Risk management

Risk is inherent to any business venture and the risk to which BAM is exposed is not unusual or different from what is considered normal 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 its 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 it builds. The new strategy also places a stronger emphasis on cultural values, to further support the brand and the strategy of the Group. 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 is to balance risk and reward and to 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 – 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.

Tenders – 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 clients and BAM. Outside its home markets BAM operates worldwide in niche areas, provided they are in line with the Group’s business principles. In PPP investments, BAM invests in design, build, finance, maintain and operate contracts (DBFMO), mainly in home markets, where payments are based on availability of the asset.

Property – BAM invests selectively in property development projects under the condition that these 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 (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 insightfull, fair and accurate representation of its performance and economic results.

Compliance – Compliance with all applicable laws and regulations including BAM’s Code of Conduct is of fundamental importance to 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 developed and implemented an unified project approach in 2019 and this will be operational in operating companies and projects in 2020. This approach covers stage gates, not only during tendering, but also in the execution of projects. The implementation of these new requirements is performed via a project team with the use of expert groups. 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 focussing 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.

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

At executive level, the Executive Committee receives progress updates on the status of the strategic objectives, initiatives and leading indicators through dashboards in periodic reports and in management meetings. These are periodically shared with the Supervisory Board.

At operational 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 opportunities and actions going forward in periodic reports and in project and management meetings. Furthermore, there is close attention to strengthening processes, systems and people’s capabilities.

At project level, the project team manages the contract and the expectations of clients 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. The periodic reporting includes a bandwidth for the outcome of the project.

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. 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, which 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 policies (for accounting, treasury, legal, compliance, information security, and so on). The internal control framework ensures insight into the effectiveness of internal risk management and control systems, as well as the reliability of the financial reporting and compliance with laws and regulations.

Comfort on the effectiveness of the internal control framework is obtained by a semi-annual assessment of the requirements in the framework. All operating companies and the headquarters carry out self-assessments and the results are reported to the Group. The results of these self-assessments 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.

In control statement process

BAM has a structured ‘in control statement process’, resulting in an end-of-year ‘Executive Board statement’. 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. Reported deviations included an improvement plan to further strenghten the level of control. The most important improvement areas are IT, procurement and project execution.

Core values supporting the right risk culture

BAM’s risk management and internal control systems are supported by BAM’s core values see Value creation. 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.

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. In addition, the Executive Board has determined the outlook based on market developments, financing, 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 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 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;
  • The management report describes the principal risks and uncertainties that Royal BAM Group faces.

Healthy order intake and project control

Fundamental to managing a healthy order intake and a controlled project execution is BAM’s stage gate policy. BAM has extended the existing stage gate approach used in the tender phase into the execution phase. This extended approach was developed and implemented in 2019 and will be fully operational in operating companies and projects in 2020.

Tenders and projects are guided through various stage gates, based on complexity, size and risk profile. The first two stage gates focus on ‘Are we doing the right tender/project?’, while the other stage gates address the question ‘Are we doing the tender or project right?’ 
The stage gates are designed to establish a robust risk profile and ensure predictable performance across all BAM’s tenders and projects. Expert involvement is arranged to leverage the combined knowledge within the Group, supporting the tender and project in reaching its full potential.

The stage gate policy follows a governance structure based on risk categorisation, to ensure each tender and project is reviewed and approved by the right level of management. Bids for major projects or project involving exceptional risk are submitted to the Executive Committee for ratification and – if necessary – to the Supervisory Board for approval.

Separate from the various stage gate assessments, the Internal Audit department performs independent project reviews on selected projects across BAM to review the effectiveness of the project control system and the overall project performance.

35 - Stage gate procedure



Europe’s first 3D concrete printing facility
Printing 3D concrete elements on an industrial scale is now available in Europe’s first commercial facility in the Netherlands. Set up by Weber Beamix and BAM Infra, the facility is scaling up 3D printing for the construction industry in all areas: volume, size, speed, and efficiency. The fully digital process allows for greater freedom in design, while the 3D printing technology saves raw materials, reduces emissions and prevents waste.

In the development of this facility, Saint-Gobain Weber Beamix and BAM Infra had the support of their long-time knowledge partners Bekaert, Witteveen + Bos and Eindhoven University of Technology. Several orders queued up even during development. BAM has started the production of the longest 3D printed concrete pedistrian bridge in Nijmegen and is in the design phase for the province of Noord-Holland for four cycling bridges. For the Driebergen-Zeist railway station project, 3D  printing of formwork saved many hours of labour and waste material.


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.

Risk description


Possible impact


Management measures


Market risk

   

Most of the Group’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 Group’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.




Transformation risk

   

The strategic agenda ‘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 One BAM transformation process, together with other strategic initiatives and targets.

 

The Executive Committee 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.




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.

BAM’s management measures with regard to innovation risk are described in paragraph ‘Material themes and management approach’.




