business Plan and Budget for the following year. The 3-Year Business Plan and Budget for the following year are then finalised by the Executive Board and submitted for final approval of the Board in December.

The Company produces monthly a rolling forecast update for the current year, which is compared with the annual budget. Each month, the 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.

Compliance

The 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. The statement on business conduct is being reviewed to take account of the Bribery Act 2010 and the review will be completed once the UK Government publishes its guidance on the Act.

Litigation and other legal matters were controlled in 2010 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.

Directors' report

The directors submit to the members their Report and Accounts of the Company for the year ended 31 December 2010.

The Directors' report of the Company for the year ended 31 December 2010 is set out on pages 57 to 61. The Business & Responsibility review (pages 12 to 47), Principal Risks (pages 40 and 41), Key Performance Indicators (page 42), Finance Director's review (pages 43 to 45), Board of Directors section (pages 46 and 47), Corporate Governance Statement (pages 50 to 56) and Directors' remuneration report (pages 62 to 69) are incorporated by reference into this Directors' report, together with the other sections of the Report and Accounts referred to in the Directors' report.

Activities

The principal activities of the Group are Engineering, Construction, Maintenance, Energy & Process 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 Business & Responsibility review (pages 12 to 47).

Fixed assets

The 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 dividends

The profit after tax for the financial year ending 31 December 2010 amounted to £23.1 million (2009: £14.6 million). An interim dividend of 3.00 pence per share (2009: 2.75 pence)* amounting to £1.9 million (2009: £1.7 million) was paid on 29 October 2010. The directors propose to recommend a payment of a final dividend at the rate of 6.25 pence per share (2009: 5.50 pence)* amounting to £4.0 million (2009: £3.5 million). If approved, the dividend will be paid on 20 May 2011 to shareholders registered at close of business on 15 April 2011.

*Restated following 1 for 10 share consolidation in 2010.

Going Concern

The 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 2010 financial statements as discussed on page 45 of the Finance Director's review.

Forward looking statements

This 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' interests

Brief biographies of the present members of the Board are given on pages 46 and 47.

In accordance with Article 78 of the Company's Articles of Association and the Combined Code on Corporate Governance, Mr Allvey, Mr Bryant, Mr Alexander and Mr Morley, being eligible, will offer themselves for re-election at the Annual General Meeting. Mr Allvey and Mr Bryant having been in office for a continuous period in excess of nine years are required to stand for re-election on an annual basis. All of the directors seeking re-election are non-executive directors and in consequence do not have service agreements with the Company.

With regard to the re-election of Mr Allvey, Mr Bryant, Mr Alexander and Mr Morley, the Board is of the opinion that they each continue 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 2010, are contained in the Directors' remuneration report, which appears on pages 62 to 69.

Related party transactions

Details of transactions with related parties undertaken by the Group during the year are disclosed in Note 24 to the financial statements on page 113 and 114.

Share capital and major shareholders

As at 31 December 2010, 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 2010 are set out in Note 20 on page 110.

On 6 May 2010 at the Annual General Meeting of the Company, shareholders approved a 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 each held as at close of business on 7 May 2010. The share consolidation became effective on 10 May 2010. Following the share consolidation, the Company's issued share capital comprised 63,424,871 ordinary shares of 50 pence each.

The three-year savings contracts in the Company's 2007 Save As You Earn Plan matured in July 2010. The Company's share price at the time of the maturity of the three-year 2007 Save As You Earn Plan was below the option price for that Plan and, in consequence, no shares have been allotted under the scheme.

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

Directors' report

Continued

in the scrip dividend. In May 2010, 37,358 ordinary shares of 50 pence each were allotted to shareholders in respect of the final dividend for 2009, and 24,703 ordinary shares of 50 pence each were allotted to shareholders in October 2010, in respect of the interim dividend for 2010. Further information on the scrip dividend option for 2011 is set out on page 116.

The issued share capital of the Company as at 31 December 2010 was £31,743,466.00, consisting of 63,486,932 ordinary shares of 50 pence each.

As at 7 March 2011, 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:

York Place Limited*	13,810,850	21.75%
Mohammed Abdulmohsin
Al-Kharafi & Sons WLL	13,789,491	21.72%
Gartmore Investments Limited	3,039,217	4.79%
Legal & General Group PLC	2,675,194	4.21%

* 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 Responsibility

The section on Performing responsibly is on pages 34 to 39.

Group policies

Details of some of the Group policies are given below:

» The Business Conduct policy and a related policy on competition covers the legal, ethical and moral standards and competition law compliance 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. This policy is being reviewed and amended to take account of the provisions of the Bribery Act 2010 but this task will not be completed until the UK Government publishes and distributes their guidance on the Act;
» 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 nondiscrimination and equal opportunities. The policy is directed at 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 Employee policies

Diversity and Inclusion

The Company is an inclusive employer and promotes equality and inclusion from recruitment and selection, through training and development, and promotion to retirement. We are fully committed to the elimination of unlawful and unfair discrimination and we value the differences that a diverse workforce brings to the organisation. It is Company policy that people with disabilities should have full and fair consideration for all vacancies. Wherever possible, we endeavour to interview those people with disabilities who fulfil the minimum criteria, and to retain employees in the workforce if they become disabled during employment and to provide specialist training where appropriate. We support our supply chain and encourage their active commitment to our approach on equality and inclusion.

Our customers are looking to us to provide local employment and skills, and to facilitate inclusion on our projects. We continue to work with the UK Contractors Group to deliver an Equality and Diversity Action plan across Costain and to apply local solutions to diversity issues on projects. We assist our customers in their employment and skills agenda by delivering an Apprentice Development Programme and through establishing National Skills Academies.

Employee Involvement

The Company maintains a strong communications network and employees are encouraged to discuss with management matters of interest and issues affecting day-to-day operations of the Group. Employees are kept informed of the financial and economic factors affecting the Company's performance and other matters of concern to them as employees in various ways. These include regular videos and updates from the Chief Executive and other Senior Managers, a Costain online news service, personal briefings and email. Senior Managers also visit sites and discuss with employees matters of current interest and concern to them and the business. Employees also have the opportunity to provide feedback and ask questions at the annual staff road shows which take place around the country.

The Company also has an established Employee Consultative Committee which convenes biannually and on an ad hoc basis throughout the year, to discuss matters impacting the business, in order that the views of employees can be taken into account in making decisions likely to affect their interests.

Share schemes are an established part of our reward package, encouraging and supporting employee share ownership. In particular, employees currently participate in the Company's Save As You Earn Plan.

Policy and practice on payment of suppliers

As a result of the nature of the Group's business, the contractual relationships with suppliers of goods and services and with subcontractors 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 43 (2009: 47) days of average daily purchases. The Company has no trade creditors (2009: Nil).

Significant agreements

The directors are not aware of any significant agreements to which the Company and/or any of its subsidiaries or associates are 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, which would terminate upon a change of control. 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 development

The 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.

Donations

Group charitable donations of £94,565 (2009: £95,293) were made during the year. Further information on charitable giving can be found on page 39 of this report. No political donations were made (2009: £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:

	£
Cancer Research	10,500
Claire House/Childflight Hospices	3,988
Crash	11,044
Cumbria Flood Fund	6,445
Cystic Fibrosis Trust	2,666
East Anglian Children's Hospice	2,000
Wellchild	8,620
Community and Sport	18,913
Wateraid	5,289
Naomi House	2,600

* A total of £22,500 was donated in amounts smaller than £2,000 and these are not included above.

At the AGM in 2010, shareholders voted in favour of a consolidation of the Company's share capital into shares of a higher nominal value. As a result, shareholders exchanged their then existing ordinary shares with a nominal value of 5 pence each for new ordinary shares with a nominal value of 50 pence each. The consolidation gave rise to fractional entitlements to new shares where shareholders held a number of then existing ordinary shares that were not exactly divisible by ten. The fractional entitlements were aggregated and sold on the market. The Board indicated that in view of the value of the fractional entitlements the Board would remit the proceeds of sale of the fractional entitlements to CRASH (registered charity number 1054107), the construction and property industries charity for the homeless. Shareholders were given the option to elect to receive the proceeds of the fractional entitlements rather than such amount being paid to charity. A number of shareholders were supportive of the proceeds of the fractional entitlements being paid to charity and, as a result, the sum of £8,044 was paid to CRASH.

Disclosure of information to auditors

The 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.

Auditors

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

Directors' report

Continued

Directors' Indemnity

There are no subsisting indemnities in favour of directors.

Directors' conflicts of interest

There 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' responsibilities

The 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 shares

Subject to the Companies Act 2006 (in this section the 'Companies Act'), any resolution passed by the Company under the Companies Act 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 Act and other shareholders' rights, unissued shares are at the disposal of the Board.

Voting

Every 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 voting

No 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 Act.

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

Dividends and Other Distributions

The Company may by ordinary resolution from time to time declare dividends not exceeding the amount recommended by the Board. Subject to the Companies Act, 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 Act.

Variation of Rights

Subject to the Companies Act, 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 Company

There 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 Association

Unless 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.

Appointment and replacement of directors

The directors shall be not less than two 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 resolves 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 directors

Subject to the Company's 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 shares

The 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 2010, the only shares that had been allotted were in order to satisfy awards

under employee share schemes and the 2009 and 2010 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 2010 and they do not propose to do so at this year's Annual General Meeting.

Major shareholders

Details of the major shareholders of the Company are given on page 58 of the Directors' report.

Securities carrying special rights

No person holds securities in the Company carrying special rights with regard to control of the Company.

Rights under the employee share schemes

ACS HR Solutions Share Plan Services (Guernsey) Limited (formerly ExcellerateHRO Share Plan Services (Guernsey) Limited), as Trustee of the Costain Group Employee Trust, holds 0.00005% of the issued share capital of the Company as at 31 December 2010 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. The Trustee does not exercise any right to vote or to receive a dividend in respect of this shareholding.

Annual General Meeting

The 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 5 May 2011 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 2010 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 2010 Annual Report will accompany the Notice of Annual General Meeting.

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 Secretary

Directors' remuneration report

Introduction

This report, approved by the Board, has been prepared in accordance with the requirements of the UKLA listing rules, the Companies Act 2006, the UK Combined Code on Corporate Governance and best practice guidelines.

A resolution to approve the Directors' remuneration report will be proposed at the AGM.

Remuneration Committee

The Remuneration Committee (the Committee) is comprised exclusively of independent non-executive directors. The members of the Committee are Michael Alexander (Chairman), John Bryant and James Morley.

In 2010, the Committee met four times and details of the attendance at those meetings are provided in the Corporate Governance Statement on page 51.

To ensure that the Company's remuneration practices are market competitive, the Committee has access to experienced specialist consultants. During the year, the Committee took advice, as appropriate, from:

» Hewitt New Bridge Street ('HNBS'), this advice related to developing its remuneration policy, particularly in relation to the production of bespoke benchmarking data in respect of the remuneration of executive directors and senior management;
» Aon Hewitt, the parent company of HNBS, which provided advice in connection with the company's pension schemes.

In addition, advice was sought where appropriate from other sources, namely the Chief Executive, Finance Director, the Company's Chairman and the HR & Legal Director. The Company Secretary acts as secretary to the Committee. The Committee may invite any of the executive directors to attend all or part of its meetings. Individuals are not present when their own remuneration is being discussed.

The Committee's terms of reference are available on the Company's website at www.costain.com or from the Company Secretary. Copies of the letters appointing the Committee's advisers can be obtained from the Company Secretary.

Remuneration Committee activity

The following table sets out the key remuneration issues which the Committee covered at each of the meetings over the course of the year.

Date	Key agenda items
February 2010	» Approved 2009 Annual Cash Bonuses subject to final audit of accounts » Reviewed salary of the senior executives » Set the 2010 Annual Cash Bonus targets » Reviewed the Chairman's and non-executive directors' fees
March 2010	» Approved Deferred Share Bonus Plan ('DSBP') and the Long Term Incentive Plan ('LTIP') performance targets for the 2010 awards » Reviewed the Directors' remuneration report » Reviewed the effectiveness of the remuneration advisers
October 2010	» Considered on behalf of the Board outline salary proposals across the Company for 2011 » Reviewed the Committee's terms of reference » Reviewed the LTIP performance conditions
December 2010	» Continued with the review of the LTIP performance conditions » Reviewed the current remuneration arrangements to ensure that they do not encourage undue risk

Remuneration policy

The Committee determines the remuneration policy for executive directors, the Chairman, the non-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.

Each year, the Committee reviews the remuneration policy, taking into account both the external market (including environment, social and corporate governance issues) and the Company's strategic objectives over the short and the medium term. The framework has been designed as an integral part of the Company's overall business strategy.

The Annual Cash Bonus is based upon rewarding performance against key financial performance measures including, but not limited to, earnings before interest and tax and overhead costs. The Deferred Share Bonus Plan ('DSBP') is based upon earnings before tax and interest but paid in shares deferred for two years, whilst the Long Term Incentive Plan ('LTIP') is based on growth in Earnings Per Share ('EPS') over a three year period. Both the DSBP and the LTIP encourage management to align their interests with those of the shareholders.

