Risk management


10 - Main risk areas 

Risk is inherent to any business venture and the risk to which the Group is exposed is not unusual or different from what is considered acceptable in the industry. The Group’s risk management system is designed to identify and manage risks. Effective risk management enables BAM to capitalise on opportunities in a carefully controlled way.

Risk profile and appetite

The focus areas of BAM’s strategy Building the present, creating the future have a positive impact on the risk profile of the Group. In the current project and business portfolio, BAM has a more disciplined focus on market segments and projects where the company can use either scale or expertise as a critical success factor. For the future business portfolio, BAM is rationalising its propositions and developing new solutions for clients and is investing in digitalisation to be an industry leader in how and what BAM builds. The new strategy also places a stronger emphasis on cultural values, to further support the brand and the strategy 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 general approach of BAM is to balance risk and reward and limit uncertainties as much as possible, taking into account the sector in which managing risk is a necessary core competence to survive and to carry out sustainable business.

Key factors in explaining the risk appetite are described in accordance with the following risk categories:

Strategy: Based on knowledge and experience in the home markets, BAM participates in tenders for complex multidisciplinary projects, in which the risks are distributed in a controlled manner between the customer and BAM. Outside the home markets, BAM operates worldwide in niche areas, provided they are in line with the Group’s business principles. In PPP investments, BAM only invests in Design Build Finance Maintain Operate contracts in home markets where payments are based on availability of the asset. BAM invests selectively in property development projects on condition that they are profitable and have a clear and predefined exit strategy.

Operational: BAM seeks to limit the risks that may jeopardise the execution of its business activities.

Finance: BAM strives to maintain a solid financial position for ensuring access to the financial markets and retaining its customers, supply chain and other partners. BAM wants to minimise its (financial) reporting risks.

Compliance: Compliance with all applicable laws and regulations including BAM’s code of conduct is of fundamental importance for the Group.

Risk appetite statements are further underpinned by BAM’s strategic agenda, governance, core values, code of conduct and policies and procedures. 

Improvements to the risk management framework

The enterprise risk management is embedded in different levels of the organisation and has various areas of attention. The core of BAM’s risk management at project level covers the full lifecycle of the project, from opportunity to tendering, and from execution to handover. BAM has further strengthened baseline requirements for the management of tenders, worked on the development of a unified project approach and using more extensively the business intelligence from the tender and project database. BAM continues to improve its risk management capabilities in order to realise the strategic agenda and guarantee value creation in the long term.

BAM’s risk management framework

At Group level, the BAM strategy is the starting point. The Group’s strategy offers guidance on focusing the project portfolio (doing things better), shaping the business portfolio (doing better things) and the creation of the future portfolio (doing new things). These areas and underlying strategic objectives and initiatives form the basis for the focus on enterprise risk management, taking into account BAM’s risk appetite. The Supervisory Board supervises and advises the Executive Board, which has the overall responsibility for enterprise risk management within the Group. 


47 - BAM’s risk management framework

There is an annual risk assessment for the Group in relation to the strategic agenda and operating plans.

BAM’s risk management framework, which is based on COSO (Committee of Sponsoring Organisations of the Treadway Commission), addresses strategic, operational, financial and compliance risks. Risks are assessed and prioritised on their impact and probability and on effectiveness of the controls. The cycle is concluded with a risk response and monitoring of effectiveness in the organisation. The Executive Board receives progress updates on the status of the strategic objectives, initiatives and leading indicators through dashboards in periodic reports and in management meetings. This is also periodically shared with the Supervisory Board.

At the operating company level, there is attention to the management of processes, the portfolio and projects in various phases. The management of the operating companies closely monitors the progress of projects, the risks and the opportunities and actions going forward in periodic reports and in project and management meetings. Furthermore, there is close attention to strengthening processes, systems and its people capabilities.

At project level, the project team manages the contract and the expectations of customers in the most effective and efficient way, by forming the right team that can make this possible and by choosing the right tools and capabilities to support them. Digital construction is one of the means to minimise risk and cost. In addition, project teams manage risks and opportunities, both qualitatively and quantitatively, identified in the tendering phase as input for the periodic reporting of project performance. The periodic reporting also includes a bandwidth for the best and worst case scenarios to be reported to management.

The risk management and control system provides a platform for the structured sharing of knowledge and expertise between the operating companies, so that risk management plays a key role in achieving the strategic objectives. Business functions and topics across the Group accelerate the process of acquiring and sharing knowledge and expertise through a consistent language and approach to risk management.

Operating model supporting internal control framework

The BAM strategy is supported by the BAM operating model that creates clarity and uniformity in the way the company operates. All key processes are identified around strategic enablers and are aligned with existing core processes in accordance with these enablers. BAM has derived its internal control framework from this operating model and underlying core processes and uniform guidelines and policies (for accounting, treasury, legal, compliance, information security, and so on). The internal control framework ensures insight in the effectiveness of internal risk management and control systems, as well as the reliability of the financial reporting and compliance with laws and regulations. Moreover, the internal control framework uses COSO as an external reference framework.

