In essence, doing business is an act of balancing business opportunities with risks and control activities. BAM has formal and standardised processes in place to facilitate and coordinate these activities. In this chapter BAM’s approach to risk management is explained. Additionally, an overview is provided of the main risks that BAM faces and what the Company is doing to mitigate them.
Risk management framework
BAM’s risk management framework, established by the Executive Board, covers the approach and responsibilities for risk management across the Company. The Executive Board has defined a strategy which focuses on the business and project portfolio. This portfolio focus and underlying strategic objectives and initiatives form the basis for BAM’s enterprise risk management. It addresses the Company’s strategic, operational, financial and compliance risks. Risks are assessed and prioritised on their impact and probability and on effectiveness of the controls of risk response in the organisation. The Supervisory Board monitors and advises the Executive Board, which has the overall responsibility for enterprise risk management within the Company.
On behalf of the Executive Board, the Risk and Control Committee coordinates the set-up and effectiveness of the risk management framework. The Risk and Control Committee, chaired by the chief financial officer (CFO), advises the Executive Board on main risks in the context of BAM’s risk appetite. Risk assessments are carried out on a quarterly basis. An additional assessment has been performed for emerging and low-probability risks as a consequence of the Covid- 19 pandemic. Covid-19 has caused unprecedented challenges for society, our industry and BAM. BAM responded with a multidisciplinary crisis team to coordinate the risk mitigating measures, scenario planning, cross-operating company collaboration and monitoring. Lessons learned from the first Covid-19 wave were implemented as part of mitigation during the second wave. Also the uncertainty about Brexit continued during the year. BAM has performed a risk analysis on potential impacts from a contract, supply chain, trade tariffs and customs, regulation and people perspective, including follow-up actions to mitigate risks. The effect of Brexit so far remained limited.
A fundamental part of the BAM risk management framework is the stage gate process. Tenders and projects are guided through various stage gates, based on complexity, size and risk profile. The first two stages in the process focus on ‘Are we doing the right tender or project?’, while the other stages address the question ‘Are we doing the tender or project right?’ The stage gate process is designed to establish a clear risk profile and to support predictable performance across all BAM’s tenders and projects. Expert involvement is arranged to leverage the combined knowledge within the Company, supporting the tender and project in reaching its full potential. The stage gate process follows a governance structure based on risk categorisation, to ensure that each tender and project is reviewed and approved by the proper level of management. Bids for major projects or projects involving exceptional risk are submitted to the Executive Board for ratification and – if necessary – to the Supervisory Board for approval. Apart from the various stage gate assessments, BAM’s Internal Audit department performs independent project reviews on selected projects across the Company to review the effectiveness of the project control system and the overall project performance.
BAM’s risk management framework is reviewed on a semi-annual basis. In 2020 the review resulted in adjustments based on changes in the organisation, processes, systems (e.g. development shared services, new stage gate requirements, system improvements for tendering). These changes have been translated in new or updated policies, procedures and processes. They are also incorporated in the internal control framework as part of the yearly assessment cycle. The risk management and control systems provide a platform for the structured sharing of knowledge and expertise in the business, so that risk management plays a key role in achieving the strategic objectives. In line with the Dutch Corporate Governance Code, the COSO (Committee of Sponsoring Organisations of the Treadway Commission) Enterprise Risk Management Framework from 2017 has been used as reference to further mature the risk management framework within BAM.
BAM’s risk management and internal control systems are supported by BAM’s core values. These values steer the behaviour of BAM’s people and help to ensure that BAM’s risk profile remains in line with the risk appetite.
Risk profile and appetite
The Executive Board is responsible for establishing the risk appetite within BAM in relation to the strategy and activities of BAM. Risk appetite is defined as the level at which BAM is willing to accept risk in the ordinary course of business in order to achieve its objectives.
The risk appetite is being discussed between the Supervisory Board and Executive Board as part of the discussion on the business and project portfolio, which is translated in a stricter selection of new opportunities and tenders. The risk appetite will be further assessed in relation to the development of the new strategic agenda to further de-risk the company. It has already been restricted, in particular with respect to large projects and the wind-down of BAM International, during 2020.
