Annual Financial Report
Source: RNS
Morgan Sindall Group plc ('the Company')
Annual Financial Report
21 March 2024
Further to the release of the Company's Preliminary Results announcement on 22 February 2024, the Company announces that it has today published and issued to shareholders the 2023 Annual Report and Accounts ('Annual Report'), Notice of Annual General Meeting 2024 and Form of Proxy. In addition, it has published its 2023 Responsible Business Data Sheet, 2023 Gender Pay Gap Report and 2023 Modern Slavery and Human Trafficking Statement. The following documents can be downloaded from the Company's website:
· 2023 Annual Report - https://www.morgansindall.com/investors/reports-and-presentations
· Notice of Annual General Meeting 2024 - https://www.morgansindall.com/investors/annual-general-meeting
· 2023 Responsible Business Data Sheet - https://www.morgansindall.com/investors/reports-and-presentations
· 2023 Gender Pay Gap Report - https://www.morgansindall.com/investors/governance
· 2023 Modern Slavery and Human Trafficking Statement - https://www.morgansindall.com
The Annual Report has been prepared using the single electronic reporting format required by the Transparency Directive Regulation. The Annual Report 2023, Notice of Annual General Meeting and Form of Proxy in unedited full text have been submitted to the Financial Conduct Authority's national storage mechanism ('NSM') and will shortly be available via the NSM website at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
The Company will hold its Annual General Meeting (AGM) at 10.00am on Thursday, 2 May 2024 at the offices of Morgan Sindall Group plc, Kent House, 14-17 Market Place, London W1W 8AJ.
We are looking forward to seeing shareholders at the AGM in person. The Company will notify shareholders of any changes to the AGM via a Regulatory Information Service and on the AGM page of the Company's website. We encourage shareholders who cannot attend the meeting to submit any questions on the business of the AGM in advance of the meeting by email to cosec@morgansindall.com (marked for the attention of the Company Secretary). We will endeavour to publish (on an anonymised basis) any questions received before 10.00am on Tuesday, 30 April 2024 and our responses to those questions on our website prior to the AGM. Following the AGM, we will publish on our website (on an anonymised basis) the full set of questions received including those received after 10.00am on Tuesday, 30 April 2024 and our answers to those questions. However, we reserve the right to edit questions or not to respond where we consider it appropriate, taking account of our legal obligations.
In accordance with the requirements of Rules 4.1 and 6.3.5 of the Disclosure Guidance and Transparency Rules, a description of the principal risks and uncertainties affecting the Group is set out in Appendix 1 to this announcement. The Company's Preliminary Results announcement released on 22 February 2024 contained all other information required by DTR 6.3.5.
ENQUIRIES:
Morgan Sindall Group plc Tel: 020 7307 9200
Clare Sheridan, Company Secretary
Appendix 1
The Group remains resilient due to our decentralised approach, long-term partnerships, and strong balance sheet and order book.
Overview of the Group's risk profile
Our markets have continued to receive high levels of political support owing to their contribution to the UK economy and underlying demand. In addition, the Group's resilience and agility have been demonstrated during periods of macro disruption, which provides reassurance for the future.
This resilience is the result of a number of factors, including our strong balance sheet, our decentralised approach and ability to respond quickly to change, and our long-term focus on contract selectivity, high quality of delivery, prudent risk management and strong client and supply chain relationships.
The macro environment
UK construction continues to benefit from sustained political commitment to investment, as confirmed in the Autumn Statement, particularly in regeneration, construction and infrastructure (primary areas in the UK targeted for growth). In addition, our diversity of offering protects the business from cyclical changes in individual markets.
Inflation
Macro-induced inflationary pressures have eased, with projects agreed in 2022 now largely completed. Current projects are continuing to benefit from our preferred and predominant two-stage and negotiated procurement routes. These routes allow early collaboration with our clients and suppliers, resulting in more realistic customer budgets and greater pricing stability within the supply chain. In addition, we continue to benefit from mechanisms such as contingency allowances and/or indexation provisions on contracts that enable us to manage risk and predict outturns.