Comfort on the effectiveness of the internal control framework is obtained by a semi-annual assessment of the requirements in the framework. The Group and operating companies carry out self-assessments and the results are reported to the Group Governance Risk & Compliance function. No significant deviations are identified but improvement areas are defined. The most important improvement areas are finance, IT, procurement and project execution. The results of these self-assessments are challenged by the Group and improvement actions are discussed and monitored. Furthermore, Internal Audit has challenged the results and provided recommendations to further improve the effectiveness of the internal control framework.

In control statement process

BAM has a structured ‘in control statement process’, resulting in an end-of-year ‘Executive Board statement’ at the end of this risk management chapter. 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 confirmed and signed the letter of representation, which supports the Executive Board in their assessment of the effectiveness of the design and operation of the internal control and risk management systems. Operating companies confirmed that the deficiencies in the minimum requirements framework do not have material impact on their level of internal control.

Core values supporting the right risk culture

BAM’s risk management and internal control system is supported by BAM’s core values. These elements are instrumental in steering the behaviour of BAM’s people and help to ensure that BAM’s risk profile remains in line with the risk appetite. The Group’s culture is further strengthened by scalable learning from tenders and projects, more predictable performance, working together in open collaboration and ownership of challenges and opportunities. BAM’s people are fundamental to its success. This is why project and business careers are being aligned. A stronger culture will be promoted to make the Group more attractive as an employer and a partner par excellence.


48 - Tender stage gate procedure

Data-driven tendering 

Extensive tender data have been collected over the years to make better data-driven business decisions. Lessons learned from these tenders are shared with the management of the operating companies, focusing on product type, client relationship, geographical location, contract type and preferred partners for the tender at hand. Combining this data with project execution data ensures even better focus on business development and selective tendering. 

Fundamental behind managing a healthy order intake is BAM’s tender stage gate procedure (see scheme below). Material tenders are guided through various stage gates based on the complexity and size of the tender (tender category). Through the process, qualitative and quantitative risks and opportunities that may impact the success of the tender are considered. Areas considered include client, contract, team, work schedule, finance, partners, safety, location et cetera.

The tender stage gate procedure also includes several approval rounds depending on the risk profile. The procedure follows a governance structure based on tender categories to ensure tenders are reviewed and approved by the right level of management. Bids for major projects or projects involving exceptional risk are submitted and presented to the Executive Board and – if necessary – the Supervisory Board for approval.

Peer reviews and tender assessments are performed by experts from other operating companies in the Group during the tender phase of major projects. These reviews mobilise the full knowledge of the Group and contribute in robustness of the proposal made to the client. Operational audit performs reviews of high-risk-projects shortly contract award to assess the effectiveness of the project control system.

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. The main risk areas are specified on the following pages.

Risk description

Possible impact

Management measures


Market risk

The markets in which BAM operates are subject to fierce competition in most of the Group’s home markets.

Intense 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 customers.

Based on the Group’s strategy, BAM applies a more 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 thus develops new solutions for customers and invests in digitalisation to be a market leader in how and what BAM builds.


Transformation risk

The strategic programme Building the present, creating the future 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 Group’s strategic (One BAM) agenda, 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 will change the top structure of the company in the first quarter of 2019 to bring it more in line with the priorities.


Safety risk

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 or even fatalities and may lead to project disturbance. Incidents may lead to loss of time, additional costs and as a result impact BAM’s performance.

Chapter 9.7 ‘Material themes and management approach’ describes BAM’s management measures as part of section Health and safety.


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. BAM’s capital employed position is important to adequately finance the projects.

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. This again has consequences for the financial results (level and duration of the capital employed, profit).

If the Group intends to take on property development risks, this requires the prior consent of the Executive Board. The latter takes a decision on the basis of project proposals from the relevant operating company and associated analyses carried out by the Group’s Property Investment function. 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. However, the United Kingdom – where BAM only operates in the non-residential property sector – is an exception to this. There, the inventory risk is mitigated by a system of phased project execution.


Innovation risk

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.

Chapter 9.7 ‘Material themes and management approach’ describes BAM’s management measures as part of section Innovation.


Project risk

BAM is 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 litigations and ultimately to the failure to achieve BAM’s strategic objectives.

BAM has implemented several measures to manage the project risk. The starting point is selective tendering with a focus on portfolio management, a robust tender stage gate procedure and peer reviews. During the execution phase, much attention is paid to achieving operational excellence with, among other things, the right composition of the project team, design management, schedule management, contract management, working capital management and project monitoring.


Supply chain risk

On an annual basis, the Group 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 impact on successful and profitable execution of the projects.

Chapter 9.7 ‘Material themes and management approach’ describes BAM’s management measures as part of section Procurement.

 


People risk

Attracting, training and retaining talented people is crucial for BAM, because it enables the Group to respond more effectively to changes in the market by exploiting its full potential. It is essential that BAM remains a preferred employer.