The risk appetite and main risk areas are described based on the following categories:
- Strategic risks - BAM takes a balanced approach on risk and reward to achieve its strategic objectives in terms of results and innovation and continues to invest in innovation through digital technologies and digital construction.
- Operational risks – BAM seeks to limit the risks that may jeopardise the execution of its business activities.
- Finance risks – BAM strives to maintain a solid financial position (e.g. solvability and credit facilities), ensuring access to the financial markets and retaining its clients, supply chain and other partners. BAM wants to provide an insightful, fair and accurate representation of its performance and economic results.
- Compliance risks – Compliance with all applicable laws and regulations including BAM’s Code of Conduct is of fundamental importance to the Company.
Risk appetite statements are further underpinned by BAM’s strategic agenda, governance, core values, Code of Conduct and policies and procedures.
In control statement process
The effectiveness of the internal control framework is monitored in a semi-annual assessment of the requirements in the framework. BAM has derived its internal control framework from the business model (see page 42) and underlying key processes and policies (for accounting, treasury, legal, compliance, information security, and so on). All key processes are identified around strategic enablers and are aligned with existing core processes in accordance with these enablers. The internal control framework ensures insight into the effectiveness of internal risk management and control systems, as well as the reliability of financial reporting and compliance with laws and regulations.
All operating companies and the headquarters carry out selfassessments and the results are reported to the Royal BAM Group. These results are challenged, and improvement actions are implemented and monitored. Furthermore, internal audits challenge the results and provide recommendations to further improve the effectiveness of the internal control framework.
The in control statement process results in an end-of-year ‘Executive Board statement’ (see next paragraph). The underlying assessments on operating company level form the basis for management’s accountability for the effectiveness of the internal control framework, together with the formal issuance of a statement and letter of representation to the Executive Board. Any deviations from the internal control framework are highlighted, including identified follow-up actions to resolve these deviations.
All operating companies have confirmed and signed the letter of representation which supports the Executive Board in its assessment of the effectiveness of the design and operation of the internal control and risk management systems. BAM has identified areas of improvement as BAM is not yet at the level of maturity it aspires to. Reported deviations included an improvement plan to further strengthen the level of control. The most important risk areas which impacted BAM were health and safety, project execution risks and financial resilience.
Executive Board statement
The Executive Board is responsible for the design and operation of the internal risk management and control systems. In discharging this responsibility and to provide a substantiation for the statement below, the Executive Board has made an assessment of the effectiveness of the design and operation of the internal control and risk management systems (see previous paragraph). In addition, the Executive Board has determined an outlook based on market developments, orderbook, financing and cash flow (see page 42).
On the basis of this management report and in accordance with best practice 1.4.3 of the Dutch corporate governance code as adopted on 8 December 2016, and article 5:25c of the Financial Supervision Act (‘Wet op het financieel toezicht’), the Executive Board confirms that, to the best of its knowledge:
- The management report provides sufficient insights into any failings in the effectiveness of the internal risk management and control systems of Royal BAM Group;
- The aforementioned systems provide reasonable assurance that the financial reporting does not contain any material inaccuracies;
- Based on the current state of affairs, it is justified that the financial reporting is prepared on a going concern basis;
- The management report states those material risks and uncertainties that are relevant to the expectation of Royal BAM Group’s continuity for the period of 12 months after the preparation of the management report.
It should be noted that the above does not imply that these systems and procedures provide absolute assurance as to the realisation of operational and strategic business objectives, or that they can prevent all misstatements, inaccuracies, errors, fraud and non-compliances with legislation, rules and regulations. Nor can they provide certainty that we will achieve our objectives.