The remuneration package is based on the following principles:

Principle	How achieved	Rationale
To provide competitive and appropriate total remuneration	Target levels of remuneration are independently benchmarked against comparable companies primarily in the UK-based contracting sector and of other companies of a similar size	To attract and retain executives of the appropriate calibre and expertise
Reward both short and long-term performance Link remuneration practices to strategy of the	Ensure an appropriate balance between short and long-term through mixture of incentive programs Regularly review performance metrics used	Focuses executives on the long-term strategy of the Company and so motivates executives to make decisions that lead to the creation of long-term value,
Company	in short and long-term incentive programs	while avoiding any incentive for undue risk taking

The chart below illustrates the average mix between the fixed and variable (performance-related) elements of remuneration of the executive directors at target and maximum performance. Target performance assumes target payouts of cash and DSBP and an expected value of LTIP awards. Maximum performance assumes all bonuses and long-term incentive awards vest in full. It demonstrates the weighting of the package towards variable pay, particularly at maximum performance. The Committee considers the mix between fixed and variable pay to be appropriate. During the year, the Committee reviewed the executive remuneration arrangements from a risk perspective and concluded that they do not encourage undue risk and that the arrangements, as a whole, provide an appropriate balance.

Fixed v. variable pay mix

(% of maximum remuneration)

Deferred share bonus Long-term incentives D E

External directorships

The Company encourages executive directors to take up external non-executive appointments, 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. Generally, no more than one such appointment may be undertaken. There must be no conflict of interest and the time devoted to the external appointment must be reasonable in relation to the individual's commitment to the Company. Fees paid for external appointments may be retained by the individual concerned.

Mr Wyllie was appointed a non-executive director of Scottish Water on 7 April 2009 and in respect of the appointment for the year ended 31 December 2010 he was paid £19,872 (2009: £19,872). He has retained these fees in accordance with the above policy.

Remuneration arrangements for executive board directors

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

» Base salary;
» Benefits;
» Pension;
» Annual cash bonus;
» Deferred share bonus; and
» Long-term incentives.

Details of each of the above elements follow, but the following table summarises the packages of the two executive directors for 2011:

Component	Andrew Wyllie Chief Executive	Tony Bickerstaff Finance Director
Base salary from
1 April 2011	£408,000	£270,300
Maximum Annual
Cash Bonus
(% of salary)	100%	100%
Maximum DSBP
(% of salary)	50%	50%
Maximum 2011
LTIP award
(% of salary)	100%	100%
Pension arrangement	Pension allowance – 22% of salary
Benefits	Company car or car allowance, fuel,
		medical insurance and life assurance

Directors' remuneration report

Continued

Base salary

Base salaries for the executive directors are reviewed annually by the Committee and take effect from 1 April. The Committee also gives guidance to the Chief Executive as to the matters being taken into account in the salary review of other senior management and all other employees of the Group. The Company's policy is to broadly target the median position in light of remuneration generally within the Company and other companies in the UK-based construction sector. Salaries are set with reference to individual performance, experience and responsibilities.

The Committee approved a 2% salary increase across the Company in 2011. For 2011, the executive directors received a 2% increase and the base salaries of the executive directors with effect from 1 April 2011 will be:

	Base salary	Base salary
Executive Director	at 1 April 2010	at 1 April 2011
A Wyllie	£400,000	£408,000
A O Bickerstaff	£265,000	£270,300

Other Benefits

The non-salary benefits for executive directors comprise:

» Company car or car allowance;
» Fuel;
» Medical insurance; and
» Life assurance.

Pensions

Under their terms of engagement, the executive directors are entitled to an annual pension allowance of 22% of base salary.

Life assurance cover of four times base salary is provided through the Costain Life Assurance Scheme. The annual premiums payable in respect of life assurance for Messrs Wyllie and Bickerstaff were £1,811 (2009: £2,531) and £1,190 (2009: £1,568) respectively.

The Group's main registered pension scheme was closed to the future accrual of benefits with effect from 30 September 2009. From 1 October 2009, a new Group Flexible Retirement Plan was set up with Standard Life for employees and senior management. Neither executive director participated in the scheme.

Annual Cash Bonus

Executive directors and other senior management are eligible for Annual Cash Bonuses to encourage improved performance, with targets established by the Committee to align rewards with the Company strategy. The targets 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. For the year ended 31 December 2010, the Chief Executive had a maximum bonus opportunity of 100% of base salary and the Finance Director 80% of base salary.

For the year ended 31 December 2010, 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, cash flow, order book and health and safety targets. The remaining 10% was linked to personal goals.

For the year ended 31 December 2011, the maximum Annual Cash Bonus potential for the Chief Executive remains unchanged. However, the Committee reviewed the maximum Annual Cash Bonus potential for the Finance Director and concluded that the bonus opportunity should be increased to 100%. This increase reflects the Finance Director's growth into his role and better aligns the executives' reward.

Deferred Share Bonus Plan

Executive directors and other senior management are eligible to participate in the Company's Deferred Share Bonus Plan ('DSBP') which promotes greater alignment with shareholders through the award of deferred shares. Under the DSBP, any bonus earned is deferred in shares which vest on the second anniversary of grant, subject to continued employment and not being under notice of termination (either given or received) on the date of vesting. Shares to satisfy the deferred bonuses are purchased by a trust on behalf of the Group and so do not lead to any dilution of shareholder interest.

For the year ended 31 December 2010, both executive directors had a maximum DSBP opportunity of 50% of base salary. The performance measure was Earnings Before Interest and Tax ('EBIT') as described in the table below:

EBIT	Percentage of award granted
£19.3m	0%
£22.1m	100%
Between £19.3m and £22.1m	Pro-rata between 0% and 100%

The EBIT for the year ended 31 December 2010 was £29.4 million and so the measure has been met as to 100%. 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 middle market quotation of a share at the date of the deferred award. 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 2010.

For the year ended 31 December 2011, the maximum DSBP for the executive directors remains unchanged. The Committee will disclose on a retrospective basis the EBIT measure for 2011 in next year's report.

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 share options with a nil exercise price over a fixed value of shares. The tax approved and non-tax approved options are linked, in terms of value and on exercise and mirror the same commercial terms as a DSBP award. An advantage of this combined arrangement is that it allows for greater tax efficiencies for both the participant and the Company. The first awards under the combined arrangement were granted to eligible employees in April 2010.

Long-Term Incentives

The Long-Term Incentive Plan ('LTIP') was approved by shareholders at the 2002 AGM. The LTIP allows for conditional awards to a participant with a maximum face value of up to 100% of base salary at the date of grant of the award.

In 2010, LTIP awards of 50% of base salary were made to the Chief Executive and Finance Director. The performance condition for the 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.

		EPS for the financial year
--	--	----------------------------	--

ended 31 December 2012	Percentage of award vesting
21.0p	15%
27.5p	100%
Between 21.0p and 27.5p*	Pro-rata between 15% and 100%

*Restated following 1 for 10 share consolidation in 2010.

During the year, the Committee reviewed the performance conditions attached to LTIP awards and concluded that EPS remains the most appropriate condition. However, for awards made in 2011 and going forward it concluded that EPS should be calculated before pension interest (itself calculated under IAS 19). The Committee believes that this is correct because the defined benefit pension scheme has been closed and future pension interest charges are not impacted by the performance of the business but instead are driven by future discount rates and assumed assumptions about returns on assets.

In 2011, LTIP awards of up to 50% of salary will have an aggregate EPS target meaning that the sum of the EPS in 2011, 2012 and 2013 will determine the level of vesting. The Chief Executive and Finance Director will be granted LTIP awards over shares worth 100% of base salary. The higher 50% of salary of their awards requires an EPS result in 2013 significantly above the target applying to awards of up to 50% of salary. The EPS targets for 2011 awards will be:

Sum of the EPS for the financial

years ending 31 December 2011, 2012 and 2013	Vesting level for awards up to 50% of salary
102p	15%
113p	100%
Between 102p and 113p	Pro-rata between 15% and 100%

EPS for the financial year	Vesting level for awards from
ending 31 December 2013	50% to 100% of salary
47p	0%
56p	100%
Between 47p and 56p	Pro-rata between 0% and 100%

During 2011, the Committee will review the LTIP because the current plan will reach the end of its 10 year life in 2012, meaning that shareholder approval to a new plan will be sought at the 2012 AGM.

All employee share plans

A Save As You Earn Share Option Scheme ('the Plan') was approved by shareholders at the 2002 AGM. Again, this means that it will expire in 2012 and, during 2011, the Committee will review all employee share plan participation.

Service agreements and letters of appointment

The executive directors have service contracts that can be terminated by either party on the giving of 12 months' notice. There is no provision for payment of predetermined compensation in case of wrongful termination by the Group and the duty to mitigate loss applies.

Mr Wyllie's service agreement is dated 25 April 2005 and Mr Bickerstaff's 3 March 2006.

Directors' remuneration report

Continued

Chairman and other non-executive directors

Remuneration for non-executive directors, other than the Chairman, is determined by the Board, following consultation between the Chairman and the Chief Executive. The Chairman's fee is determined and recommended to the Board following consultation between the Committee and the Chief Executive. Fees are reviewed annually and any increase is effective from 1 April.

Remuneration for non-executive directors, other than the Chairman, comprises a basic annual fee for acting as non-executive director of the company and additional fees for the Senior Independent Director, and chairmanship of the Audit and Remuneration Committee. Following a review in 2011, it was decided to increase the basic annual fees (fees were last increased in 2007 although the Chairman of the Remuneration Committee and Audit Committee and the Senior Independent Director received an additional fee of £1,000 per annum in 2008) reflecting the increased time commitment expected of non-executive directors and the expertise that they bring to the Company. The fees are:

			Audit Committee	Remuneration
Year	Annual fee	Senior Independent Director	Chairman	Committee Chairman
2011	£41,000	£6,000	£8,500	£6,000
2010	£39,000	£6,000	£8,500	£6,000

During 2010, the Chairman was paid fees of £120,000. He does not receive any additional fees for committee memberships. For 2011, he will receive a fee of £127,000.

The independent non-executive directors have letters of appointment. The appointment of an independent non-executive director can be terminated by reasonable notice on either side. Messrs Allvey, Alexander, Bryant and Morley are not entitled to compensation for loss of office.

The nominee non-executive directors (as indicated in the Corporate Governance Statement on page 50), hold office for as long as the shareholder nominating them holds a specific percentage of the issued share capital. The nominee non-executive directors are 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.

The dates of the non-executive director's original appointment are as follows:

Non-executive director	Date of appointment	Expiry of current term*
David P Allvey	01.11.2001	Close of the 2012 AGM
John M Bryant	01.02.2002	Close of the 2012 AGM
Michael R Alexander	25.07.2007	Close of the 2011 AGM
James Morley	09.01.2008	Close of the 2011 AGM
Samer 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.

Performance graph

The graph shows the value, by 31 December 2010, for £100 invested in Costain Group PLC on 1 January 2006 compared with the value of £100 invested in the FTSE All-Share Index. The FTSE All-Share Index was chosen as it represents the broadest market comparator of other quoted companies.

Total shareholder return

Source: Thomson Reuters

The text and table that follow comprise the auditable part of the Directors' remuneration report, being the information required by the UKLA listing rules 9.8.6 and 9.8.8.

Directors' emoluments

The aggregate directors' remuneration for the year ended 31 December 2010 was £1,525,230 (2009: £1,457,902).

				2010	2009	2010	2009
	Salary/Fee	Bonus	Benefits	Total	Total	Pension	Pension
	£	£	£	£	£	£	£
Executive directors
A Wyllie	393,750	360,000	13,465	767,215	710,814	86,625	82,500
A O Bickerstaff	258,750	190,800	11,965	461,515	413,600	56,925	52,066
Non-executive directors
D P Allvey	120,000			120,000	120,000	–	–
J M Bryant	45,000			45,000	45,000	–	–
M R Alexander	45,000			45,000	45,000	–	–
J Morley	47,500			47,500	47,500	–	–
S G Younis	39,000			39,000	20,400	–	–
Former directors					55,588
Total	949,000	550,800		25,430 1,525,230	1,457,902	143,550	134,566

Directors' share interests

(i) Beneficial holdings

	At 1 January 2010	At 31 December 2010
	Number of ordinary shares	Number of ordinary shares*
A Wyllie	275,938	28,217
A O Bickerstaff	120,000	12,000
D P Allvey	52,500	5,250
J M Bryant**	92,861	9,627
M R Alexander	42,452	9,263
J Morley	50,000	5,000
S G Younis	–	–

* the Company undertook a 1 for 10 share consolidation in 2010.

** all shares held by spouse through a nominee account.

(ii) Deferred Share Bonus Plan awards

Under the DSBP, deferred bonus awards can be granted in the following two forms:

(i) an option with a nil exercise price over a number of shares (Deferred Award); and

(ii) an option with a nil exercise price over a fixed value of shares (the Option), which is granted in combination with an HMRC approved market value option over a number of shares (Combined Deferred Award) – this applies to an individual maximum of £30,000.

Directors' remuneration report

Continued

	Date Granted	At 1 Jan 2010	Granted during the year	Lapsed during the year	Exercisable during the year	At 31 Dec 2010*	Exercise price*	Exercisable from
A Wyllie	19.04.10	–	258,0001	–	–	25,800	–	April 2012-2020
	19.04.10	–	123,771	–	–	12,377	£2.42p	April 2012-2020
			(£29,999.91)2			(£29,999.91)
	19.04.10	–	123,7713	–	–	12,377	–	April 2012-2020
A O Bickerstaff	19.04.10	–	121,8001	–	–	12,180	–	April 2012-2020
	19.04.10	–	123,771	–	–	12,377	£2.42p	April 2012-2020
			(£29,999.91)2			(£29,999.91)
	19.04.10	–	123,7713	–	–	12,377	–	April 2012-2020

Details of the executive directors' participation in the DSBP are as follows:

* Restated following 1 for 10 share consolidation in 2010.