Inflation is still stretching budgets and resulting in some instances of us, our clients and our partners delaying decisions; however, our current order book and predominant public sector and regulated industry focus do offer some resilience, particularly as underlying demand is still strong.
In Urban Regeneration, construction cost inflation has provided additional challenges to the returns on some of its active developments and to the viability of some schemes being evaluated prior to commencement.
Supply chain solvency
There is an increasing risk that our supply chain partners may be trading with strained finances as a result of inflationary and borrowing pressures, compounded by increases in interest rates. Our teams are acutely aware of this and have increased their due diligence and provided help and assistance where appropriate. In some limited circumstances, we have supported key partners with more favourable terms to assist their cash flow while obtaining assurance on production progress and forms of guarantee.
We mitigate our supply chain solvency risk by treating our suppliers as partners and paying them promptly. Building long-term relationships with our supply chain also provides us with a competitive advantage and superior project delivery. In addition, our decentralised structure spreads the risk across different industry sectors, markets and geographical regions.
While we have witnessed some issues in 2023 and expect to see further disruption during 2024, these have not been material to date.
Partnerships and public sector clients
The divisions remain focused on long-term partnerships, our favoured route to market, as it allows us to work with clients and in environments where we have a track record in delivery, enabling more predictable outcomes. In addition, a substantial proportion of our regeneration schemes and construction order book are supported by public sector and regulated industry clients, via frameworks with committed spend and joint venture arrangements secured over the medium to longer term. Our regeneration activities consist mostly of lower-risk, non-speculative arrangements that ensure more efficient use of capital, underpinned by a long-term visible pipeline.
Divisional perspectives
Construction and Infrastructure's long-term focus on selecting the right projects has continued to deliver margins within or above their target ranges together with positive cash positions. This reflects the work of the divisions over the past few years to improve risk management in all areas of their operations. Their respective future order books remain high quality, consisting predominantly of public sector work via two-stage or negotiated procurement routes in established sectors. We have maintained contingency allowances in contract pricing, and our preferred procurement routes allow us to pass through increased supply chain costs.
Fit Out, while more susceptible to GDP and macroeconomic fluctuations, also enjoys a significant proportion of two-stage/negotiated work in its future order book with visibility into 2024. Demand remains high as offices are repurposed and the short timescale of most projects assists with control of any cost pressures.
Partnership Housing and Urban Regeneration have seen residential demand plateauing in 2023. There are several macro uncertainties that could continue to put pressure on our residential portfolio in 2024. For example, households are faced with cost-of-living and affordability challenges, resulting in lower confidence, and government incentives such as Help to Buy are limited. While we work closely with our local authority partners, planning delays remain a challenge for our development programmes. However, UK demand for affordable housing, where most of our portfolio resides, is undiminished, employment prospects remain positive and the incentive of all political parties is strong.
Whatever scenarios play out, we have several options available to help mitigate and manage potential fluctuations. For example, a large proportion of our schemes are in public sector partnerships. These are typically earmarked to improve and accelerate local estate regeneration and they therefore continue to be driven by central and local government, even in declining markets. These schemes are resilient because they are flexible; future phases can be remodelled to meet changing market dynamics, such as changes to the commercial and tenure mix or alternative funding structures. In addition, the schemes are subject to viability tests, eligible for gap funding, include profit-sharing arrangements, allow for alteration in the pace of the build, and include robust risk and capital controls, all of which reduces risk and helps manage expenditure by limiting exposure at key stages of development. As a result, we expect progress in some regeneration projects to slow but not stop.
The Building Safety Act has tightened safety regulations for residential buildings, and we are well advanced in our response to ensure that current live project specifications are compliant. We have investigated issues on past projects, engaged with the Department for Levelling Up, Housing and Communities (DLUHC), signed the developers' pledge, and made provisions, with the cash expected to be expended over the next one to two years. Some of the cash may be recoverable, although this will take time to resolve.
Property Services has been affected in the short term by inflationary pressures and the impact of the time lag between immediate cost increases and the administration of contractual index-linked price adjustments.
Financing
In terms of resourcing our medium- and long-term plans, the Group remains in a strong financial position.