Furthermore, the Executive Board confirms that, to the best of its knowledge:
- The financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of Royal BAM Group and of companies included in the consolidation;
- The management report provides a fair review of the position at the balance sheet date, the development and performance of the business during the financial year of Royal BAM Group;
- The management report describes the principal risks and uncertainties that Royal BAM Group faces
Main risk areas
Several risk areas and measures have been identified with respect to BAM’s strategic objectives. Follow-up and feedback are part of the regular management reporting cycle.
|Most of the Company’s home markets are subject to fierce competition.||Fierce competition may lead to a buyer’s market, which influences margins, causes a shift in design and contract risks for the contractor and endangers the pre-financing of projects by clients.||Based on the Company’s strategy, BAM applies a disciplined focus on market segments and projects where it can use either scale or expertise as a critical success factor. For its future business portfolio, BAM rationalises its propositions and develops new solutions for clients and invests in digitalisation to be a market leader in how and what BAM builds.|
|The strategic agenda involves a transition to a new organisation, so that BAM can follow the developments in the sector and be a leader in the selected markets.||BAM may not realise a successful and agile implementation of the defined transformation targets, together with other strategic initiatives and targets.||The Executive Board is closely steering and monitoring the progress of the transformation activities as defined in the strategic agenda and translated in the yearly operating plans. Furthermore, BAM has implemented a programme management organisation to steer transition progress.|
|The construction industry is at the brink of major technological changes. Digital technology is beginning to change value creation within the industry, where traditional capabilities may become commoditised.||Competitors or disruptive newcomers on the market can marginalise BAM’s distinctive capabilities and thus jeopardise the existing business model.||BAM’s management measures with regard to innovation risk are described in paragraph 9.7, ‘Material themes and management approach’.|
|The recent Covid-19 pandemic continues to evolve and has resulted in the implementation of significant measures by governments, including lockdowns, closures, quarantines and travel bans intended to control the spread of the virus.||Disruptions related to widespread public health concerns (e.g. Covid-19 pandemic) can materially adversely impact BAM’s results of operations.||The Executive Board is closely steering and monitoring this crisis, together with its multidisciplinary crisis team, with a focus on a safe and healthy working environment on project sites, in offices and at home, managing costs and capex, preserving cash and strengthening liquidity in cooperation with its key stakeholders.|
|Property development risk|
|BAM is involved in property development for its own account. The level and timing of both income (sale/rent) and costs (site acquisition and building costs) of these projects may deviate from the initial expectations as a result of divergent market and process (planning/permits) conditions, for example due to the Covid-19 crisis.||Property development projects can be postponed or completed at higher costs than budgeted. Furthermore the realisable value of our land bank and property development positions may be lower than book value. Planned divestments of commercial property may take longer due to Covid-19 uncertainty. This has consequences for the financial results (level and duration of the capital employed, profit).||The Executive Board decides on the basis of project proposals in the Property Committee. The general rule is that construction does not start before a significant number of properties have been sold or, for non-residential buildings, a large part of the project has been rented out or sold. The Property Committee also closely monitors the right timing for divestments of property, especially in the area of commercial property, due to Covid-19 uncertainty.|
|The nature of BAM’s business can pose safety risks to its people. The well-being and safety of the people of BAM are of vital importance to the Company.||Safety incidents may lead to serious injuries, fatalities or project disturbance, loss of time or additional costs, and as a result impact BAM’s performance.||BAM’s management measures with regard to health and safety are described in paragraph 9.7, ‘Material themes and management approach’.|