1 Number of shares under the Deferred Award.

2 Maximum number and value of shares under the Combined Deferred Award.

3 Number of shares under the Option.

The value of the shares under the Combined Deferred Award and the Option are equal. The Combined Deferred Award and the Option must normally be exercised at the same time. When calculating the maximum value of the shares under a Deferred Award that may be granted under the terms of the Plan, the value of the shares under the Option is not counted.

All of the awards will become exercisable on the second anniversary of the date of grant subject to the continued employment of the participant. The value of the shares delivered under the Combined Deferred Award on exercise is the same as the value of the shares under that award at the time of grant. The number of shares under the Deferred Award and Option at grant will be delivered to the participants on exercise.

To the extent that all or any part of an Award becomes exercisable, it remains exercisable until the tenth anniversary of the date of grant.

(iii) Long-Term Incentive Plan awards

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

	Date Granted	At 1 Jan 2010	Granted during the year	Lapsed during the year*	Vested during the year	At 31 Dec 2010*	Exercisable from
A Wyllie	21.04.06	696,855	–	696,855	–	–	–
	18.04.071	775,998	–	–	–	77,599	March 2011
	21.04.082	1,546,391	–	–	–	154,639	March 2011
	07.04.093	824,175	–	–	–	82,417	March 2012
	14.04.104	–	816,326	–	–	81,632	March 2013
A O Bickerstaff	21.04.06	382,376	–	382,376	–	–	–
	18.04.071	434,109	–	–	–	43,410	March 2011
	21.04.082	907,216	–	–	–	90,721	March 2011
	07.04.093	527,472	–	–	–	52,747	March 2012
	14.04.104	–	540,816	–	–	54,081	March 2013

* Restated following 1 for 10 share consolidation in 2010.

1 EPS for the financial year ended 31 December 2010 of 32.7p (25% vests) to EPS of 37.1p (100% vests) on a sliding scale between 25% and 100% pro rata to the EPS actually achieved.

2 EPS for the financial year ended 31 December 2010 of 30.9p (25% vests) to EPS of 34.3p (100% vests) on a sliding scale between 25% and 100% pro rata to the EPS actually achieved.

3 EPS for the financial year ended 31 December 2011 of 21.0p (15% vests) to EPS of 27.5p (100% vests) on a sliding scale between 15% and 100% pro rata to the EPS actually achieved.

4 EPS for the financial year ended 31 December 2012 of 21.0p (15% vests) to EPS of 27.5p (100% vests) on a sliding scale between 15% and 100% pro rata to the EPS actually achieved.

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 50p each in the Company for the dealing day immediately preceding the date of grant for the 2007 award was 445p, for the 2008 award 242p, for the 2009 award 227p and for the 2010 award 245p.
(c) The total number of ordinary shares of 50p each still outstanding and subject to the 2007 award is 121,009 (2009: 1,210,107), the 2008 award 245,360 (2009: 2,453,607), the 2009 award 678,295 (2009: 7,339,788) and the 2010 award 678,602.
(d) At 31 December 2010, the derived mid-market price of the ordinary shares in the Company, as advised by the Company's brokers, was 212p. The range of the share price of the ordinary shares during 2010 was 185.5p to 265p.

(e) All figures have been adjusted and restated to reflect the 1 for 10 share consolidation in 2010.

(iv) Save As You Earn share options

	Date Granted	At 1 Jan 2010	Granted during the year	Lapsed during the year	Exercisable during the year	At 31 Dec 2010*	At exercised price*	Exercisable from
A Wyllie	23.05.08	47,959	–	–	–	4,795	196.0p	Jul-Dec 2011
A O Bickerstaff	23.05.08	47,959	–	–	–	4,795	196.0p	Jul-Dec 2011

* Restated following 1 for 10 share consolidation in 2010.

The report was approved by the Board of directors on 9 March 2011 and has been signed on its behalf by:

Michael R Alexander

Chairman of the Remuneration Committee

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 these 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 adequate accounting records that are sufficient to show and explain the parent companies' transactions and 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 for the year ended 31 December 2010, prepared in accordance with IFRSs as adopted by the EU, 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 & Responsibility review, the Principal risks and Key Performance Indicators review and the Finance Director's review sections of this report include a fair review of the development and performance of the business and the position of the Company 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

David Allvey Chairman

Andrew Wyllie Chief Executive

Independent Auditor's Report to the members of Costain Group PLC

We have audited financial statements of Costain Group PLC for the year ended 31 December 2010 set out on pages 74 to 114. 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 auditors

As explained more fully in the Directors' Responsibility Statement 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 and express an opinion on, 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 statements

A description of the scope of an audit of financial statements is provided on the APB's website at www.frc.org.uk/apb/scope/private.cfm.

Opinion on financial statements

In 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 2010 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 2006

In 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 50 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 exception

We 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; or
» a Corporate governance statement has not been prepared by the Company.

Under the Listing Rules we are required to review:

» the directors' statement, set out on page 57, in relation to going concern;
» the part of the Corporate governance statement on page 50 relating to the Company's compliance with the nine provisions of the June 2008 Combined Code specified for our review;
» certain elements of the Report to shareholders by the Board on directors remuneration.

Stephen Bligh (Senior Statutory Auditor)

for and on behalf of KPMG Audit Plc, Statutory Auditor 15 Canada Square London E14 5GL

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

Financial statements

Consolidated income statement
Consolidated and Company statements of comprehensive income and expense
Consolidated statement of financial position
Company statement of financial position
Consolidated and Company statements of changes in equity
Consolidated cash flow statement
Company cash flow statement
Notes to the financial statements
Five-year financial summary
Financial calendar and other shareholder information

Consolidated income statement

Year ended 31 December

	Notes	2010 £m	2009 £m
Continuing operations
Revenue	3	1,022.5	1,061.1
Less: Share of revenue of equity accounted joint ventures and associates	13	(98.0)	(67.7)
Group revenue		924.5	993.4
Cost of sales		(883.9)	(949.2)
Gross profit		40.6	44.2
Administrative expenses		(23.2)	(22.2)
Group operating profit		17.4	22.0
Profit on sale of interests in joint ventures and associates	4	11.2	2.0
Profit on sale of land and property		1.3	–
Share of results of equity accounted joint ventures and associates	13	(0.5)	(3.2)
Profit from operations	3	29.4	20.8
Finance income	7	30.7	26.0
Finance expense	7	(32.2)	(28.7)
Net finance expense		(1.5)	(2.7)
Profit before tax	3/4	27.9	18.1
Income tax expense	8	(4.8)	(3.5)
Profit for the year attributable to equity holders of the parent		23.1	14.6
Earnings per share
Basic (2009 restated)	9	36.4p	23.0p
Diluted (2009 restated)	9	35.4p	22.6p

Share numbers included in the earnings per share calculation have been restated for the 1 for 10 share consolidation (Note 20).

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.

Consolidated statement of comprehensive income and expense

Year ended 31 December

	2010 £m	2009 £m
Profit for the year	23.1	14.6
Exchange differences on translation of foreign operations	(1.1)	(3.6)
Cash flow hedges
Group:
Effective portion of changes in fair value during year	0.3	(0.4)
Net changes in fair value transferred to retained earnings	(0.3)	(0.9)
Tax recognised on changes in fair value	–	0.4
Joint ventures and associates:
Effective portion of changes in fair value (net of tax) during year	(1.3)	2.7
Net changes in fair value (net of tax) transferred to retained earnings	8.1	1.9
Actuarial gains/(losses) on defined benefit pension scheme	24.6	(67.4)
Tax recognised on actuarial (gains)/losses recognised directly in equity	(8.1)	18.9
Other comprehensive income/(expense) for the year	22.2	(48.4)
Total comprehensive income/(expense) for the year attributable to equity holders of the parent	45.3	(33.8)

Company statement of comprehensive income and expense

The Company does not have any comprehensive income or expense, other than a profit for the year of £7.5 million (2009: profit of £2.1 million).

Consolidated statement of financial position

As at 31 December

	Notes	2010 £m	2009 £m
Assets
Non-current assets
Property, plant and equipment	11	9.7	11.5
Intangible assets	12	0.1	1.0
Investments in equity accounted joint ventures	13	24.5	27.2
Investments in equity accounted associates	13	1.5	1.6
Loans to equity accounted joint ventures	13	10.8	12.8
Loans to equity accounted associates	13	0.6	2.5
Other	14	18.9	12.7
Deferred tax	8	20.9	34.6
Total non-current assets		87.0	103.9
Current assets
Inventories		1.3	2.4
Trade and other receivables	14	162.0	201.9
Cash and cash equivalents	15	146.0	120.8
Total current assets		309.3	325.1
Total assets		396.3	429.0
Equity
Share capital	20	31.7	31.7
Share premium		2.0	1.9
Foreign currency translation reserve		6.8	7.0
Hedging reserve		(2.2)	(9.0)
Retained earnings		(0.7)	(35.4)
Total equity attributable to equity holders of the parent		37.6	(3.8)
Liabilities
Non-current liabilities
Retirement benefit obligations	19	39.6	104.7
Other payables	17	5.2	4.5
Provisions for other liabilities and charges	18	2.5	3.1
Total non-current liabilities		47.3	112.3
Current liabilities
Trade and other payables	17	304.8	313.3
Income tax liabilities	8	1.7	1.7
Bank overdrafts	15	1.7	0.3
Provisions for other liabilities and charges	18	3.2	5.2
Total current liabilities		311.4	320.5
Total liabilities		358.7	432.8
Total equity and liabilities		396.3	429.0

The financial statements were approved by the Board of Directors on 9 March 2011 and were signed on its behalf by:

Director Director

A Wyllie A O Bickerstaff

Registered number: 1393773

Company statement of financial position

As at 31 December

	Notes	2010 £m	2009 £m
Assets
Non-current assets
Investments in subsidiaries	13	123.0	114.5
Total non-current assets		123.0	114.5
Current assets
Trade and other receivables	14	5.8	1.6
Cash and cash equivalents	15	77.6	26.3
Total current assets		83.4	27.9
Total assets		206.4	142.4
Equity
Share capital	20	31.7	31.7
Share premium		2.0	1.9
Other reserves		4.5	2.3
Retained earnings		46.9	44.9
Total equity attributable to equity holders of the parent		85.1	80.8
Liabilities
Non-current liabilities
Provisions for other liabilities and charges	18	1.4	1.5
Total non-current liabilities		1.4	1.5
Current liabilities
Trade and other payables	17	117.9	58.0
Income tax liabilities	8	1.7	1.7
Provisions for other liabilities and charges	18	0.3	0.4
Total current liabilities		119.9	60.1
Total liabilities		121.3	61.6
Total equity and liabilities		206.4	142.4

The financial statements were approved by the Board of Directors on 9 March 2011 and were signed on its behalf by:

Director Director

A Wyllie A O Bickerstaff

Registered number: 1393773

Consolidated statement of changes in equity

	Share capital £m	Share premium £m	Translation reserve £m	Hedging reserve £m	Retained earnings £m	Total equity £m
At 1 January 2009	31.7	1.7	10.6	(12.7)	2.3	33.6
Profit for the year	–	–	–	–	14.6	14.6
Other comprehensive income/(expense)	–	–	(3.6)	3.7	(48.5)	(48.4)
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)
At 1 January 2010	31.7	1.9	7.0	(9.0)	(35.4)	(3.8)
Profit for the year	–	–	–	–	23.1	23.1
Other comprehensive income/(expense)	–	–	(1.1)	6.8	16.5	22.2
Transfer between reserves	–	–	0.9	–	(0.9)	–
Equity-settled share based payments	–	–	–	–	1.5	1.5
Dividends paid	–	0.1	–	–	(5.5)	(5.4)
At 31 December 2010	31.7	2.0	6.8	(2.2)	(0.7)	37.6

Company statement of changes in equity

	Share capital	Share premium	Other reserve	Retained earnings	Total equity
	£m	£m	£m	£m	£m
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 granted
to employees of subsidiaries	–	–	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
At 1 January 2010	31.7	1.9	2.3	44.9	80.8
Comprehensive income	–	–	–	7.5	7.5
Equity-settled share based payments granted
to employees of subsidiaries	–	–	2.2	–	2.2
Dividends paid	–	0.1	–	(5.5)	(5.4)
At 31 December 2010	31.7	2.0	4.5	46.9	85.1

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

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

Group

Translation reserve

The 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 reserve

The 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.