The inability to attract and keep the right talent, expertise and human capital within BAM will have a negative effect on success.

BAM strives for an open culture of learning and exchanging knowledge in the form of training and education, building on the available knowledge and expertise. To attract top talent, BAM has a professional recruitment team that works together with recruitment agencies through advertisements, but also with various training institutes. BAM increases the mobility of employees between the core businesses. The Group invests in the further 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 Group 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 Group 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 confidentiality and continuity measures as well as the integrity of data. Training and communication increase familiarity with safe IT use among BAM people and partners, as this is considered essential.

 


Sustainability risk

The construction industry relies heavily on natural resources, which will be depleted as soon as consumption goes faster than the natural supplement. Global warming and climate change cause more frequent extreme weather conditions, such as storms, heat waves, droughts, heavy rainfall with flooding and heavy snowfall.

Failure to deliver more sustainably and innovatively could disrupt BAM’s position vis-à-vis customers and chain partners. Extreme weather events and material shortages can lead to disruption of the building process.

 

BAM has a strong corporate team to support continuous improvement and makes considerable efforts to reduce the impact on the environment with the ambition to achieve a net positive result. To reduce the impact of BAM on resource use, the company works with partners in the supply chain and customers to explore circular economic business models.

 


Financial risk

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. The company enters ‘equity-light’ in property development projects and in PPP investments. It is the intention of the company to sell these projects to investors.

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.


Reputation risk

The trust of customers, shareholders, lenders, construction partners and employees in the Group 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.

Chapter 9.7 ‘Material themes and management approach’ describes BAM’s management measures as part of section Business conduct and transparency.


What impacted BAM in 2018?

Some risks and uncertainties related to the nature and complexity of BAM’s business environment had an impact on BAM in 2018. Some examples are given in this section.

Brexit

The United Kingdom is BAM’s second largest home market after the Netherlands. BAM’s UK activities are split between three operating companies: BAM Construct UK in non-residential construction and property development, BAM Nuttall in civil engineering and the UK operations of BAM PPP. They are widely diversified by location (strong regional presence across the United Kingdom), client base (public and private) and market (retail, office and industrial construction, and across all civil sectors). The operating companies are among the leaders in their markets.
BAM has performed a risk analysis on the potential scenarios, ranging from ‘No Deal’ to ‘No Brexit’. The risk analysis covered potential impacts from a contract, supply chain, trade tariffs and customs, regulation and people perspective, including follow up actions to mitigate risks. The primary exposure for BAM in the United Kingdom relates to the short-term ‘No Deal’ scenario, creating potential changes in the cost and availability of materials and consumables, with foreign exchange being a significant secondary contributor. Any new insights and developments are being monitored.

Asymmetric risk profile

BAM’s performance in 2018 was impacted by an asymmetric risk profile, especially on large infrastructural projects within Belgium, Germany and the Netherlands. For example, there was an additional cost overrun of about €30 million on the project sea lock IJmuiden. The new planning showed a delay in realisation of the sea lock and additional cost for realisation. BAM continues to be selective in tendering for large projects, and is discussing with its public sector clients on ways to improve the risk and reward balance and contract conditions.

Impairments

BAM recognised an impairment on its assets. There was a non-cash property impairment mainly related to a Dutch regional land position adjacent to the development of a large wind farm, which is now reduced to the value of farmland. Furthermore, there is an impairment taken on the deferred tax assets, triggered by changes in the Dutch corporate income tax rates and lower performance in the Dutch fiscal unity. 

Resource pressures

There are positive marked developments in most of BAM’s home countries. This resulted in supply chain pressure and increased labour costs especially in the Netherlands and Germany.
The HR and Procurement functions work closely together with the business to ensure that projects are being executed by the right people with the right quality. Furthermore, BAM is more selective in tendering for the projects the Group can execute in line with internal and external requirements.

Safety

This year, BAM did not have any fatal incidents. Although the focus on safety remains high, the company still faces incidents at project sites. Besides having the knowledge and tools to work safely, it is crucial that employees can always communicate openly about unsafe situations with each other and their managers.

Accelerate strategy execution

In 2018, BAM concluded that the implementation of the strategy required reinforcement. It was decided to change the top structure of BAM to bring it more in line with the priorities, as stated in the strategy Building the present, creating the future. With the appointment of a COO for each of the two business lines and a chief business excellence officer, BAM creates more focus on its strategic and operational priorities. This leads to more synergy, more efficient working, faster innovations and better project management, with the purpose of achieving predictable performance in line with BAM’s financial targets.

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, the Executive Board has made an assessment of the effectiveness of the design and operation of the internal control and risk management systems (as described in this risk chapter). Furthermore, the Executive Board has determined the outlook based on market developments, financing (as described in chapter 3.4 Outlook) and orderbook and cash flow.

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 significant failings in the design and operating 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; and
  • 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 twelve 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; and
  • The management report describes the principal risks and uncertainties that Royal BAM Group faces.

 

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