|BAM is constantly active in thousands of projects where the Company is exposed to a wide variety of risks, in a sector known for its asymmetrical risk profile. Selecting the right projects against balanced contractual conditions is crucial.||Failure to achieve a healthy order intake and flawless project execution leads to fluctuations in the project results, possible claims and litigation and ultimately to the failure to achieve BAM’s strategic objectives.||BAM has implemented several measures to manage the project risk and to steer towards the desired risk appetite. The starting point is selective tendering with a focus on portfolio management, and a robust stage gate procedure for tenders and during the execution phase with focus on, among other things, design management, schedule management, contract management. During 2020 BAM further de-risked the company with the wind down of the activities of BAM International, which is operating outside the company’s European home markets, and with claim settlements to bring down open exposure to clients on variable considerations.|
|Supply chain risk|
|On an annual basis, BAM purchases more than 70 per cent of its turnover from suppliers and subcontractors. These partners have a major impact on the projects, both financially and technically.||Failure to manage the cost of the supply chain (subcontractors, materials and services) and insufficient access to qualified and cost-effective vendors has an impact on successful and profitable execution of the projects.||BAM’s management measures with regard to procurement and supply chain risk are described in paragraph 9.7, ‘Material themes and management approach’.|
|Attracting, training and retaining talented people is crucial for BAM, because it enables the Company to respond more effectively to changes in the market by exploiting its full potential. It is essential that BAM remains a preferred employer.||An inability to attract and keep the right talent, expertise and human capital within BAM will have a negative effect on success.||To attract top talent, BAM has a professional recruitment team that works together with external recruitment agencies. The Company invests in the development of employees through various training programmes, including a programme for management trainees, project directors and project managers, and prepares candidates for key positions to improve (inclusive) leadership.|
|Information technology risk|
|Digitalisation, data, communication and connectivity are essential for BAM. A global presence also leads to cyber-security challenges, which require the Company to have the flexibility to continuously adapt.||Information technology is crucial in supporting and protecting the core and supporting processes. BAM increasingly relies on digital communication, connectivity and the use of technology. The Company has to remain alert to prevent the use of compromised data and the unavailability, loss or theft of critical strategic, financial and operational data.||BAM aims to improve the maturity of the IT function to keep up with external developments. In addition, BAM has increased its security efforts to remain resilient to growing cyber-risks. This includes implementing and testing of an information security framework to ensure confidentiality, integrity and continuity of data.|
|The construction industry relies heavily on natural resources, which will be depleted when consumption goes faster than the natural supplement. Climate-related risks such as global warming cause more frequently occurring extreme weather conditions, such as storms, heat waves, droughts, heavy rainfall with flooding and heavy snowfall.||Failure to deliver sustainable construction processes and (new) sustainable solutions could disrupt BAM’s position related to clients and supply chain partners and lead to reduced revenue and higher costs.||BAM has covered sustainability in its governance (corporate team and operating company teams), strategy (ambition to achieve a net positive result), project portfolio (reduce the impact of BAM on resource use in cooperation with partners in the supply chain and clients to explore circular economic business models), risk management (identify and manage potential risks and opportunities) and metrics (target as part of our strategic agenda). BAM reports on the Task Force on Climate-related Financial Disclosures (TCFD) guidelines through its yearly CDP climate response, which is publicly available on the CDP website.|
|The attractiveness of BAM as a trusted partner to collaborate with or to invest in is strongly influenced by its financial position and the ability to manage financial risks.||Failure to achieve the status of trusted partner may prevent BAM from working with preferred parties and lead to restrictions on access to financial markets.||BAM has taken actions to mitigate financial risks following the extraordinary circumstances in 2020 to ensure sufficient liquidity to run its operations. There was additional focus on cash by implementing a cost-savings programme, limiting capex and obtaining available governmental support. Furthermore, the revolving credit facility (RCF) has been extended by one year to March 2024. The RCF was fully drawn as a precautionary measure in response to Covid-19, increasing flexibility and financial resilience. The extraordinary circumstances in 2020 required close monitoring of the relevant bank covenant ratios. As a result, BAM obtained a waiver from its lenders. Also, the bonding facilities have been closely monitored to ensure sufficient headroom under the credit facilities to issue bonds and bank guarantees. Furthermore, a major restructuring programme was initiated to deliver cost savings of €100 million annually.