People
Where we are recruiting, we are seeing significant interest in the new positions we have created to help us achieve our strategic objectives. However, we do recognise some challenges associated with changes in lifestyle, cost of living, poaching and an ageing workforce, which we must carefully manage.
A culture where people feel included and empowered continues to be a key ingredient of our success, and our commitments to tackling climate change and delivering social value are key to attracting and retaining the talent we need to grow and sustain the business.
Emerging risks
While our principal risks address shorter-term issues, our strategic planning process includes identifying emerging risks that may affect our ability to deliver our objectives over the medium to longer term. This is supplemented by reviews of any matters likely to impact strategy that take place as part of our twice-yearly internal risk management process and monthly Board reporting.
The following emerging risks are currently being tracked and monitored by the Board. The Board is satisfied with progress being made in these areas, although it will continue to revisit them as matters develop.
· Long-term scarcity of skilled labour in the industry
· Technology's advancing pace
· People's changing work patterns
Principal risks
Our principal risks are those we consider the most significant in terms of potential impact to the business and have been extensively reviewed.
In 2023, the Board conducted its annual review of the Group's risk appetite and noted that macroeconomic uncertainty, inflationary and interest rate headwinds, and supply chain solvency continue to elevate certain risks towards the upper end of appetite. It noted that the Group's current strategy was well suited to deal with these issues; however, given their fluidity, the Board will closely monitor the situation during 2024 and, should the need arise, take appropriate action.
Strategic risk
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A. Economic change and uncertainty |
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Despite economic headwinds, our market sectors remain structurally secure and our balance sheet strong. We believe the diversity of our operations, quality and volume of our pipeline of opportunities, and secured short- and medium-term workload in both regeneration and construction will provide a level of insulation against any specific adverse market conditions where they occur. |
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Risk description |
Update on risk status |
Mitigation |
Change in risk |
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There could be fewer or less profitable opportunities in our chosen markets, including a decline in construction activity caused by macroeconomic shifts.
Allocating resources and capital to declining markets or less attractive opportunities would reduce our profitability and cash generation. |
· Continued scrutiny of UK construction balance sheets underpins our competitive position in the sector and gives confidence to our clients, employees and supply chain. · In a declining market, a strong balance sheet allows us to remain agile, continue to take long-term decisions and respond to opportunities. · The UK is continuing to invest in areas that complement our strategy (as confirmed in the 2023 Autumn Statement and cross-party statements), including affordable housing, education, critical infrastructure and urban regeneration. Our business model is designed to provide a mix of earnings across different market cycles. · The Group has shown strong credentials during recent market turbulence and we expect to navigate any subsequent market fluctuations with limited material disruption. · Our public and regulated sector focus, pipeline and order book, coupled with a strong underlying demand for buildings in these sectors, gives some comfort around macroeconomic challenges, provided that government funding and commitment continues. |
· The diversity of our operations protects against fluctuations in individual markets while our decentralised approach enables our divisions to respond quickly to change. · The Board regularly reviews the economic environment in which we operate to assess whether any changes to the outlook justify a reassessment of our risk appetite or business model. · We stress-test our business plan against the current economic outlook to ensure our financial position is sufficiently flexible and resilient. · We are strategically focused on a high-quality order book underpinned by a strong balance sheet and financial strength. · A high proportion of our secured workload is with public sector and regulated entities via long-term arrangements, with a healthy level of demand and typically preferential terms. · We continue to be very selective and our procurement routes, margins, contract terms and secured workload remain favourable. · We use analytical software to enhance our understanding of our medium-term pipeline quality and risk, enabling us to predict trends more accurately and adjust our strategy in response. |
Stable
Responsibility The Board
Strategic priority · Increase our quality of earnings · Secure long-term workstreams · Maintain a strong balance sheet |
Strategic risk
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B. Exposure to the UK residential market |
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Government support for UK housing needs complements our product positioning. While government housing incentives have reduced, the homebuyer market continues to be supported by employment levels (including job vacancies) which are favourable and expected to remain so over the short to medium term. Headwinds such as interest rate rises and inflation could impact consumer confidence, mortgage availability and loan-to-value ratios. However, our portfolio is geared towards the affordable market which the government is expected to continue to incentivise. |
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Risk description |
Update on risk status |
Mitigation |
Change in risk |
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The UK housing sector is strongly influenced by government stimulus and consumer confidence.
