Business risks

The Group’s risk management framework requires all Divisions and operating companies within them to identify and assess the key risks facing their business which could impact on their ability to deliver their objectives. The Group, divisions and each operating company maintains a risk register which is used to document the key risks facing the business together with an assessment of the likelihood and impact of that risk occurring as well as an assessment of the effectiveness of the key controls in place to mitigate the risk. Actions plans are developed and put in place to mitigate unwanted exposures. These risk registers are regularly reviewed to identify new risks as they arise and to monitor the action plans.

How we manage risk and assurance

The Board is responsible for the Group’s system of risk management and internal control and the Group risk management framework sets out the mechanism and reporting structure to ensure that key risks are continually monitored and any action plans to mitigate the risks are reviewed.

The Board has delegated to the Audit Committee the responsibility for reviewing the effectiveness of the Group’s internal controls including the systems established to identify, assess, manage and monitor risk. In addition to the ongoing monitoring of risk and controls, a report detailing the key risks together with an assessment of the controls in place to mitigate these risks and any action plans is prepared annually and reviewed by the Audit Committee. The last report was prepared in March 2011 and reviewed at the June 2011 Audit Committee meeting. The Board has concluded that the Group maintained sound risk management and internal control systems throughout the year to June 2011.

Other processes of assurance are managed through Group Standing Orders (updated in January 2011) the Board, the Executive Management Team, a range of Group policies and several central function committees including the Group Corporate Responsibility steering committee and the Group Health, Safety and Environment steering committee, both being chaired by the Chief Executive Officer and reporting regularly to the Board.

Principal risks

The nature of the industry and the business environment in which the Group operates is inherently risky and a number of risks and uncertainties exist. Although it is recognised that it is not possible to eliminate all such risks and uncertainties, the Group has well established risk management and internal control systems to manage them.

The Group’s established risk management and internal control systems have helped it to respond to the changing business environment and the challenges presented during the year.

Risk

The order books for our Construction and Services divisions are dependent upon the level of expenditure in the public sector and the availability of credit for private sector expenditure. Instability in global exchange rates could significantly escalate material and fuel prices, thereby putting pressure on some project cost forecasts.

Mitigation

The Group has created a structure to manage and mitigate risk with the following key components:

• A wide geographic regional network of offices across the UK providing strong integration into local communities, our client base and our supply chain
• A strong level of framework agreements and partnerships with government, local authorities and the private sector
• An ability to react to evolving opportunities in the marketplace and to maintain a focus on cost reduction and efficiency.

We also carry out monthly and quarterly reviews of our workload and forecast our overhead levels as a percentage of future work in order to maintain a steady ratio of overhead costs to revenue. Fuel and other materials that are in high demand, such as steel, are hedged or forward-purchased when deemed necessary. In addition our terms and conditions include inflation and/or escalation clauses as standard.

Risk

The Group carries out several hundred contracts annually and the risks to which the Group is exposed are dependent upon the nature of the work, the duration of the contract and the legal form of the contract.

Mitigation

The Group’s appetite for very long-term, large, competitively tendered construction contracts is limited, driven by the desire to maintain quality of workload and manage risk. Tenders for contracts are subject to approval by the Board, chief executive and finance director or divisional directors depending upon the value and nature of the contract. Contracts in progress are controlled and managed through the Group’s operating structure and procedures including rigorous and regular review of the forecast revenue and costs to complete.

Risk

The cost and quality of property and land is fundamental to the profitability of a property development and housing business.

Mitigation

Site evaluation is a key process and site appraisals are carried out in detail, including using external advice where appropriate. Land and development acquisitions are subject to approval by the Board, chief executive and finance director or divisional directors depending upon the value of the land. Developments in progress are controlled and managed through the Group’s operating structure and procedures including rigorous and regular review of the forecast financials and sales activity.

In the case of the Property division, development risk is controlled by ensuring construction generally commences once the division has either pre-sold or pre-let key elements of the development.

Risk

The Group recognises there are risks associated with PFI investment.

Mitigation

The Group is selective in the PFI projects it bids for, primarily concentrating on the sectors where we have established construction and facilities management expertise.