Company

Other reserve

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

Consolidated cash flow statement

Year ended 31 December

	Notes	2010 £m	2009 £m
Cash flows from operating activities
Profit for the year		23.1	14.6
Adjustments for:
Share of results of joint ventures and associates	13	0.5	3.2
Finance income	7	(30.7)	(26.0)
Finance expense	7	32.2	28.7
Income tax	8	4.8	3.5
Profit on sales of interests in joint ventures and associates		(11.2)	(2.0)
Depreciation of property, plant and equipment	4	1.7	2.7
Amortisation of intangible assets	4	0.9	0.9
Share-based payments expense	5	4.5	1.1
Profit on sale of plant and equipment		(1.2)	–
Profit on sale of land and property		(1.3)	–
Cash from operations before changes in working capital and provisions		23.3	26.7
Decrease/(increase) in inventories		1.1	(0.8)
Decrease/(increase) in receivables		37.2	(32.7)
(Decrease)/increase in payables		(10.2)	9.1
Movement in provisions and employee benefits		(20.0)	(18.4)
Cash from/(used by) operations		31.4	(16.1)
Interest paid		(0.9)	(0.5)
Income tax received		0.2	0.1
Net cash from/(used by) operating activities		30.7	(16.5)
Cash flows from/(used by) investing activities
Interest received		1.0	2.6
Dividends received from joint ventures and associates	13	0.1	0.6
Additions to property, plant and equipment	11	(1.1)	(7.2)
Additions to intangible assets	12	–	(0.1)
Proceeds of disposal of property, plant and equipment		3.8	0.4
Proceeds from sales of interests in joint ventures and associates		–	8.7
Additions to investments in joint ventures and associates	13	–	(0.2)
Loan repayments by joint ventures and associates	13	0.5	0.7
Additions to loans to joint ventures and associates	13	(5.9)	(9.7)
Net cash used by investing activities		(1.6)	(4.2)
Cash flows used by financing activities
Ordinary dividends paid		(5.4)	(4.7)
Repayment of borrowings		–	(0.3)
Net cash used by financing activities		(5.4)	(5.0)
Net increase/(decrease) in cash, cash equivalents and overdrafts		23.7	(25.7)
Cash, cash equivalents and overdrafts at beginning of the year	15	120.5	146.9
Effect of foreign exchange rate changes		0.1	(0.7)
Cash, cash equivalents and overdrafts at end of the year	15	144.3	120.5

Financial statements 4

Company cash flow statement

Year ended 31 December

	Notes	2010 £m	2009 £m
Cash flows from operating activities
Profit for the year		7.5	2.1
Adjustments for:
Finance income		(3.7)	(4.5)
Finance expense		0.3	0.7
Income tax		(1.2)	(0.8)
Amount written back against investments		(6.3)	–
Cash used by operations before changes in working capital and provisions		(3.4)	(2.5)
(Increase)/decrease in receivables		(4.2)	0.5
Increase/(decrease) in payables		60.3	(37.6)
Movement in provisions		(0.2)	–
Cash from/(used by) operations		52.5	(39.6)
Interest paid		(0.3)	(1.1)
Income tax received		0.8	0.6
Net cash from/(used by) operating activities		53.0	(40.1)
Cash flows from/(used by) investing activities
Dividends received		3.5	4.0
Interest received		0.2	0.5
Additions to investments in subsidiaries		–	(0.1)
Net cash from investing activities		3.7	4.4
Cash flows used by financing activities
Ordinary dividends paid		(5.4)	(4.7)
Net cash used by financing activities		(5.4)	(4.7)
Net increase/(decrease) in cash and cash equivalents		51.3	(40.4)
Cash and cash equivalents at beginning of the year	15	26.3	66.7
Cash and cash equivalents at end of the year	15	77.6	26.3

Notes to the financial statements

1 General information

Costain 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 and Responsibility review section of these financial statements.

The consolidated financial statements of the Company for the year ended 31 December 2010 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 9 March 2011.

2 Summary of significant accounting policies

Both 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 preparation

These 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 judgments, 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 judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Judgments 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 25.

Going concern

The Group's business activities and the factors likely to affect its future development, performance and position are set out in the Business and Responsibility 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 Finance Director's review section of these financial statements and in Note 16.

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 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 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 policies

The 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.

» IFRIC 12 'Service Concession Arrangements' has been adopted from 1 January 2010 with retrospective effect. The adoption has not resulted in any significant changes to the assets recorded within the Group's investments although there is a change in the timing of profit recognition over the lifetime of the contract. There is no change in the overall project cash flows. As the effect of adoption on comparative amounts was immaterial, comparative amounts have not been restated.
» IFRIC 16 'Hedges of a Net Investment in a Foreign Operation' effective from 1 January 2010. IFRIC 16 concludes that the risk which arises from the foreign currency exposure to the functional currency of the foreign operation and the presentation currency of the consolidated financial statements does not create an exposure to which an entity may apply hedge accounting. The Group has complied with this and not created any hedging instrument and not applied hedge accounting.

Notes to the financial statements

Continued

2 Summary of significant accounting policies continued

The following standards and interpretations are effective for the year ended 31 December 2010 but are not applicable to the Group:

» Amendments to IFRS 2 'Group cash settled share-based payment transactions';
» IFRS 3 'Business combinations (revised 2008)';
» IAS 27 'Consolidated and separate financial statements (revised 2008)';
» Amendments to IAS 39 'Financial Instruments: recognition and measurement';
» Amendments to IAS 39 'Reclassification of financial assets';
» IFRIC 15 'Agreements for the Construction of Real Estate';
» IFRIC 17 'Distributions of non-cash assets to owners';
» IFRIC 18 'Transfer of assets from customers'.

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 translation

Transactions 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.

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable, net of value added tax and includes the share of revenue of jointly controlled operations. The majority of the Group's revenue arises from construction contracts.

2 Summary of significant accounting policies continued

(a) Construction contracts

Revenue 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.

(b) Other revenue

Revenue 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 remains 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 assets

Intangible 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 equipment

Property, 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 term Plant 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 – Company

Company investments in subsidiaries are carried at cost less impairment losses less any pre-acquisition dividends received.

Notes to the financial statements

Continued

2 Summary of significant accounting policies continued

PFI investments

The Group has interests in PFI investments held through joint ventures and associates. These arrangements, whereby a private sector operator participates in the development, financing, operation and maintenance of infrastructure for public services, are accounted in accordance with IFRIC 12. Under this interpretation, the infrastructure assets within the Group's investments are recognised as financial assets because the operator has an unconditional right to receive a specified amount of cash or other financial asset over the life of the agreement. The operator recognises investment income in respect of the financial asset on an effective interest basis.

The PFI associates and joint ventures can 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 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, the assets 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.

Provisions

A 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.

Taxation

The 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 tax 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 taxation is also dealt with in equity.

2 Summary of significant accounting policies

continued

Additional taxes arising from the distribution of dividends are recognised at the same time as the liability to pay the related dividend.

Leases

Leases principally comprise operating leases. Payments 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 contracts

Where 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 capital

Ordinary 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.

Dividends

Dividends 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 payments

These 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.

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 obligations

A defined benefit pension scheme is operated in the United Kingdom, which provides benefits based on pensionable salary. The details are included in Note 19. 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.

Any increase in the present value of the liabilities of the defined benefit pension scheme arising 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 liabilities

Financial 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 assets

Financial 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.

A financial asset is derecognised 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 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.

Notes to the financial statements

Continued

2 Summary of significant accounting policies continued

Loans and receivables

Loans and other receivables with 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.

Trade and other receivables

Trade and other receivables do not carry interest and are stated at their initial value less impairment losses.

Impairment of financial assets

Estimated recoverable amounts are based on the ageing of the outstanding receivable and individual receivables are provided against when management deem the amounts are not collectible.

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 derecognised 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.

Financial liabilities are derecognised only when the obligations are discharged, cancelled or expire.

Trade payables

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

(c) Derivative financial instruments

Derivative financial instruments are used in order to manage risks arising from changes in foreign exchange rates, interest rates and inflation and are measured at their fair value. 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.

2 Summary of significant accounting policies continued

IFRSs endorsed but not applied

The 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:

» IFRS 9 'Financial instruments';
» IAS 24 'Related party disclosures (revised 2009)';
» IAS 32 'Amendments to financial instruments classification of rights issues '(mandatory for years commencing on or after 1 February 2010)';
» IAS 39 'Amendments to financial instruments recognition and measurement; embedded hedged items';
» IAS 39 'Amendments to financial instruments recognition and measurement; embedded derivatives';
» IAS 39 'Amendments to reclassifications of financial assets: effective date and transition';
» IFRIC 9 'Amendments to reassessment of embedded derivatives';
» IFRIC 19 'Extinguishing financial liabilities with equity instruments'.

3 Operating segments

Segment information is based on four business segments: Environment, Infrastructure, Energy & Process and Land Development operations in Spain. The activities previously reported separately as Community have been combined into a single enlarged Environment segment and comparative segment information has been restated accordingly. The segments are strategic business units with separate management reporting to a segment managing director and have different core customers or different services. This information is provided to the Chief Executive who is the chief operating decision maker. The segments are discussed in the Business and Responsibility review section of these financial statements.

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.

2010	Environment £m	Infra structure £m	Energy & Process £m	Land Development £m	Central costs £m	Total £m
Segment revenue
External revenue	422.3	371.0	131.2	–	–	924.5
Share of revenue of joint ventures and associates	67.5	24.3	5.4	0.8	–	98.0
Total segment revenue	489.8	395.3	136.6	0.8	–	1,022.5
Segment profit/(loss)
Operating profit/(loss)	3.6	12.2	8.0	–	(6.4)	17.4
Profit on sales of joint ventures and associates	11.2	–	–	–	–	11.2
Profit on sale of land and property	1.3	–	–	–	–	1.3
Share of results of joint ventures and associates	1.1	–	0.2	(1.8)	–	(0.5)
Profit/(loss) from operations	17.2	12.2	8.2	(1.8)	(6.4)	29.4
Net finance expense						(1.5)
Profit before tax						27.9

Segment profit/(loss) is stated after charging the following:

Depreciation	–	1.3	0.4	–	–	1.7
Amortisation	0.4	0.4	0.1	–	–	0.9

Notes to the financial statements

Continued

3 Operating segments continued

Segment assets	Environment £m	Infra structure £m	Energy & Process £m	Land Development £m	Central costs £m	Total £m
Reportable segment assets	66.7	78.7	48.6	35.2	0.2	229.4
Unallocated assets:
Deferred tax						20.9
Cash and cash equivalents						146.0
Total assets						396.3
Expenditure on non-current assets
Property, plant and equipment	–	0.8	0.3	–	–	1.1
Loans to joint ventures and associates	3.5	–	–	2.4	–	5.9
Segment liabilities
Reportable segment liabilities	156.5	112.1	46.6	–	0.5	315.7
Unallocated liabilities:
Retirement benefit obligations						39.6
Overdrafts						1.7
Income tax						1.7
Total liabilities						358.7
	Environment	Infra structure	Energy & Process	Land Development	Central costs	Total
2009	£m	£m	£m	£m	£m	£m
Segment revenue
External revenue	531.9	364.8	96.7	–	–	993.4
Share of revenue of joint ventures and associates	62.0	–	4.5	1.2	–	67.7
Total segment revenue	593.9	364.8	101.2	1.2	–	1,061.1
Segment profit/(loss)
Operating profit/(loss)	2.1	16.9	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	(0.8)	–	0.2	(2.6)	–	(3.2)
Profit/(loss) from operations	3.3	16.9	9.3	(2.6)	(6.1)	20.8
Net finance expense						(2.7)
Profit before tax						18.1
Segment profit/(loss) is stated after charging the following:
Depreciation	0.8	1.1	0.8	–	–	2.7
Amortisation	0.4	0.3	0.2	–	–	0.9

3 Operating segments continued

		Infra	Energy &	Land	Central
Segment assets	Environment £m	structure £m	Process £m	Development £m	costs £m	Total £m
Reportable segment assets	118.8	76.8	42.3	35.4	0.3	273.6
Unallocated assets:
Deferred tax						34.6
Cash and cash equivalents						120.8
Total assets						429.0
Expenditure on non-current assets
Property, plant and equipment	0.2	6.4	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	186.8	92.8	46.0	–	0.5	326.1
Unallocated liabilities:
Retirement benefit obligations						104.7
Overdrafts						0.3
Income tax						1.7
Total liabilities						432.8

Geographical information

In 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
	2010	2009	2010	2009
	£m	£m	£m	£m
United Kingdom	1,000.8	1,025.8	48.8	62.9
Spain	0.8	1.2	35.0	35.4
Rest of the World	20.9	34.1	3.2	5.6
	1,022.5	1,061.1	87.0	103.9

Customers accounting for more than 10% of revenue

One customer (2009: one) in the Infrastructure segment accounted for revenue of £126.9 million (2009: £145.8 million) and one customer (2009: one) in the Environment segment accounted for revenue of £163.2 million (2009: £121.0 million).

Notes to the financial statements

Continued

4 Other operating expenses and income
	2010 £m	2009 £m
Profit before tax is stated after charging:
Profit on sale of interests in joint ventures and associates	11.2	2.0
Depreciation of property, plant and equipment (Note 11)	1.7	2.7
Amortisation of intangible assets (Note 12)	0.9	0.9
Hire of plant and machinery	28.6	36.5
Rent of land and buildings	2.9	3.3
and after crediting:
Income from rent of land and buildings	1.6	1.9

The £11.2 million profit on sale of interests in joint ventures and associates relates to the transfer of a portfolio of six PFI investments to The Costain Pension Scheme for £22.0 million. As a result of this transfer, £8.1 million of fair value adjustments on the PFI financial assets relating to cash flow hedges were recycled through the income statement.

Auditors' remuneration	2010 £m	2009 £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, pensions and corporate advice (2009: Taxation advice)	0.3	0.1
	0.8	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

Group	2010 £m	2009 £m
Wages and salaries	130.9	124.9
Social security costs	13.2	11.8
Pension costs (Note 19)	6.5	6.7
Share-based payments expense (Note 19)	4.5	1.1
	155.1	144.5

Average number of persons employed	2010 Number	2009 Number
Environment	1,639	1,622
Infrastructure	1,263	948
Energy & Process	1,424	1,410
Central	23	23
	4,349	4,003

Company

The Company does not employ any personnel, except for the directors considered in Note 6.

6 Remuneration of directors

Details of the directors' remuneration, pension entitlements, interest in the long-term incentive plans, deferred share bonus plans and share options are included in the Directors' remuneration report.