Inflationary and interest rate pressures could challenge scheme viability, slowing down decision-making and project commencement.
If mortgage availability, affordability or consumer confidence is reduced, this could impact on demand, make existing schemes difficult to sell and future developments unviable, reducing profitability and tying up capital. |
· We experienced a reduction in sales activity in 2023. While average sales prices reduced by c£20k, this was due to the increase in the proportion of affordable plots being completed in the year. · In Urban Regeneration, there are short-term viability challenges to navigate due to current inflation and interest rates. We are working through this with our partners and, where necessary, seeking additional gap funding and sources of finance with better terms. We expect progress in some regeneration projects to slow but not stop. · Negative housing dynamics such as a reduction in consumer confidence due to lower real net disposable income could impact sales. · Constrained planning remains a frustration and has the potential to delay our schemes. However, anticipated improvements in the system could allow further efficiencies and increase the speed at which we bring developments forward. · Commentators suggest that household inflation should ease during 2024, which should help alleviate affordability issues. |
· A rigorous, three-stage formal appraisal process is undertaken before committing to development schemes and capital commitments. · We work closely with public sector partners and government agencies such as Homes England to secure extra development funding if required. · We use less speculative, risk-sharing development models, subject to viability conditions, that lessen negative impacts from market fluctuations. · On selected large-scale residential schemes, we seek to forward sell and/or fund sections to targeted institutional investors to reduce risk. · Our residential portfolio has a wide geographical spread, protecting against regional market variations, and is geared towards providing an affordable product. · Rather than building up a land bank, we target option agreements with landowners that limit and/or defer long-term exposure and boost return on capital employed. · We regularly monitor and forecast our pipeline of development opportunities and secured workload, which includes monitoring key UK statistics such as unemployment, lending and affordability. · For a large proportion of current schemes, we have the ability to slow (or accelerate) build rates should the need arise. · Our partnership model provides resilience by allowing us to flex scheme phasing, timing, tenure mix and funding structures to suit varying market scenarios. The model can be de-risked by increasing the proportion of contracting work in Partnership Housing, forming strategic joint ventures and increasing the proportion of affordable units. · Past, present and future government stimuli, such as the Help to Buy scheme, stamp duty relief and mortgage guarantee scheme for properties up to £600k, complement our product offering. |
Increase
Responsibility The Board, executive directors and divisional senior management teams
Strategic priority · Increase our quality of earnings · Secure long-term workstreams · Maintain a strong balance sheet |
Operational risk
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C. We cause a major health and safety incident and/or adopt a poor safety culture |
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Our first priority is to protect the health and safety of our key stakeholders and wider public. We have continued to focus on improving our safety performance by increasing health and safety awareness and promoting safe behaviours. Our challenge is to keep refining our approach to drive further improvement and ensure that everyone who comes into contact with our work, on and off site, goes home safe and well. |
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Risk description |
Update on risk status |
Mitigation |
Change in risk |
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Health and safety will always feature significantly in the risk profile of a construction business. We carry out a significant portion of our work in public areas and complex environments.
