Exposure to risk is inevitable in pursuing BAM’s strategy. controlled risks can lead to new opportunities, resulting in value creation. BAM’s new strategy has a clear focus on continued de-risking and accelerate opportunities for future growth. This strategy is translated in BAM’s risk management framework and enables BAM’s management to identify, evaluate and address risks.
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 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 and mitigating actions are defined and monitored. There was uncertainty and some impacts from the Covid-19 pandemic in the beginning of 2021, however the effects remained limited in the remainder of the year. A new risk related to the increasing pricing and availability pressure in the supply chain for materials and shortage of available staff has been identified. This is leading to possible cost increases and the risk of not meeting clients’ construction budgets during tenders.
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 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.
Continuous improvement is part of the Risk and Control Committee agenda which resulted in further strengthening of risk governance in relation to the new operating model, increased management attention to improvements of the internal control effectiveness in processes and systems and improvement in project control and reporting. The continuous improvement points further strengthen the risk management and control systems and 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.
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. Continued de-risking is part of the new strategy, which is also reflected in the adjusted risk appetite framework. The risk appetite is being recalibrated based on the new strategy. An important pillar is continued de-risking of the market choices and to avoid disproportionate risk in the project portfolio, in particular with respect to large projects.
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 and sustainable technologies and solutions.
- 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 chapter 3.1).
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
|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.|
|Acquisitions and divestments|
|Acquisitions and divestments need to deliver the new strategic agenda regarding profitable growth platforms and improving BAM’s risk/reward profile||BAM may not realise the expected return on investment, return on capital employed and reduction of liabilities by its acquisitions and divestments||BAM defined a new strategy with focus on markets and projects where BAM has proven competitive strengths. BAM has strengthened the strategy department with internal corporate development expertise, besides working with external experts. In 2021, BAM made progress with the divestment programme (see paragraph 2.2). Management further strengthened the portfolio towards sustainability and industrialised construction with the acquisition of off-site production facilities for modular construction.|
|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 manages innovations in a structured manner, with mainly initiatives at individual project level. BAM prioritises projects where such innovation is replicable, in order to reduce risk and increase profitability.|
|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 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.||Property development projects can be postponed or completed at higher costs than budgeted. Furthermore, the realisable value of land bank and property development positions may be lower than book value.||The Executive Board decides based on 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.|
|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 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 during the execution phase. BAM will move its project portfolio away from large unrewarded risks by limiting the size of single-stage, lump-sum tenders to €150 million. Furthermore, BAM made progress with the divestments and wind-down of BAM International.|
|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 has a vendor management process that strives for added-value, long-term, mutually beneficial relationships with partners. BAM works with selected groups of suppliers and subcontractors on different levels, both on business segment as well as on country level. Suppliers are assessed against five different themes: safety, quality, total cost, logistics, and engineering and process. This assessment leads to a dialogue to improve performance and continuation of cooperation.|
|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 and security|
|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.|
|Crisis and business continuity disruptions can have a material effect on the Company’s operations due to risks such as natural disasters, influenza pandemic.||Disruptions (for example related to widespread public health concerns like Covid-19) can have a significant negative impact on BAM’s business results.||BAM has a structured crisis management and multidisciplinary business continuity organisation to ensure continuity in a safe and healthy manner on project sites, in offices and at home.|
|Providing insightful, fair and accurate representation of performance and economic results is essential for trust in BAM.||Potential material misstatements in the financial reports may lead to a loss of confidence in the accounts by internal and external stakeholders.||BAM has a centrally steered Finance organisation that coordinates the process of accurate, complete and timely closing and consolidation of financial data. The central BAM Accounting Guidelines (BAG) provide the principles and standards for the application of IFRS rules within BAM and there is monitoring whether new accounting guidelines are appropriately implemented by the businesses of BAM. Furthermore, Group Finance coordinates, supports and approves complex interpretations and valuations that need to be supported by position papers. Periodic reviews by finance and risk functions underpin the insightful, fair and accurate representation of performance and economic results and are aimed to prevent any material misstatements due to fraud or errors.|
|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’s financing strategy is based on long-term relationships with reputable financial institutions and a well-spread debt maturity schedule. A strong centralised focus on cash and working capital, including financing by clients and suppliers, limits the need for extra capital. In 2021, the repayment of the €400 million RCF and remaining €120 million convertible bond took place.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.|
|Regulatory and reputation|
|Regulatory compliance and the trust of clients, shareholders, lenders, construction partners and employees in BAM is vital to ensure the continuity of the Company.||Ethical misconduct or non-compliance with applicable laws and regulations (such as competition, bribery and corruption) could expose BAM to liabilities or have a negative impact on its business and reputation. BAM may be subject to administrative, civil or criminal liabilities including significant fines and penalties, as well as suspension or debarment from government or non-government contracts for some period of time.||The BAM Code of Conduct and adjoining policies such as those relating to bribery, corruption and competition align with generally accepted standards and values but also with local legal and other rules and regulations. All employees have to acknowledge the compliance with the Code of Conduct. The Group has a robust speak up approach (including external reporting line), so that breaches of the code and policy can be reported through various channels. Compliance officers monitor compliance and advise on integrity issues.|
What impacted BAM in 2021?
Some risks and uncertainties related to the nature and complexity of the business environment, but also opportunities had an impact on BAM in 2021. The major events are covered in this section.
BAM is highly committed to prevent safety incidents and is focused on continuous improvement. BAM has been able to safeguard the health of its employees in 2021 and did not have any fatal incidents. Although the focus on safety remains high, the company still faces incidents at project sites. In 2021, the Supervisory Board installed an additional committee (Health Safety Sustainability Committee) to have additional insight on maintaining a safe working environment.
Asymmetric risk-reward balance
The results of some large projects were impacted by an asymmetric risk/reward balance, including discussions on variation orders. BAM’s new strategic agenda focuses on de-risking the portfolio, including BAM’s decision to move its project portfolio away from large unrewarded risk by limiting the size of single-stage, lump-sum tenders to €150 million.
A new risk has been identified relating to the availability of materials in the supply chain. This is leading to possible cost increases and the risk of not meeting clients construction budgets during tenders. BAM has taken appropriate measures as part of its tender process which has limited the impact up-to-now.
Most of BAM’s construction activities were not affected by Covid-19, which still impacted daily live during 2021. In Ireland the operations were reduced by Covid-19 restrictions in the first quarter of 2021. BAM maintained strong focus on complying with government rules and regulations and ensured a safe working environment. The restrictions increased in most of the BAM countries in the last months of 2021, however this did not affect the health of employees and the operations.
BAM launched its new strategy Building a sustainable tomorrow in February 2021. BAM is progressing with the divestment of activities in the managing for value markets. In paragraph 2.2 an overview of progress on divestments is given.
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