7 Net finance expense

	2010	2009
	£m	£m
Interest income from bank deposits	0.4	1.2
Interest income on loans to related parties	0.6	1.4
Expected return on defined benefit pension scheme assets	29.7	23.4
Finance income	30.7	26.0
Interest payable on bank overdrafts and loans	(0.9)	(0.5)
Interest cost on the present value of the defined benefit obligations	(31.3)	(28.2)
Finance expense	(32.2)	(28.7)
Net finance expense	(1.5)	(2.7)

Interest income on loans to related parties relates to shareholder loan interest receivable from investments in equity accounted joint ventures and associates.

8 Income tax

	2010	2009
	£m	£m
On profit for the year
United Kingdom corporation tax at 28.0% (2009: 28.0%) – Adjustment in respect of prior years	0.2	0.1
Current tax credit for the year	0.2	0.1
Deferred tax charge for current year	(5.0)	(3.4)
Adjustment in respect of prior years	–	(0.2)
Deferred tax charge for the year	(5.0)	(3.6)
Income tax expense in the consolidated income statement	(4.8)	(3.5)
	2010 £m	2009 £m
Tax reconciliation
Profit before tax	27.9	18.1
Income tax at 28.0% (2009: 28.0%)	(7.8)	(5.1)
Rate adjustments relating to overseas profits	(0.8)	0.2
Share of results of joint ventures and associates at 28.0% (2009: 28.0%)	(0.1)	(0.9)
Disallowed provisions and expenses	(0.9)	(0.5)
Non-taxable gains and profits relieved by capital losses	3.5	0.6
Utilisation of previously unrecognised temporary differences	0.8	2.3
Rate adjustment relating to deferred tax	0.3	–
Adjustments in respect of prior years	0.2	(0.1)
Income tax expense in the consolidated income statement	(4.8)	(3.5)
Effective rate of tax	17.2%	19.3%

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 (2009: £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 in the United Kingdom have reduced to £6.0 million (2009: £8.6 million).

Notes to the financial statements

Continued

8 Income tax continued

Deferred tax assets recognised at 27.0% (2009: 28.0%)	2010	2009
	£m	£m
Accelerated capital allowances	2.2	2.5
Short-term temporary differences	8.0	2.8
Retirement benefit obligations	10.7	29.3
Deferred tax asset	20.9	34.6
The Company had no deferred tax asset at either year-end.
	2010	2009
Analysis of deferred tax movements	£m	£m
At 1 January	34.6	18.9
Deferred tax in consolidated income statement
Accelerated capital allowances	(0.3)	0.2
Short-term temporary differences	5.8	(0.2)
Retirement benefit obligations	(10.5)	(3.6)
	(5.0)	(3.6)
Deferred tax in other comprehensive income and expense
Retirement benefit obligations	(8.1)	18.9
Cash flow hedges	–	0.4
	(8.1)	19.3
Deferred tax recognised directly in the consolidated statement of changes in equity
Short-term temporary differences	(0.6)	–
At 31 December	20.9	34.6

Factors that may affect future tax charges

The 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 at 27.0% (2009: 28.0%)

		Group		Company
	2010	2009	2010	2009 £m
	£m	£m	£m
Accelerated capital allowances	0.8	1.0	–	–
Short-term temporary differences	4.0	3.4	–	0.1
Trading tax losses	1.6	2.4	–	–
Management expenses and charges	15.4	15.9	15.4	15.9
Temporary differences	21.8	22.7	15.4	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	74.4	77.1	67.3	67.3

The current year tax effect, at 28.0%, of using the above short-term temporary differences and trading tax losses was £0.8 million (2009: £2.3 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.

A further reduction to reflect the proposed tax rate of 24.0% from 1 April 2014 would reduce the deferred tax asset by £2.3 million.

9 Earnings per share

The calculation of earnings per share is based on profit of £23.1 million (2009: £14.6 million) and the number of shares set out below.

	2010	2009
	Number	Number
	(millions)	(millions)
		(restated)
Weighted average number of ordinary shares in issue for basic earnings per share calculation	63.5	63.4
Dilutive potential ordinary shares arising from employee share schemes	1.7	1.3
Weighted average number of ordinary shares in issue for diluted earnings per share calculation	65.2	64.7

At 31 December 2010, all options were included in the diluted weighted average number of ordinary shares calculation (2009: 2.8 million were excluded as they were anti-dilutive).

Share numbers included in the earnings per share calculation have been restated for the 1 for 10 share consolidation (Note 20).

10 Dividends

During the year, the 2009 final dividend of 5.5p (2009: 5.0p) per share was paid to shareholders (£3.5 million in cash and £0.1 million via a scrip alternative (2009: £3.1 million in cash and £0.1 million via a scrip alternative)). An interim 2010 dividend of 3.0p (2009: 2.75p) per share (£1.9 million in cash (2009: £1.7 million in cash and £0.1 million via a scrip alternative)) was also paid.

A final dividend in respect of the year ended 31 December 2010 of 6.25p per share, amounting to a dividend of £4.0 million, is to be proposed at the Annual General Meeting. If approved, the dividend is expected to be paid on 20 May 2011 to shareholders registered at the close of business on 15 April 2011 and a scrip dividend alternative will be offered. These financial statements do not reflect the final dividend payable.

11 Property, plant and equipment

	Land and buildings	Plant and equipment	Total
Group	£m	£m	£m
Cost
At 1 January 2009	1.9	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	2.0	21.4	23.4
At 1 January 2010	2.0	21.4	23.4
Currency realignment	–	0.1	0.1
Additions	–	1.1	1.1
Disposals	(1.1)	(2.5)	(3.6)
At 31 December 2010	0.9	20.1	21.0
Depreciation
At 1 January 2009	0.3	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	0.4	11.5	11.9
At 1 January 2010	0.4	11.5	11.9
Provided in year	0.3	1.4	1.7
Disposals	(0.1)	(2.2)	(2.3)
At 31 December 2010	0.6	10.7	11.3
Net book value
At 31 December 2010	0.3	9.4	9.7
At 31 December 2009	1.6	9.9	11.5
At 1 January 2009	1.6	6.1	7.7

Notes to the financial statements

Continued

12 Intangible assets

Group

Software development costs and licences	£m
Cost
At 1 January 2009	4.9
Additions	0.1
At 31 December 2009	5.0
At 1 January 2010	5.0
Additions	–
At 31 December 2010	5.0
Amortisation

At 1 January 2009	3.1
Provided in year	0.9
At 31 December 2009	4.0
At 1 January 2010	4.0
Provided in year	0.9
At 31 December 2010	4.9

Net book value

At 31 December 2010	0.1
At 31 December 2009	1.0
At 1 January 2009	1.8

The net book value of intangible assets comprises £0.1 million (2009: £0.1 million) relating to software licences and in 2009 £0.9 million relating to software development costs. The amortisation charge is included in cost of sales.

13 Investments

	Investments		Loans
	Joint ventures	Associates	Joint ventures	Associates	Total
Group	£m	£m	£m	£m	£m
Cost or fair value
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
At 1 January 2010	27.3	0.6	23.9	8.9	60.7
Currency realignment	(0.6)	–	(0.4)	–	(1.0)
Additions	–	–	5.9	–	5.9
Repayments	–	–	(0.5)	–	(0.5)
Reclassifications	14.5	(0.4)	(14.5)	(1.8)	(2.2)
Disposals	(2.4)	–	(3.6)	(5.6)	(11.6)
At 31 December 2010	38.8	0.2	10.8	1.5	51.3
Share of post-acquisition reserves
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	–	–	2.7
Cash flow hedges – disposals	1.9	–	–	–	1.9
At 31 December 2009	(18.4)	(5.5)	–	–	(23.9)
At 1 January 2010	(18.4)	(5.5)	–	–	(23.9)
Currency realignment	(0.2)	–	–	–	(0.2)
Disposals	2.1	(0.3)	–	–	1.8
Reclassifications	–	1.0	–	–	1.0
Dividends	–	(0.1)	–	–	(0.1)
(Loss)/profit for the year	(1.4)	0.9	–	–	(0.5)
Cash flow hedges – change in fair value	–	(1.3)	–	–	(1.3)
Cash flow hedges – disposals	3.6	4.5	–	–	8.1
At 31 December 2010	(14.3)	(0.8)	–	–	(15.1)
Amounts written off
At 1 January 2009 and 31 December 2009	–	(0.2)	–	(0.2)	(0.4)
At 1 January 2010	–	(0.2)	–	(0.2)	(0.4)
Reclassifications	–	0.2	–	0.2	0.4
At 31 December 2010	–	–	–	–	–
Reclassifications
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
At 1 January 2010	18.3	6.7	(11.1)	(6.2)	7.7
Arising in the year	(18.3)	(4.6)	11.1	5.3	(6.5)
At 31 December 2010	–	2.1	–	(0.9)	1.2
Net book value
At 31 December 2010	24.5	1.5	10.8	0.6	37.4
At 31 December 2009	27.2	1.6	12.8	2.5	44.1
At 1 January 2009	32.2	0.1	9.5	0.9	42.7

Notes to the financial statements

Continued

13 Investments continued

During the year, the Group reduced its investment in Sleeperz Limited from a holding of 24% to 12.7%, and accordingly has shown the remaining investment within other non-current assets. The Group also reclassified its loans to China Harbour-Costain Mexico S de RL de CV, following the capitalisation of the shareholder loan balances to equity.

Analysis of share of joint ventures and associates revenue, income and assets and liabilities

	2010			2009
	Alcaidesa Holding SA £m	Other joint ventures £m	Associates £m	Total £m	Alcaidesa Holding SA £m	Other joint ventures £m	Associates £m	Total £m
Revenue	0.8	81.1	16.1	98.0	1.2	49.0	17.5	67.7
(Loss)/profit before tax Income tax	(2.5) 0.7	0.5 (0.1)	1.4 (0.5)	(0.6) 0.1	(3.7) 1.1	(0.8) (0.2)	0.9 (0.5)	(3.6) 0.4
(Loss)/profit for the year	(1.8)	0.4	0.9	(0.5)	(2.6)	(1.0)	0.4	(3.2)
Non-current assets Current assets Current liabilities Non-current liabilities	23.6 32.7 (15.5) (17.0)	– 21.4 (20.7) –	54.5 18.9 (6.9) (65.0)	78.1 73.0 (43.1) (82.0)	21.7 35.3 (2.9) (27.5)	36.8 16.4 (14.6) (38.0)	114.5 17.0 (13.8) (116.1)	173.0 68.7 (31.3) (181.6)
Investments in joint ventures and associates	23.8	0.7	1.5	26.0	26.6	0.6	1.6	28.8
Financial commitments Capital commitments	– –	– –	14.8 48.2	14.8 48.2	2.2 2.2	3.5 –	11.6 52.0	17.3 54.2

Net interest payable by joint ventures and associates in 2010 was £0.9 million (2009: £1.6 million payable). The applicable interest rates are income of 0% to 0.3% per annum (2009: 0.5% to 5.4%) and expense of 1.3% to 11.5% per annum (2009: 1.3% to 12.5%).

The financial commitments relate to associates involved in PFI schemes and the capital commitments relate 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

		2010			2009
	Alcaidesa Holding SA £m	Other joint ventures £m	Associates £m	Total £m	Alcaidesa Holding SA £m	Other joint ventures £m	Associates £m	Total £m
Revenue	1.6	175.7	57.3	234.6	2.4	110.4	60.9	173.7
(Loss)/profit before tax Income tax	(5.0) 1.4	0.7 (0.2)	4.0 (1.6)	(0.3) (0.4)	(7.4) 2.2	(1.4) (0.4)	3.5 (2.2)	(5.3) (0.4)
(Loss)/profit for the year	(3.6)	0.5	2.4	(0.7)	(5.2)	(1.8)	1.3	(5.7)
Non-current assets Current assets Current liabilities Non-current liabilities	43.4 65.5 (31.1) (29.2)	– 51.3 (49.7) –	203.5 56.7 (25.5) (230.1)	246.9 173.5 (106.3) (259.3)	38.5 70.7 (5.8) (50.2)	73.5 36.8 (33.4) (75.3)	288.7 133.3 (48.5) (366.9)	400.7 240.8 (87.7) (492.4)
Equity	48.6	1.6	4.6	54.8	53.2	1.6	6.6	61.4

Details of the principal subsidiary undertakings, jointly controlled entities, associates and jointly controlled operations are shown in Note 23.

13 Investments continued Company

Investments in subsidiaries	£m
Cost
At 1 January 2009	388.8
Additions	1.2
At 31 December 2009	390.0
At 1 January 2010	390.0
Additions	2.2
At 31 December 2010	392.2
Amounts written off
At 1 January and 31 December 2009	(275.5)
At 1 January 2010	(275.5)
Released	6.3
At 31 December 2010	(269.2)
Net book value

At 31 December 2010	123.0
At 31 December 2009	114.5
At 1 January 2009	113.3

Additions relate to the increase in the cost of investments in subsidiaries by the equivalent amount of the equity settled share-based payment charge in relation to employees of subsidiaries included in the income statement.

Details of the principal subsidiaries in which the Company has an interest are set out in Note 23.

14 Trade and other receivables

	Group		Company
	2010 2009		2010	2009
	£m	£m	£m	£m
Amounts included in current assets
Trade receivables	54.9	98.1	–	–
Other receivables	6.9	9.8	–	–
Amounts due from customers for contract work	93.1	84.5	–	–
Prepayments and accrued income	6.7	6.8	0.2	0.2
Amounts owed by joint ventures and associates	0.4	2.7	–	–
Amounts owed by subsidiary undertakings	–	–	5.6	1.4
	162.0	201.9	5.8	1.6
Amounts included in non-current assets
Other	18.9	12.7	–	–

At 31 December 2010, 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 £28.8 million (2009: £21.1 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 24, there is no allowance for bad or doubtful debts (2009: £Nil).