Accidents could result in legal action, fines, costs and insurance claims as well as project delays and damage to reputation. Poor health and safety performance could also affect our ability to secure future work and achieve targets. |
· We saw an increase in safety incidents in 2023 due in part to our standards and procedures not always being adhered to. Our divisions will continue to promote safety awareness and safe behaviours as well as reviewing technological solutions to supporting site supervision. · To address underlying trends contributing to safety incidents, we continued to focus in 2023 on trips, slips and cuts; material handling and storage; and the use of powered/non-powered tools. · We have continued to look for trends in safety observations made by people on or visiting our sites and compare them to 'leading indicators' so that we can take a strategic approach to improvement. For example, a trend towards reduced supervision of sites during the summer would be analysed against the pattern of leave commitments of project staff and action taken to ensure that appropriate cover is always maintained. · To supplement the work of our Group protecting people forum (formerly the health and safety forum), we have set up monthly meetings of safety leaders across the divisions, focusing on immediate issues, opportunities and lessons learned as they arise. |
· The Board is responsible for health and safety, which is the first item on the agenda at every Board meeting. In addition, our responsible business committee focuses on our health and safety culture to drive better behaviour and performance. · Individuals in each division, and on the Board and Group management team, are given specific responsibility for health and safety matters. · Our Group protecting people forum meets regularly, with representatives from all divisions sharing best practice and exchanging information on emerging risks. · We have well-established procedures in place including safety systems, audits, site visits, incident investigation and root-cause analysis, monitoring and reporting, and reporting of near-miss incidents and incidents that could potentially have resulted in serious injury. · Our regular health and safety training includes behavioural change, housekeeping on site, and leadership engagement in driving site standards. · Each division's health and safety policy is communicated to all its employees, and senior managers are appointed to ensure the policies are implemented. · We have developed major incident management and business continuity plans, which are periodically tested and reviewed. · All divisions are accredited to ISO 45001 for occupational health and safety. · We continue to offer our colleagues a range of benefits that promote physical and mental wellbeing. |
Increase
Responsibility The Board, Group management team, divisional senior management teams, protecting people forum
Strategic priority · Secure long-term workstreams · Consistently deliver on our Total Commitments |
People risk
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D. We fail to attract and retain the talent we need to maintain and grow the business |
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Our current success is helping us attract and retain people, and in the short to medium term we are focusing on increasing the Group's diversity. Where staff retention is challenged, this tends to be influenced by both social and business-related issues, for example lifestyle changes, poaching and an ageing workforce. |
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Risk description |
Update on risk status |
Mitigation |
Change in risk |
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Skills shortages in the construction industry will remain an issue for the foreseeable future.
If we fail to attract and retain the talent required to excel in project delivery and meet our clients' and other stakeholders' expectations, this could damage our reputation and our ability to secure future work and meet our targets. |
· Improvements continue to be made to the working environment and investment made in technology and leadership training. Our voluntary staff turnover rate was 12% in 2023, compared to 15% in 2022. · We are responding to the challenge of an ageing employee population and undertaking work to improve our diversity and inclusion. · We are considered a leader in the sector in addressing climate emissions, which should help attract new recruits. We also offer an increasing digital emphasis and improved working environments, practices and employment packages. However, it is recognised that the sector has work to do in terms of being attractive and the first choice for young people. |
· We give our people empowerment and responsibility together with clear leadership and support. · We offer them a strong Group culture and attractive benefits, working environments, technology tools and wellbeing initiatives to help improve their working lives. · We conduct employee engagement surveys and monitor joiner and retention metrics including voluntary staff turnover. We carry out annual appraisals that provide two-way feedback on performance, and conduct exit interviews when people leave. · Our succession planning includes identifying and developing future skills. · We provide training and development to build skills and experience, such as our leadership development and graduate, trainee and apprenticeship programmes. |
Stable
Responsibility The Board, Group management team, divisional senior management teams
Strategic priority · Secure long-term workstreams · Excel in project delivery for our clients · Consistently deliver on our Total Commitments |
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Financial and operational risk
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E. Partner insolvency and/or adverse behavioural change |
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Some partners may have been trading with stretched finances following the pandemic, the unwind of government measures introduced to support business recovery, and the reverse charge VAT initiative. More recent inflation and interest rate increases have likely put further pressure on their balance sheets, leading to a greater likelihood of failure. |
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Risk description |
