This time last year, the City couldn't lift contractors high enough. Today, shares are plummeting the same day that firms announce splendid profit growth. What on earth is the City up to?
About this time last year, when contractors' shares were going through the roof, a senior City analyst said he was trying to savour the moment.

"Things for the sector have never been so good and I doubt I'll see them as good again," he explained. "So I'm making the most of it."

Let's hope he did, because if the performance of contracting firms on the stock market over the past few weeks is anything to go by, the good times are over. Amec, Carillion, Interserve and Mowlem have all seen their shares plunge, and most other firms are a long way off their peaks.

"The shares are definitely under pressure," says Seymour Pierce analyst Leslie Kent. "Just when you thought it was safe to get back into the contractors, things are suddenly not as good as they seemed."

Instead, the City is getting jittery over the increasingly pessimistic mutterings from analysts and firms alike. These are because contractors have been hit by the downturn in the commercial sector, and delays and rising bid costs are eating into their cash and returns from the PFI.

If the decline continues at this rate, contractors could be heading back to the situation of three years ago when the City treated them with a mixture of distrust and disdain.

"The market seems to be saying that it's still a good sector to be in – but just not as good as it thought a year ago," says one contracting boss. "The key will be how low the shares go this time and if they bounce back."

But how can things have changed so quickly? Especially when you consider the recent results season, when nearly every company met or exceeded its earnings target. Part of the blame can be put on the poor performance of the stock market this year – but a more worrying trend has emerged over the past few weeks.

You only have to look at the City's reaction to the latest results season to see that the cracks that began appearing in in March, courtesy of Amey and its PFI woes, are rapidly widening.

Amec's shares dropped 53p, or 15%, despite profit increasing by 7%, and Mowlem's shares fell 12% after it revealed that its profit had risen 13%.

Then take Interserve's 33% profit growth, which was rewarded with a 33% fall in its share price. And poor old Carillion nearly doubled profits to £16.1m but still saw 7p shaved off its shares in the first two hours of trading after its results announcement last Wednesday.

No wonder even the most bullish chief executives were frustrated this week. Clearly it's not the profits that are prompting the City once again to sell its stakes in contractors. So what is it? Well, partly the cautious words accompanying the figures. The phrases "project delays" and "rising bid costs" are beginning to replace "fantastic opportunities" and "strong demand".

"The Square Mile is starting to realise that having a record order book is one thing, but actually winning the work and seeing it go through is another," says Kent. "Throw a couple of sentences with 'delays' and 'uncertainties' in with your results, and it doesn't take much more to scare the punters off."

Mowlem's and Amec's crime was to warn about uncertainties in commercial and international markets respectively – and as for Interserve, well, it made the blunder of saying the outlook was gloomy for the second half of the year. Nobody wanted to hear that.

Carillion, on the other hand, was very positive but had the misfortune to report its results the same day as Interserve. The damage was done by the time analysts and jittery investors were finished slashing projections for Interserve. Such a knee-jerk reaction is typical, but the fear among contractors is that it is also evidence that the City is turning cold on the whole sector.

News last week that Amey was cutting 300 jobs did nothing to instill confidence and comes after well-documented problems at Laing and Morgan Sindall.

"Nobody trusts the contractors, given their track record, and you only need one little slip-up to get everyone selling them," explains Tony Williams, a former construction analyst with ABN Amro, who now works as an independent advisor. "Rightly or wrongly, the perception in the City is that the sector hasn't changed."

Just when you thought it was safe to get back into the contractors, things are not as good as they seemed

Leslie Kent, analyst, Seymour Pierce

There are some grounds for the City's reaction. Everyone is agreed that the commercial office market has peaked and will probably be quiet for the next 18 to 24 months. Projects have been delayed or scrapped as economic uncertainty increases.

"Work-in-hand is good at the moment, but there's not a lot of new work coming through," says Williams. "There is going to be a dip in activity that will affect everyone. Even if the economy bounced back today, there will be a lull because of the very long lead-in times for large office schemes."

Contractors would normally point to the government's spending plans to allay fears, but investors and firms alike are waking up to the fact that even the PFI is not the gravy train it was cracked up to be.

First there are the accounting changes that oblige companies to write off bid costs as soon as they are incurred and prevent them from being written back into accounts until the contract is won. This is known as the "Amey factor", after the changes turned Amey's expected £55m profit in March into an £18m loss, and hit the cash flow of many other firms.

Then there are the bid costs themselves, which have taken on more importance for a company's balance sheet now that they cannot be hidden or fudged. PFI projects are becoming increasingly expensive to bid for as the process drags on, and they can tie up key staff for years.

Contractors have spent up to £5m just trying to get on the shortlist for large hospital PFI projects and then missed out on the job and lost their bid costs. Even if firms win a good percentage of the contracts they go for, the bid costs are still going to hit margins.

At the same time, the government is trying to put the squeeze on returns at the other end. No wonder some firms are pulling back, because the risks are starting to outweigh the rewards. And as a result, analysts are not placing so much value on PFI activities.

"Fund managers have spotted the risks attached to the PFI," says KBC Peel Hunt analyst Stephen Rawlinson. "The rising bid costs mean firms must work harder to meet their numbers. The City doesn't have a good understanding of the PFI, so any negativity from contractors is going to be seized on."

David Jackson, chairman of support services company Peterhouse, is putting the group's construction businesses up for sale and is adamant that the PFI is not for his firm.

"One of the best decisions we made was not to bid for PFI schemes. The bidding costs are horrendous – the risks for a smaller business like us are too high." Jackson also agreed there had been a gradual shift of City sentiment against the PFI because of the risks.

Another factor in contractors' problems is the support service sector's fall from favour. It had enjoyed high ratings and the likes of Amec, Carillion and Mowlem – still contractors by name – had beefed up their services businesses to cash in on this.

"Amec and others had been trying to say they had large support services businesses, but that's not flavour of the month now – so although it's not against contractors per se, they still get hit," says Williams.

These factors show there are grounds for pessimism and concern, but the general feeling among analysts and contractors is that the City has now gone too far the other way. This argument says that although the commercial sector is slipping and concerns about the PFI are growing, the government's commitment to improving public services will see the sector through.

What's more, using private cash through the PFI is still the best way for the government to get schools and roads built. The government knows this and is working with contractors to make the process quicker and cheaper. "Although some issues need to be dealt with, the PFI is here to stay," says Mowlem chief executive John Gains.

"The City always overreacts," says KBC Peel Hunt's Rawlinson. "It overreacted last year when the shares were too high and now it's overreacting with the big falls. Now the market should find a middle ground."