The average credit period within trade receivables on amounts billed for construction work and on sales of goods is 30 days (2009: 36 days). The analysis of the due dates of the trade receivables was £39.3 million (2009: £76.5 million) due within 30 days, £14.1 million (2009: £16.4 million) due between 30 and 60 days and £1.5 million (2009: £5.2 million) due after 60 days.

Included in the trade receivables balance are debtors, with a carrying amount of £2.2 million (2009: £5.7 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.

Notes to the financial statements

Continued

14 Trade and other receivables continued

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 £3,132.5 million (2009: £2,423.4 million). Progress billings and advances received from customers under open construction contracts amounted to £3,070.5 million (2009: £2,375.1 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 17).

15 Cash and cash equivalents

Cash and cash equivalents are analysed below, and include the Group's share of cash held by jointly controlled operations of £33.8 million (2009: £36.0 million).

	Group		Company
	2010	2009	2010	2009
	£m	£m	£m	£m
Cash and cash equivalents	146.0	120.8	77.6	26.3
Bank overdrafts	(1.7)	(0.3)	–	–
Cash, cash equivalents and overdrafts in the cash flow statement	144.3	120.5	77.6	26.3

16 Financial instruments and risk management

The 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 Management

The Group's objectives when managing capital are to safeguard its ability to continue as a going concern and to provide resources to grow the business, in order to provide returns for shareholders and other stakeholders. The current capital base of the Group is driven by shareholder financing. The Board of directors ('Board') continues to explore options to manage and strengthen the Group by growing the business and improving profitability and the Business review describes the Group's strategy and its operations. The Board monitors the overall strength of the balance sheet, particularly shareholders' equity and the pension liability as the Group's bonding facilities include a tangible net worth covenant based on shareholders' equity excluding the impact of the pension liability. The Board ensures the level of dividends to equity shareholders is appropriate.

In addition, the Board seeks to maintain an appropriate level of cash balances to accommodate the nature of the Group's business, which involves significant working capital flows.

There were no changes in the Board's approach to capital management during the year.

Liquidity and funding risk

Ultimate 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 £116.0 million (2009: £125.3 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.

16 Financial instruments and risk management continued

Liquidity and funding risk continued

Unsecured bonding facilities available

	Group and Company
	2010 £m	2009 £m
Expiring within one year	–	–
Expiring between two and five years*	345.0	290.0
	345.0	290.0
* 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. The facilities extend to 30 September 2013.

Credit risk

The 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 do 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 amounts of each financial asset, including derivative financial instruments, and the individual constituents of amounts due from customers for contract work 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 constituents 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 £1.2 million (2009: £1.3 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.

Foreign currency risk

Transactional 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 2010, the net monetary assets denominated in currencies other than the functional currency of the operation involved were US Dollar denominated net assets of £0.2 million (2009: £4.8 million) and Euro denominated net assets of £10.9 million (2009: £11.8 million) in members of the Group with sterling as their functional currency.

A 10% strengthening in the US Dollar would not have impacted the results (2009: adversely impacted by £0.1 million). A 10% strengthening in the Euro would have adversely impacted the results by £0.2 million (2009: adversely impacted by £0.3 million). A 10% strengthening in the UAE Dirham would have adversely impacted the results by £0.3 million (2009: £Nil).

Notes to the financial statements

Continued

16 Financial instruments and risk management continued

Cash flow hedges

At 31 December 2010, the Group had foreign currency contracts (67 purchase contracts (2009: 84) and 33 sale contracts (2009: 19)) designated as hedges of committed future purchases. The Group held no other foreign currency sale contracts (2009: 3 as hedges of future receivables).

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 (2009: Nil).

Foreign currency sale and purchase contracts outstanding at 31 December 2010 are summarised below. The carrying value represents the fair value of the contract; the contractual cash flows represent the sterling commitments.

Foreign exchange contracts

		2010				2009
	Carrying Amount £m	Contractual cash flows £m	Within one year £m	Between one and five years £m	Carrying Amount £m	Contractual cash flows £m	Within one year £m	Between one and five years £m
Purchases	(0.8)	(47.0)	(40.3)	(6.7)	(0.2)	(98.5)	(68.0)	(30.5)
Sales	0.4	17.5	13.1	4.4	(0.2)	21.2	11.8	9.4
	(0.4)	(29.5)	(27.2)	(2.3)	(0.4)	(77.3)	(56.2)	(21.1)

The expected impact on the income statement of the foreign exchange contracts is: 2011 loss £0.2 million, 2012 loss £0.1 million and 2013 loss £0.1 million.

At 31 December 2010, 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 (2009: Nil).

Maturity of PFI swaps

		2010				2009
	Total £m	Within one year £m	Between one and five years £m	After five years £m	Total £m	Within one year £m	Between one and five years £m	After five years £m
Interest rate swaps	2.8	0.2	0.6	2.0	10.3	0.4	1.5	8.4
RPI swaps	–	–	–	–	1.7	0.1	0.2	1.4
	2.8	0.2	0.6	2.0	12.0	0.5	1.7	9.8
Less tax	(1.1)	(0.1)	(0.3)	(0.7)	(3.4)	(0.1)	(0.5)	(2.8)
	1.7	0.1	0.3	1.3	8.6	0.4	1.2	7.0

These amounts (net of tax) were recognised within the value of the investment or within provisions, as appropriate, as fair value derivatives.

16 Financial instruments and risk management continued

Financial liabilities and assets

Currency and maturity of financial assets

	2010				2009
	Total £m	Within one year £m	Between one and five years £m	After five years £m	Total £m	Within one year £m	Between one and five years £m	After five years £m
Cash and cash equivalents:
Pounds sterling	142.3	142.3	–	–	112.8	112.8	–	–
UAE Dirham	3.2	3.2	–	–	3.8	3.8	–	–
US Dollar	0.2	0.2	–	–	0.6	0.6	–	–
Euro	0.1	0.1	–	–	3.0	3.0	–	–
Other	0.2	0.2	–	–	0.6	0.6	–	–
	146.0	146.0	–	–	120.8	120.8	–	–
Loans to joint ventures and associates:
Pounds sterling	0.6	0.2	0.4	–	2.5	0.5	1.9	0.1
US Dollar	–	–	–	–	4.0	4.0	–	–
Euro	10.8	–	10.8	–	8.8	–	8.8	–
	11.4	0.2	11.2	–	15.3	4.5	10.7	0.1
Trade, other receivables and amounts owed by joint ventures and associates:
Pounds sterling	80.3	61.4	18.9	–	122.2	109.5	12.7	–
Other	0.8	0.8	–	–	1.1	1.1	–	–
	81.1	62.2	18.9	–	123.3	110.6	12.7	–
Total financial assets	238.5	208.4	30.1	–	259.4	235.9	23.4	0.1

Currency and maturity of financial liabilities

		2010			2009
	Total £m	Within one year £m	Between one and five years £m	Total £m	Within one year £m	Between one and five years £m
Bank overdraft – UAE Dirham	1.7	1.7	–	–	–	–
Bank overdraft – Hong Kong Dollar	–	–	–	0.3	0.3	–
	1.7	1.7	–	0.3	0.3	–
Trade and other payables:
Pounds sterling	134.4	129.2	5.2	155.2	150.7	4.5
Other	5.5	5.5	–	6.9	6.9	–
	139.9	134.7	5.2	162.1	157.6	4.5
Total financial liabilities	141.6	136.4	5.2	162.4	157.9	4.5

The bank overdrafts are at a floating rate and are unsecured.

Notes to the financial statements

Continued

16 Financial instruments and risk management continued

Reconciliation of trade and other receivables and trade and other payables to the balance sheet.

	2010		2009
	Current £m	Non-current £m	Current £m	Non-current £m
Trade and other receivables (as above)	62.2	18.9	110.6	12.7
Amounts due from customers	93.1	–	84.5	–
Prepayments and accrued income	6.7	–	6.8	–
	162.0	18.9	201.9	12.7

	2010		2009
	Current £m	Non-current £m	Current £m	Non-current £m
Trade and other payables (as above)	134.7	5.2	157.6	4.5
Credit balances on long-term contracts	21.2	–	19.9	–
Accruals and deferred income	148.9	–	135.8	–
	304.8	5.2	313.3	4.5

Effective interest rates of financial assets and liabilities

	2010	2009
Financial assets
Cash and cash equivalents	0.0% to 0.5%	0.0% to 4.0%
Loans to joint ventures and associates	10.0% to 11.5%	9.0% to 11.5%
Financial liabilities
Bank overdrafts	5.0%	6.0%

The Company's financial assets comprised cash at bank of £77.6 million (2009: £26.3 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 values of loans carrying interest rates above 10% may be higher than their carrying values of £0.6 million (2009: £1.7 million).

17 Trade and other payables

	Group			Company
	2010	2009	2010	2009
	£m	£m	£m	£m
Current liabilities
Trade payables	107.6	129.4	–	–
Other payables	19.3	23.9	–	–
Social security	3.9	4.0	–	–
Credit balances on long-term contracts	21.2	19.9	–	–
Accruals and deferred income	148.9	135.8	0.1	0.1
Amounts owed to joint ventures and associates	3.9	0.3	–	–
Amounts owed to subsidiary undertakings	–	–	117.8	57.9
	304.8	313.3	117.9	58.0
Non-current liabilities
Other payables	5.2	4.5	–	–

At 31 December 2010, credit balances on long-term contracts included advance payments from customers of £10.7 million (2009: £12.6 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.

18 Provisions for other liabilities and charges

	Engineering &	Void	PFI
	Construction	space	investments	Other	Total
Group	£m	£m	£m	£m	£m
Current
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	–	3.5
At 31 December 2009	0.2	0.7	3.4	0.9	5.2
At 1 January 2010	0.2	0.7	3.4	0.9	5.2
Provided	–	0.1	0.6	0.5	1.2
Utilised	–	(0.1)	–	(0.3)	(0.4)
Disposals	–	–	(3.4)	–	(3.4)
Transfer	–	–	0.6	–	0.6
At 31 December 2010	0.2	0.7	1.2	1.1	3.2

	Engineering & Construction £m	Void space £m	PFI investments £m	Other £m	Total £m
Non–current
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	1.0
Utilised	(0.9)	–	(1.3)	–	(2.2)
Transfer	–	–	(3.5)	–	(3.5)
At 31 December 2009	–	0.5	0.6	2.0	3.1
At 1 January 2010	–	0.5	0.6	2.0	3.1
Currency alignment	–	–	–	0.1	0.1
Provided	–	0.1	–	0.1	0.2
Utilised	–	(0.2)	–	(0.1)	(0.3)
Transfer	–	–	(0.6)	–	(0.6)
At 31 December 2010	–	0.4	–	2.1	2.5

Company	Funding obligations £m	Other £m	Total £m
Current
At 1 January 2009	0.3	–	0.3
Utilised	(0.2)	0.3	0.1
At 31 December 2009	0.1	0.3	0.4
At 1 January 2010	0.1	0.3	0.4
Released	–	(0.2)	(0.2)
Transfer	0.1	–	0.1
At 31 December 2010	0.2	0.1	0.3
Non-current
At 1 January 2009	1.3	0.3	1.6
Provided	0.2	(0.3)	(0.1)
At 31 December 2009	1.5	–	1.5

At 1 January 2010 1.5 – 1.5 Transfer (0.1) – (0.1) At 31 December 2010 1.4 – 1.4

Notes to the financial statements

Continued

18 Provisions for other liabilities and charges continued

Group

Engineering & 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 investments, where the carrying value of the investment is negative and an obligation exists to provide further funding. The provisions are expected to reverse when the obligation to provide funding is satisfied, expected to be within one year.

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.

Company

Provisions in the Company principally relate to funding obligations to a non-trading Overseas subsidiary, which eliminates on consolidation.

19 Employee benefits

(a) Pensions

A 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 £8.1 million comprising £6.5 million included in operating costs and £1.6 million included in net finance expense (2009: £11.5 million, comprising £6.7 million in operating costs and £4.8 million in net finance expense).

The operating cost figure included £5.3 million (2009: £3.8 million) in respect of the defined contribution schemes.

The Company does not operate a pension scheme.

19 Employee benefits continued

Defined benefit scheme

The 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 2010 and was updated to 31 December 2010 by a qualified independent actuary.