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. 

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

The Executive Committee 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. In the United Kingdom – where BAM only operates in the non-residential property sector – the inventory risk is mitigated by a system of phased project execution.




Safety

   

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 Material themes and management approach’.




Project risk

   

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. The starting point is selective tendering with a focus on portfolio management, a robust tender stage gate procedure, a uniform project approach (UPA) and peer reviews. During the execution phase, 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.

BAM’s management measures with regard to procurement and supply chain risk are described in paragraph Material themes and management approach’.




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.

To attract top talent, BAM has a professional recruitment team that works together with external recruitment agencies. The Group 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 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 an information security framework to ensure confidentiality, integrity and continuity of data.




Sustainability risk

   

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 acute frequent 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 a strong corporate team and sustainability teams in all operating companies to ensure continuous improvement. By driving and implementing sustainability measures, BAM makes considerable efforts to reduce its 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 clients 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 clients, 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.

BAM’s management measures with regard to business conduct and transparancy are described in paragraph Material themes and management approach’.


Innercity re-development
The construction of Zalmhaven project  is now in full swing. Three residential towers will arise in the former harbour of Rotterdam, developed by The Zalmhaven CV joint venture. This urban development comprises a 215-metre tower which will house 256 apartments, two 70-metre towers which will house 196 apartments and 33 single-family homes, retail spaces and parking facilities. The first homes will be completed in 2022.
Zalmhaven CV is a joint venture between area and project developer AM (part of Royal BAM Group nv) and developer and investment manager Amvest. The project is being built by BAM Bouw en Techniek. With this development Rotterdam will get a major eye-catcher at the foot of the well-known Erasmus Bridge.

Michelle Corbeau, Project Developer for AM,  and Edwin van Leeuwen, Project Developer for Amvest: ‘Zalmhaven was developed in response to the high demand for new homes in Rotterdam. With this eye-catching residential high-rise in the beautiful Scheepvaartkwartier neighbourhood, Zalmhaven CV is realising 485 rental and owner-occupied homes for the elderly, young couples and families who want to live in the city centre. As an extension to the city centre, Zalmhaven offers the whole package from a pleasant living environment to job opportunities and a place to unwind in local bars and restaurants. We are not just building new homes, we are creating a place where people want to live.’

What impacted BAM in 2019?

The following risks and uncertainties related to the nature and complexity of BAM’s business environment had an impact on BAM in 2019.

Risk/reward profile

BAM’s performance in 2019 was impacted by significant cost overruns on several large projects in Germany and in the Middle East. These cost overruns led to a profit warning on the 8th of July. BAM remains selective in tendering for large projects and continues to discuss ways to improve the risk and reward balance as well as contract conditions with its public sector clients.

Safety

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.

PAS and PFAS

In the Netherlands, a national nitrogen approach programme (in Dutch ‘Programma aanpak stikstof’ or PAS) was introduced to limit nitrogen deposition and protect natural habitats. PAS has also led to a (temporarily) shut-down of large construction projects, which potentially affects BAM’s project portfolio.

BAM established a PAS taskforce that performed a risk analysis for all BAM tenders and projects in the Netherlands, including potential impacts and a roadmap with steps to take anticipating on a lower order intak.

A related issue that impacted BAM in the Netherlands is that of PFAS, a collective name for substances that can be found in soil and surface water. National PFAS legislation is being reviewed by the Dutch government to limit the impact for the construction sector. BAM and other industry participants are cooperating closely with the government on how to build more homes and improve infrastructure, balanced with PAS an PFAS requirements.

Brexit

The United Kingdom is BAM’s second largest home market after the Netherlands. BAM’s activities in the United Kingdom 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. Uncertainty about Brexit continued during the year. Brexit uncertainty persists although recent elections provide some more clarity, leading to potential delay in investments.

Events after balance sheet date

Supervisory Board of Royal BAM Group nv has announced - with a press release of 17 February 2020 - that by mutual agreement it has been decided that Rob van Wingerden will not be nominated for a next term as CEO and member of the Executive Board. In accordance with its contractual obligations, BAM will pay a severance payment of one-year base salary.


Studley Castle historical landmark
Just south of Birmingham, Grade II* listed Studley Castle has been transformed into a hotel. Dating from 1834, the castle has been restored and refurbished and is now the fourteenth hotel of Bourne Holidays group. A new building, with hotel rooms and a restaurant with a banquet hall, connects the monumental building with the old stables located behind. More than two hundred rooms and extensive wellness facilities are housed in the modern hotel of historic character. The team of BAM Construction has worked closely with Bourne Leisure to develop the design and construction strategy to deliver the rejuvenation of this historical heritage. Jon Kitely, BAM’s Construction Manager on this project: ‘We had the opportunity to deliver a redevelopment which will see the rejuvenation of this important local landmark, allowing its story to continue towards, and beyond, it’s 200th anniversary.’

 

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