Other specific financial risk management measures, including those in the area of interest rate risk, foreign exchange risk, price risk, credit risk and liquidity risk are disclosed in note 3 of the financial statements. More information on deferred tax assets and liabilities is disclosed under note 24 of the financial statement, a specific tax risk is the expected enactment of the new tax rules in 2021 since the new legislation in the Netherlands has not been fully enacted as per 31 December 2020, When it substantially enacts in 2021, the actual impact will be further analysed.
|The trust of clients, shareholders, lenders, construction partners and employees in BAM is vital to ensure the continuity of the Company.||BAM’s reputation may be damaged if it fails to successfully mitigate the main reputational risks, such as fraud, bribery and corruption.||BAM’s management measures with regard to business conduct and transparency are described in paragraph 9.7, ‘Material themes and management approach’.|
What impacted BAM in 2020?
Some risks and uncertainties related to the nature and complexity of the business environment, but also opportunities had an impact on BAM in 2020. The major events are given in this section.
BAM is highly committed to preventing incidents. However, the company still faced incidents at project sites in 2020. BAM regrettably had to record one fatal occupational accident on a BAM site. This was extensively evaluated by operating company management, the Executive Committee and the Supervisory Board. Creating and maintaining a safe working environment remains a continuous focus area to reach the Group’s safety targets and to prevent incidents.
Asymmetric risk-reward balance
The results of some large projects in the Netherlands (civil engineering), Germany (construction), Ireland (construction) and its non-European activities (construction) were impacted by an asymmetric risk/reward balance, including discussions on variation orders. Due to Covid-19 and the mentioned performance of the Group in the first half of the year the Group obtained a waiver from the providers of the RCF for the recourse interest ratio and for the recourse leverage ratio. Furthermore, there were non-cash impairments of goodwill, property and deferred tax assets (DTA). BAM is defining a new strategic agenda in order to create more value for our shareholders and solid prospects for all our stakeholders, including our employees. In 2020, BAM already performed some de-risking and improvement initiatives that resulted in a somewhat better performance in German construction and Dutch civil engineering, while BAM also decided to wind down BAM International, active outside BAM’s European home markets, given the lack of a positive outlook.
The extraordinary circumstances caused by the Covid-19 pandemic had a considerable impact on BAM. BAM adapted to different governmental restrictions across our various markets in close cooperation with its stakeholders. The focus was on ensuring a safe working environment, reducing costs and capex, preserving cash and strengthening liquidity. BAM has been able to safeguard the health of its employees and no BAM employees deceased due to Covid-19 in 2020. However, the various markets were impacted, which resulted in a decrease in operational efficiency, especially during the second quarter of 2020. Revenue was most heavily impacted in Construction and Property in Belgium, Ireland and the United Kingdom, where governments had imposed lock-downs. The liquidity position and trade working capital efficiency remained strong.
In September 2020, BAM announced a major restructuring programme aimed at mitigating the lower revenue caused by Covid-19 and selective tendering. BAM expects this programme to result in cost savings of €100 million annually. The majority of savings will come from headcount reductions. BAM expects to see significant savings as soon as in 2021.
Settlement of material claim with the City of Cologne
BAM’s operating company Wayss & Freytag Ingenieurbau reached agreement on a long-standing and highly complex claim with the City of Cologne and de-risked BAM with this settlement. Wayss & Freytag Ingenieurbau was a one-third partner in the joint venture carrying out this project. The joint venture (‘Arge’) constructed a section of Cologne’s North/South metro line and reached an agreement to settle all outstanding claims with regard to this project, including damages caused by the collapse of the building of the City archives on 3 March 2009. A substantial part of Wayss & Freytag Ingenieurbau’s share was covered by insurance payments and the remaining part (€36 million) is taken as an exceptional charge in the 2020 accounts.
Extended partnership between BAM PPP and PGGM
BAM extended its long-term PPP partnership with Dutch pension fund service provider PGGM. A first step was during the half-year period with a positive financial impact. The second step was, when PGGM Infrastructure Fund acquired a 50 per cent interest in BAM PPP. The extended partnership is expected to generate significant potential to accelerate growth in existing European and new global markets by providing BAM PPP with a broader remit and greater flexibility to expand its portfolio. Closing this transaction resulted in an increase of shareholders’ equity and strengthened the financial resilience of BAM in 2020.
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