	2010	2009	2008
	£m	£m	£m
Present value of defined benefit obligations	(576.7)	(560.5)	(435.8)
Fair value of scheme assets	537.1	455.8	385.6
Recognised liability for defined benefit obligations	(39.6)	(104.7)	(50.2)
	2010	2009
Movements in present value of defined benefit obligations	£m	£m
At 1 January	560.5	435.8
Current service cost	–	1.7
Past service cost	1.2	1.2
Interest cost	31.3	28.2
Actuarial losses	8.5	113.7
Benefits paid	(24.8)	(23.1)
Contributions by members	–	3.0
At 31 December	576.7	560.5
	2010	2009
Movements in fair value of scheme assets	£m	£m
At 1 January	455.8	385.6
Expected return on scheme assets	29.7	23.4
Actuarial gains	33.1	46.3
Contributions by employer	43.3	20.6
Contributions by members	–	3.0
Benefits paid	(24.8)	(23.1)
At 31 December	537.1	455.8

Notes to the financial statements

Continued

19 Employee benefits continued

(a) Pensions continued

Expense recognised in the income statement

	2010	2009
	£m	£m
Current service cost	–	1.7
Past service cost	1.2	1.2
Interest cost on defined benefit obligations	31.3	28.2
Expected return on scheme assets	(29.7)	(23.4)
	2.8	7.7

Income statement classification of expense

	2010	2009
	£m	£m
Cost of sales	1.0	2.6
Administrative expenses	0.2	0.3
Finance income	(29.7)	(23.4)
Finance expense	31.3	28.2
	2.8	7.7

History of the scheme for the last five years

Experience adjustments	2010	2009	2008	2007	2006
Experience gain/(loss) on scheme liabilities (£m)	18.5	–	–	6.5	–
	(3%)	0%	0%	1%	0%
Change in assumptions on scheme liabilities (£m)	(27.0)	(113.7)	94.6	9.4	8.5
	(5%)	20%	19%	2%	2%
Experience adjustments on scheme assets (£m)	33.1	46.3	(105.1)	(4.2)	17.5
	6%	10%	(27%)	(1%)	4%
Total gain/(loss) (£m)	24.6	(67.4)	(10.5)	11.7	26.0

The cumulative amount of actuarial gains and losses recognised in other comprehensive income and expense since 1 January 2004, the transition date to IFRS, is a loss of £38.2 million (2009: £62.8 million).

Fair value of scheme assets

	2010	2009
	£m	£m
Equities	207.9	211.5
High yield bonds	54.0	50.6
Government bonds	131.2	99.9
Corporate bonds	53.0	61.5
Infrastructure and property	36.0	–
Absolute return funds and cash	55.0	32.3
	537.1	455.8

The infrastructure holding is the portfolio of six PFI investments transferred by the Group to The Costain Pension Scheme in 2010. The investments were transferred at £22.0 million and all subsequent cash flows benefit the pension scheme. The transfer is included within the contributions by employer figure in the movements in fair value of scheme assets table.

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.

19 Employee benefits continued

(a) Pensions continued

Principal actuarial assumptions (expressed as weighted averages)

	2010	2009	2008
	%	%	%
Discount rate	5.40	5.70	6.60
Expected rate of return on scheme assets	6.11	6.51	6.07
Future pension increases	3.40	3.50	2.85
Inflation assumption	3.40	3.50	2.85

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. The scheme rules specify that future pension increases are based on changes in the Retail Price Index.

Weighted average life expectancy from age 65 as per mortality tables used to determine benefits at 31 December 2010 and 31 December 2009 is:

	2010
	Male	Female	Male	Female
	(years)	(years)	(years)	(years)
Currently aged 65	21.4	23.6	20.3	23.2
Non-retirees	24.2	25.5	21.3	24.1

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	22.1	0.2
Decrease inflation, pension increases by 0.25%, decreases pension liability and reduces pension cost by	19.4	1.1
Increase life expectancy by one year, increases pension liability and increases pension cost by	14.7	0.8

The Group expects to contribute an amount equal to dividends paid to shareholders and the expenses of administration to its defined benefit scheme in the next financial year.

Notes to the financial statements

Continued

19 Employee benefits continued

(a) Pensions continued

Defined contribution schemes Several defined contribution pensions are operated. The total expense relating to these plans was £5.3 million (2009: £3.8 million).

(b) Share-based payments

The amounts recognised in the income statement, before income tax, for share-based payment transactions with employees is £4.5 million (2009: £1.1 million); the entire charge relates to subsidiaries. All figures have been restated for the 1 to 10 share consolidation (Note 20) and the 2007 LTIPs have been restated for the rights issue in that year.

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 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.

Deferred share bonus plan ('DSBP')

The following outstanding grants arrange for the grant of shares to executive directors and senior management. A Nil-cost option will be granted to each participant on a sliding scale between 0% and 100% pro rata to the EBIT achieved against the thresholds set for that year. 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. 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. Participants must be 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
Date of grant	18 April 2007	14 June 2007	21 April 2008	21 April 2008
Number of instruments initially granted	105,490	413,964	245,361	1,048,991
Share price at grant date	510p	488p	250p	250p
Contractual life	4 Years	4 Years	2.5 Years	2.5 Years
Vesting conditions:
– Period of service	3 Years	3 Years	3 Years	3 Years
– EPS targets	32.7p to 37.1p	32.7p to 37.1p	30.9p to 34.3p	30.9p to 34.3p
– Year shares issued	2010	2010	2010	2010
Settlement	Shares	Cash	Shares	Cash
Normally exercisable in periods to	17 April 2017	13 June 2017	20 April 2018	20 April 2018
Expected option life at grant date	4 Years	4 Years	3 Years	3 Years
Risk-free interest rate	4.50%	4.50%	3.85%	3.85%
Fair value at grant date	84p	71p	236.7p	187p
Number of ordinary shares – 2009	121,011	408,329	245,361	878,922
Number of ordinary shares – 2010	121,011	350,626	245,361	826,139

Arrangement	LTIP 2009	DSBP 2009	LTIP 2010	DSBP 2010
Date of grant	7 April 2009	7 April 2009	14 April 2010	19 April 2010
Number of instruments initially granted	758,374	467,543	698,947	852,147
Share price at grant date	230p	230p	250p	250p
Contractual life	2.75 Years	3 Years	2.75 Years	3 Years
Vesting conditions:
– Period of service	3 Years	3 Years	3 Years	3 Years
– EPS targets	21.0p to 27.5p	n/a (see above)	21.0p to 27.5p	n/a (see above)
– Year shares issued	2011	2012	2012	2013
Settlement	Shares	Shares	Shares	Shares
Normally exercisable in periods to	6 April 2019	6 April 2011	13 April 2020	18 April 2012
Expected option life at grant date	3 Years	3 Years	3 Years	3 Years
Risk-free interest rate	4.31%	4.31%	4.31%	4.31%
Fair value at grant date	218p	218p	236.7p	201p
Number of ordinary shares – 2009	733,979	446,846	–	–
Number of ordinary shares – 2010	678,295	418,628	678,602	827,349

19 Employee benefits continued

(b) Share-based payments continued

During the year, two participants in the LTIPs left the employ of the Group and ceased to participate in the 2009 LTIP, the 2009 DSBP, 2010 LTIP and the 2010 DSBP (2009: five participants left the employ of the Group). The only new grants in the year were the 2010 LTIP and the 2010 DSBP.

The options outstanding at the year-end have a weighted average contractual life of 1.9 years (2009: 1.7 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 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.

Employees pay a fixed amount from salary into a savings account each month and may elect to save over three or five years. At the end of the savings period, employees have six months in which to exercise their options using the funds saved. If employees decide not to exercise their options, they may withdraw the funds saved; the options expire six months after maturity. Exercise of options is subject to continued employment within the Group (except where permitted by the rules of the scheme). Details of the fair values of the awards granted and the related assumptions are set out below.

Arrangement	SAYE 2007 3 Year	SAYE 2007 5 Year	SAYE 2008 3 Year	SAYE 2008 5 Year
Date of grant	18 May 2007	18 May 2007	23 May 2008	23 May 2008
Number of instruments initially granted	585,472	413,224	1,283,825	759,437
Exercise price	333.0p	333.0p	196.0p	196.0p
Share price at date of grant	477.5p	477.5p	245.0p	245.0p
Contractual life	3 Years	5 Years	3 Years	5 Years
Vesting conditions:
– Service period	3 Years	5 Years	3 Years	5 Years
– Settlement	Shares	Shares	Shares	Shares
Normally exercisable in periods to	31 December 2010	31 December 2012	31 December 2011	31 December 2013
Expected option life at grant date	3 Years	5 Years	3 Years	5 Years
Risk-free interest rate	4.50%	4.50%	3.85%	3.85%
Fair value per granted instrument
determined at the grant date	112.7p	126.3p	64.0p	70.8p
Number of ordinary shares – 2009	272,785	164,034	1,115,588	675,572
Number of ordinary shares – 2010	249,905	146,693	994,719	593,482

Summary of LTIP, DSBP and SAYE Plans

Number and weighted average exercise prices of share options issued under all LTIP, DSBP and SAYE Plans.

	LTIP and DSBP		SAYE		Total
	Price (p)	Number (m)	Price (p)	Number (m)	Price (p)	Number (m)
Outstanding at 1 January 2009	286.0	2.2	229.0	2.7	255.0	4.9
Forfeited during the year	444.5	(0.6)	244.8	(0.3)	386.1	(0.9)
Exercised during the year	–	–	211.8	–	211.8	–
Granted during the year	230.0	1.3	–	–	230.0	1.3
Outstanding at 31 December 2009	249.0	2.9	227.0	2.4	239.0	5.3
Forfeited during the year	218.5	(0.4)	249.0	(0.4)	236.0	(0.8)
Granted during the year	229.1	1.6	–	–	229.1	1.6
Outstanding at 31 December 2010	232.1	4.1	223.4	2.0	229.3	6.1
Exercisable at the end of the period	–	–	333.0	0.2	333.0	0.2

Notes to the financial statements

Continued

20 Share capital

	2010		2009
	Number (millions)	Nominal value £m	Number (millions)	Nominal value £m
Authorised share capital – Ordinary shares of 50p each	101.5	50.7	101.5	50.7
Shares in issue at beginning of year – Ordinary shares of 50p each, fully paid Issued in year (see below)	63.4 0.1	31.7 –	63.3 0.1	31.7 –
Shares in issue at end of year – Ordinary shares of 50p each, fully paid	63.5	31.7	63.4	31.7

On 6 May 2010, at the Annual General Meeting of the Company, shareholders approved a 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 each held at close of business on 7 May 2010. Comparative information has been restated accordingly.

Following the share consolidation, the Company's issued share capital comprised 63,424,871 ordinary shares of 50 pence each. The Company announced on 20 May 2010 that the shareholders had pursuant to the Scrip Dividend Scheme, elected to receive 37,358 ordinary shares of 50 pence each in the Company in lieu of cash in respect of all or part of their final dividend for the year ended 31 December 2009, and a further 24,703 ordinary shares on 29 October 2010 in lieu of cash in respect of all or part of their interim dividend for the year ended 31 December 2010. Following admission of the shares issued pursuant to the Scrip Dividend Scheme, the Company's issued share capital comprised 63,486,932 ordinary shares of 50 pence each.

All shares rank pari passu regarding entitlement to capital and dividends.

The share options outstanding at the year-end are detailed in Note 19. Details of the performance conditions and the options granted to executive directors are given in the Directors' remuneration report.

21 Contingent liabilities

	Group		Company
	2010	2009	2010	2009
	£m	£m	£m	£m
Under guarantees of bank overdrafts and loans to subsidiary companies	–	–	1.7	0.3

Group

Certain subsidiary undertakings have entered into cross-guarantees for overdraft facilities made available to the Group. At 31 December 2010, these liabilities amounted to £Nil (2009: £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;
» 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 (Note 18).

Company

The 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 2010, the potential liability was £39.6 million (2009: £104.7 million) as disclosed in Note 19.

22 Other financial commitments Group Operating lease commitments

	2010		2009
Leases as lessee	Land and buildings £m	Other operating leases £m	Land and buildings £m	Other operating leases £m
Future aggregate minimum lease payments under non-cancellable leases expiring:
No later than one year	4.4	2.4	4.8	2.1
Between one and five years	10.9	2.7	14.2	2.1
Later than five years	9.6	–	11.5	–
	24.9	5.1	30.5	4.2
			Land and buildings

	2010	2009
Leases as lessor	£m	£m
Future aggregate minimum lease income under non-cancellable leases expiring:
No later than one year	1.2	1.4
Between one and five years	1.7	3.5
Later than five years	–	0.2
	2.9	5.1

Company

The Company does not have any other financial commitments (2009: £Nil).

Notes to the financial statements

Continued

23 Principal subsidiary undertakings, jointly controlled entities, associates and jointly controlled operations

Percentage of Activity equity held				Country of
					incorporation
Subsidiary undertakings
Costain Ltd	Engineering, Construction and Maintenance		100		UK
Costain Abu Dhabi Co WLL	Process Engineering		49		UAE
Costain Building & Civil Engineering Ltd	Engineering and Construction		100		UK
Costain Engineering & Construction Ltd	Holding and Service Company		100		UK
Costain Oil, Gas & Process Ltd	Process Engineering		100		UK
Richard Costain Ltd	Service Company	100		UK

		Issued
		share capital	Percentage of	Country of
	Activity	£m	equity held	incorporation	Reporting date
Jointly controlled entities
Alcaidesa Holding SA	Land Development	10.8	50	Spain	31 Dec
Brighton & Hove 4Delivery Ltd	Civil Engineering	–	49	UK	31 Mar
Costain Petrofac Ltd	Process Engineering	–	50	UK	31 Dec
4Delivery Ltd	Civil Engineering	–	40	UK	31 Mar

Associates
Coast to Coast Holdings Ltd	Asset Management	0.5	20	UK	31 Mar
C2C Services Ltd	Asset Management	–	20	UK	31 Mar
Integrated Bradford LEP Ltd	Construction and Operation of Schools	–	40	UK	31 Dec
Integrated Bradford SPV Two Ltd	Construction and Operation of Schools	0.1	40	UK	31 Dec
Lewisham Schools for the Future LEP Ltd	Construction and Operation of Schools	0.1	40	UK	31 Mar
Lewisham Schools for the Future SPV 2 Ltd	Construction and Operation of Schools	–	40	UK	31 Mar

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.