Risk

The Group is dependent on members of its senior management team and on a flexible, highly skilled and well-motivated workforce and believes its future success will depend, in part, on its ability to attract, develop and retain its people. If the Group does not succeed in attracting, developing and retaining skilled people it may not be able to grow the business as anticipated.

Mitigation

The Group monitors staff turnover closely and pay and conditions are reviewed regularly against the prevailing market and benchmarked to ensure that we remain competitive.

Succession planning and staff development are key at all levels in the Group.

Risk

The Group is subject to a number of complex, demanding and evolving tax, legal and regulatory requirements. A breach of laws and regulations could lead to legal proceedings, investigations or disputes resulting in a disruption of business ranging from additional costs incurred on a project to civil and/or criminal penalties as well as reputational damage. The recent Bribery Act 2010 also has the potential to impact upon the business, especially given its international remit for UK corporates.

Mitigation

The Group monitors and responds to legal and regulatory developments in the areas in which it operates. It is the Group’s policy to require that all of its subsidiaries, employees, suppliers and subcontractors comply with applicable laws, regulations and standards. Training courses are provided, including e-learning courses, to keep all parties fully aware of their responsibilities. The Group has a zero tolerance policy to bribery and corruption and has undertaken a Group-wide training programme to raise awareness of the Bribery Act 2010.

Risk

The Group’s activities require the continuous monitoring and management of health, safety and environmental risks. Failure to manage these risks could cause injury to our employees and subcontractors and could expose the Group to significant potential liability and reputational damage.

Mitigation

Detailed HSE policies and procedures exist to minimise such risks and are subject to review and monitoring by the operating companies and Group. All operating companies have a director responsible for HSE; however it is recognised that all of our directors and employees are responsible for health and safety.

Risk

The efficient operation of the Group is increasingly dependent upon the proper operation, performance and development of its IT systems. Failure to manage or integrate IT systems or failure to successfully implement changes in IT systems could result in a loss of control over critical business information and/or systems. This, in turn, could impact the Group’s ability to fulfil its contractual obligations.

Mitigation

Group IT centrally manages the majority of systems across the Group. Other IT systems are managed locally by experienced IT personnel. Significant investments in IT systems are subject to Board review and approval.

Risk

The Group is exposed to funding risks arising from changes in longevity, inflation and investment assumptions in relation to its defined benefit schemes. These changes could result in an additional funding requirement.

Mitigation

Steps have been taken over time to eradicate our calculated deficit including the closure of the Group’s pension scheme to new entrants in 2002, the composition of a cap on pensionable salary increases, taken in 2009 and the change in inflation assumption, from RPI to CPI, taken in 2011. Other measures to mitigate liabilities are under continuous review by the Group.

The performance of the Group’s pension scheme is regularly monitored by the Group and the Trustees of the pension scheme who, as appropriate, take advice from external consultants.

Risk

The Group depends, for its success, on the stability of its customers, joint venture partners, suppliers, subcontractors, funders, bondsmen and insurers. Failure in these counter parties could result in non-collection of amounts owed or disruption and delays to contract progress.

Mitigation

Considerable efforts are made to assess the financial strength of counter parties before entering into contract and to structure payments so as to mitigate our financial exposure to them for the duration of our relationship. Where the Group is particularly dependent upon the continued financial strength of the providers of key financial services to the Group, we take steps to spread this exposure across a range of counter parties so as to diversify risk.

Risk

The Group’s long-term business is dependent upon cash resources, facilities and the ability to provide performance and other bonds as necessary.

Mitigation

Cash forecasts and balances are prepared regularly (weekly and daily). Bank facilities are in place which have been recently renegotiated and extended. The Group has strong, long-term relationships with its bondsmen and has an in-house team which monitors headroom and advises on bond terms and conditions.

Risk

The Group’s ability to tender for new business and our relationship with our range of customers, supply chain partners, our employees and other stakeholders greatly depends on the good reputation that we have established and how we are perceived by others.

Mitigation

In order to protect and enhance our reputation we have a robust series of business ethics, sustainability and compliance policies together with a range of mechanisms that help deliver the Group’s corporate responsibility programme, including health and safety, environmental impact, climate change, employees, customers and supply chain and community engagement.