23 Principal subsidiary undertakings, jointly controlled entities, associates and jointly controlled operations continued

		Percentage of	Country of
	Activity	equity held	incorporation
Major jointly controlled operations
A-one+ Integrated Highway Services – MAC 7	Engineering and Maintenance	33	UK
A-one+ Integrated Highway Services – MAC 10	Engineering and Maintenance	25	UK
A-one+ Integrated Highway Services – MAC 12	Engineering and Maintenance	33	UK
A-one+ Integrated Highway Services – MAC 14	Engineering and Maintenance	33	UK
Costain-Carillion Joint Venture – M1 Widening and A5/M1 Link	Civil Engineering	50	UK
Costain-Laing O'Rourke Joint Venture – Bond Street	Civil Engineering	50	UK
Costain-Laing O'Rourke Joint Venture – Farringdon	Civil Engineering	50	UK
Costain-Skanska Joint Venture – A14	Civil Engineering	50	UK
Costain-Skanska – Pudding Mill Lane – Crossrail	Civil Engineering	50	UK
Costain-Skanska – Royal Oak – Crossrail	Civil Engineering	50	UK
Educo UK Joint Venture – Bradford Schools	Construction	50	UK
Galliford-Costain-Atkins Joint Venture – United Utilities	Civil Engineering	42	UK
Lafarge Costain Joint Venture	Civil Engineering	50	UK
Stream Three Joint Venture – Costain-VWS (UK) Ltd	Civil Engineering	50	UK

24 Related party transactions

Group

A related party relationship exists with its major shareholders, subsidiaries, joint ventures and associates, jointly controlled operations, The Costain Pension Scheme and with its directors and executive officers.

Sales of goods and services

	2010		2009
	Joint ventures and associates	Jointly controlled operations	Total	Joint ventures and associates	Jointly controlled operations	Total
	£m	£m	£m	£m	£m	£m
Services of Group employees	35.1	45.8	80.9	18.9	37.0	55.9
Construction services and materials	50.3	–	50.3	59.2	0.1	59.3
	85.4	45.8	131.2	78.1	37.1	115.2

There were no sales of goods and services to major shareholders during year (2009: 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 17. Balances with jointly controlled operations are eliminated on consolidation.

Major shareholders

Mohammed Abdulmohsin Al-Kharafi & Sons WLL and York Place Limited are regarded as related parties of the Company.

The Costain Pension Scheme

Details of transactions between the Group and The Costain Pension Scheme are included in Note 19.

Notes to the financial statements

Continued

24 Related party transactions continued

Transactions with key management personnel

The Directors of the Company and their immediate relatives control 69,357 ordinary shares which expressed as a percentage of the issued share capital is 0.1% (2009: 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, DSBP and SAYE plans, which are detailed in Note 19.

The compensation of key management personnel, including the directors, is as follows:

		Group
	2010	2009
	£m	£m
Directors' emoluments	1.7	1.6
Executive officers' emoluments	2.9	2.8
Post retirement benefits	0.4	0.3
Share-based payments	2.3	0.2
	7.3	4.9

The above amounts are included in employee benefit expense (Note 5).

Company

The Company has no transactions with related parties other than the charge in relation to share-based payments (Note 19) (2009: Nil).

25 Significant areas of judgment and estimation

The 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.

Defined benefit pension schemes require significant judgments 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 19.

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 financial period. Also, the costs and revenues may be affected by a number of uncertainties that depend on the outcome of future events and may require to be revised as events unfold and uncertainties are resolved.

Management bases its judgments 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 or loss earned to date are updated regularly and significant changes are highlighted through established internal review procedures. The impact of any change in the accounting estimates is then reflected in the financial statements.

Alcaidesa Holding SA, one of the Group's joint ventures, operates in the Spanish real estate market and holds land and property within its current and non-current assets. At 31 December 2010, a review of the net realisable value of each of its land holdings was undertaken, including the use of external valuations, and provisions, if considered necessary, have been reflected in these financial statements.

Five-year financial summary

	2010 £m	2009 £m	2008 £m	2007 £m	2006 £m
Revenue and profit
Revenue (Group and share of joint ventures and associates)	1,022.5	1,061.1	996.0	877.9	886.3
Less: Share of joint ventures and associates	(98.0)	(67.7)	(93.4)	(130.3)	(137.9)
Group revenue	924.5	993.4	902.6	747.6	748.4
Group operating profit/(loss)	17.4	22.0	19.5	9.7	(58.4)
Profit on sales of investments	–	–	–	2.7	3.6
Profit on sales of interests in joint ventures and associates	11.2	2.0	2.7	3.2	–
Profit on sale of land and property	1.3	–	–	–	–
Amounts written off loans to associate	–	–	–	–	(2.7)
Share of results of joint ventures and associates	(0.5)	(3.2)	(3.9)	0.9	(7.0)
Profit/(loss) from operations	29.4	20.8	18.3	16.5	(64.5)
Finance income	30.7	26.0	34.8	29.6	26.7
Finance expense	(32.2)	(28.7)	(30.0)	(26.3)	(23.9)
Net finance income/(expense)	(1.5)	(2.7)	4.8	3.3	2.8
Profit/(loss) before tax	27.9	18.1	23.1	19.8	(61.7)
Income tax	(4.8)	(3.5)	(4.9)	(3.8)	7.7
Profit/(loss) for the year attributable to equity holders of the parent	23.1	14.6	18.2	16.0	(54.0)
Earnings/(loss) per share – basic	36.4p	23.0p	29.0p	36.0p	(132.0)p
Earnings/(loss) per share – diluted	35.4p	22.6p	29.0p	35.0p	(132.0)p
Dividends per ordinary share
Final	6.25p	5.5p	5.0p	5.0p	–
Interim	3.0p	2.75p	2.5p	–	–
Summarised consolidated statement of financial position
Property, plant and equipment	9.7	11.5	7.7	3.5	5.7
Intangible assets	0.1	1.0	1.8	2.7	3.4
Investments in equity accounted joint ventures and associates	37.4	44.1	42.7	40.1	35.1
Other non-current assets	39.8	47.3	24.9	27.9	40.7
Total non-current assets	87.0	103.9	77.1	74.2	84.9
Current assets	309.3	325.1	329.2	285.7	219.4
Total assets	396.3	429.0	406.3	359.9	304.3
Current liabilities	311.4	320.5	312.1	273.2	280.1
Pension liability	39.6	104.7	50.2	50.6	68.7
Other non-current liabilities	7.7	7.6	10.4	8.7	10.7
Total liabilities	358.7	432.8	372.7	332.5	359.5
Equity attributable to equity holders of the parent	37.6	(3.8)	33.6	27.4	(55.2)

The earnings/(loss) per share and dividends per ordinary share for 2006 to 2009 have been restated for the 1 for 10 Share Consolidation.

Financial calendar and other shareholder information

Financial calendar*

Full year results	9 March 2011
Annual Report mailing	30 March 2011
Ex-dividend date for final dividend	13 April 2011
Final dividend record date	15 April 2011
Interim Management Statement	5 May 2011
Annual General Meeting	5 May 2011
Final dividend payment	20 May 2011
(subject to shareholder approval)
Half-year end	30 June 2011
Half-year results 2011	25 August 2011
Interim Management Statement	October 2011
Financial year-end	31 December 2011

* 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 scheme

A 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 27 April 2011. 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 Shareholders

	Accounts	Shares	%
Institutions, companies,
individuals and nominees:
Shareholdings 100,000 and more	65	54,011,308	85.08
Shareholdings 50,000-99,999	30	1,968,242	3.10
Shareholdings 25,000-49,999	34	1,145,768	1.80
Shareholdings 5,000-24,999	291	2,862,918	4.51
Shareholdings 1-4,999	11,437	3,498,696	5.51
	11,857	63,486,932 100.00

Secretary

Clive L Franks

Registered Office

Costain House, Vanwall Business Park, Maidenhead, Berkshire SL6 4UB

Telephone 01628 842444

www.costain.com [email protected] Company Number 1393773

Registrar

Equiniti, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA

Telephone 0871 384 2250 Calls to this number are currently charged at 8 pence per minute from a BT landline. Other telephony provider costs may vary.

Shareholder information

For enquiries regarding your shareholding, please telephone the Company's Registrar, Equiniti, on 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.

Dividend mandate

Shareholders can arrange to have their dividends paid directly into their bank or building society account, by completing a bank mandate form. The advantages to using this service are:

» the payment is more secure than having a cheque sent by post;
» it avoids the hassle of paying in a cheque; and
» there is no risk of lost, stolen or out of date cheques.

A mandate form can be obtained from our website, by contacting Equiniti, or you will find one attached to the tax voucher of your last dividend payment. Overseas shareholders can arrange for their dividends to be paid in their local currency and more information can be obtained from www.shareview. com/overseas

Shareview service

The Shareview service from our registrar, Equiniti, gives shareholders:

» direct access to data held on their behalf on the share register including recent share movements and dividend details; and
» the ability to change their address or dividend payment instructions online.

To sign up for Shareview, you need the 'shareholder reference' printed on your proxy form or dividend stationery. There is no charge to register.

When you register with the site, you can register your preferred format (post or e-mail) for shareholder communications. If you select 'e-mail' as your mailing preference, you will be sent shareholder communications, such as proxy forms and annual results, by e-mail instead of post, as long as this option is available.

If you have your dividends paid straight to your bank account, and you have selected 'e-mail' as your mailing preference, you can also collect your tax voucher electronically. Instead of receiving the paper tax voucher, you will be notified by e-mail with details of how to download your electronic version.

However, if you choose 'post' as your preference, you will be sent paper documents as usual.

Visit the website at www.shareview.co.uk for more details.

Details of software and equipment requirements are given on the website.

Unsolicited mail

The 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 Service Freepost (LON20771) London W1E 0ZT

ShareGift

The 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.

Designed and produced by The College www.thecollege.uk.com

Costain photographers: Mike Doherty, page 09 (Construction and Care); page 15 (Costain Innovation Evening); page 29 (Sussex Waste Water Treatment and Lewisham, Building Schools for the Future); page 33 (Trawsfynydd Strategic Integrated Framework); page 34; and page 35 (Association of Graduate Recruiters award). Gustavo Ferrari, Pro Light Studio: page 47 (Samer G. Younis). Ian Routledge: on pages 16, 18, 43, 46, 47 (Costain Board Directors) and page 35 (Credit cards).

Additional photography: www.aerial-images.co.uk, page 10; Bourne Steel Limited, page 31; Costain/Rhondda Cynon Taf County Borough Council, page 38; Fluid Moves Productions Ltd, page 37; Network Rail, page 31: © NDA, page 11; Philip Lane Photography (Waste), page 29; and www.webbaviation.co.uk (Hydrocarbons), page 33.

The Annual Report is printed by an FSC (Forest Stewardship Council), ISO 14001 and Carbon Neutral certified printer using vegetable 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 100 White Gloss and revive 100 White Offset – both are recycled papers. They contain 100 recycled waste, are FSC certified and produced at a mill with ISO 14001 certification. Recycled fibres used are Process Chlorine Free (PCF).

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 it to Costain Group PLC or dispose of it in your recycled paper waste. Thank you.

This Annual Report is available at: www.costain.com

Visit www.costain.com

Costain Group PLC Costain House Vanwall Business Park Maidenhead Berkshire SL6 4UB

B y prin ting this document on revive 100 whi t e glo s s & o ffset, both 100% recycled papers, the environmental impact was redu ced by *

2 ,912kg of land fil

73 ,758 li tres of wa t e r

6 ,813 kW h of electrici ty

636kg C O of greenhou s e gase

4 ,735kg of woo d

European B REF (da t a on virgin fibre paper) Carbon foo tprint da t a audi ted by the CarbonNeu tral Compan * compared t -recycled pape

Results are obtained according to technical information and are subject to modification.

AI assistant

COSTAIN GROUP PLC — Annual Report 2010

4669_10-k_2010-12-31_228ccbd0-a33f-4951-92eb-1a75181a6931.pdf

'Choosing Costain' to meet national needs

Contractor of the Decade

"Extraordinary renaissance"

2 Business & Responsibility review

4 Financial statements This section contains the detailed

Meeting national needs The priorities

Energy commitment »

Waste solutions »

Go online to see this in action www.costain.com/investors

Reducing congestion »

Vital role for railways »

Water challenges »

Meeting national needs The investment

Why these markets are attractive to Costain

Waste

£10-£20bn ...to 2020

Education

Go online to see this in action www.costain.com/investors

Why these markets are attractive to Costain

Power

Highways £10bn+ ...to 2015

Marine

Rail

Meeting national needs Our strategy

Go online to see this in action www.costain.com/investors

Infrastructure

Energy & Process

Meeting national needs Delivering innovation

The Customer's Need

The Costain Solution

Key Benefits

Facts & Figures

The Customer's Need

The Costain Solution

Key Benefits

Facts & Figures

The Customer's Need

The Costain Solution

Key Benefits

Facts & Figures

Business & Responsibility review

2010 highlights

Financial »

Environment »

Social »

Chairman's statement

Overview & Strategy

David Allvey Chairman

Approaches to Mouchel Group plc

Results

Dividend

Pension

Share Consolidation

Staff

Summary & Outlook

Chief Executive's review

Overview

2010: another strong performance

Progress in Operations

Order book providing long-term earnings visibility

Chief Executive's review continued

Strong finances

Enhancing our Safety, Health and Environmental performance

Developing our people

'Choosing Costain': meeting national needs

Summary

Our values

Costain Values »

Our Vision »

Our Strategy »

Underpinned by our CR commitment »

Our Strategic focus »

Our Business Objectives »

Our Capability »

Our sustainable investment proposition...

...to deliver value

Key contract wins in target markets

COSTAIN GROUP PLC Annual Report 2010