Update on risk status |
Mitigation |
Change in risk |
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An insolvency of a key client, subcontractor, joint venture partner or supplier could disrupt project works, cause delay and incur the costs of finding a replacement, resulting in significant financial loss. |
· Currently the main risk is supply chain insolvency. Some councils' financial issues could delay new opportunities; however, they appear to be supporting ongoing schemes and priority projects such as regeneration and education that align with our business model. · As we are less able to rely on historical supply chain credit checks, our teams have heightened sensitivity and are looking for signs of stress that would enable early intervention and options to resolve. This includes measures to gain transparency and, should a failure occur, afford us a greater ability to step in if needed. · Current UK macroeconomic issues have stretched many of our supply chain partners' balance sheets. However, the strength of our balance sheet gives us the option to step in and help them manage short-term issues, such as cash flow, if and as deemed appropriate. · Our strategy has been to reduce payment days and our supply chain partners regard us as dependable and responsible. In addition, we do not hold any cash in the form of retention from our preferred supply chain partners which helps reduce their cash flow pressures and the likelihood of failure. |
· Our business model and order book are predominantly focused on public sector and regulated industries and commercial customers in sound market sectors, reducing the likelihood of a material customer failure. · We carry out rigorous due diligence preconstruction, particularly on commercial clients and key supply chain partners, including a focus on payment behaviours, cash terms and profiling, and likely liquidity outcomes. Mitigation could include obtaining, where necessary, relevant securities in the form of guarantees, bonds, escrows and/or more favourable payment terms, or even, in some cases, declining a project. · Formal due diligence is carried out when selecting joint venture partners, including seeking protection in the event of default by one of the partners. Joint ventures require executive director approval. · We work with preferred or approved suppliers where possible, which aids visibility of both financial and workload commitments. · Our business model reduces the concentration of supply chain risk as our divisions operate in different markets and geographical regions, using local supply chains. This helps ensure we do not overstress suppliers' finances or operational resources. · We rigorously monitor work in progress, debts and retentions. |
Increase
Responsibility The Board, Group management team, divisional senior management teams
Strategic priority · Maintain a strong balance sheet |
Financial risk
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F. Inadequate funding |
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Our committed bank facilities of £180m are in place, £165m until October 2026 and £15m to June 2026, which, coupled with our strong cash position, provide significant headroom. |
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Risk description |
Update on risk status |
Mitigation |
Change in risk |
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A lack of liquidity could impact our ability to continue to trade, or restrict our ability to achieve market growth or invest in regeneration schemes. |
· £180m of bank facilities remained available but undrawn throughout 2023 and were extended by one year. · During the reporting period and for the foreseeable future, our average net daily cash continues to be healthy and indicates the cash-backed nature of the business. · Our balance sheet continues to provide assurance for our stakeholders and allows us to continue investing in regeneration schemes while remaining selective in construction. |
· We have a Group-led, disciplined capital allocation process for significant project-related capital, which takes into consideration future requirements and return on investment. · We monitor our cash levels daily and conduct regular forecasting of future cash balances and facility headroom. · Our long-term cash forecasts are regularly stress-tested. |
Stable
Responsibility Executive directors, Group tax and treasury director, divisional senior management teams
Strategic priority · Maintain a strong balance sheet |
Financial risk
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G. Mismanagement of working capital and investments |
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Our strong balance sheet and cash position continue to support investment in long-term regeneration schemes and protect against economic downturn, allowing us to make the right long-term decisions. |
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Risk description |
Update on risk status |
Mitigation |
Change in risk |
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Poor management of working capital and investments leads to insufficient liquidity and funding problems. |
· Our ongoing focus on working capital management has enabled us to maintain levels similar to prior years while continuing to maintain payment practices that are favourable to our supply chain and investment in regeneration. · Our cash position is not supported by any form of supply chain debtor finance and gives a clear indication of our financial health. · We continue to maintain a positive momentum in cash management in construction due to a combination of improved returns, cash optimisation and cash conversion. · Our average net daily cash for the period demonstrates our disciplined working capital management. |
· Our delegated authorities require that capital and investment commitments are notified and signed off at key stages with senior-level approval. · We reinforce a culture within our bidding and project teams of focusing on cash returns to ensure they meet expectations. · We monitor and manage our working capital with an acute focus on any overdue work in progress, debtors or retentions. · We monitor cash levels daily and produce regular cash forecasts. · We manage our capital on regeneration schemes efficiently, for example through phased delivery, institutional and government funding solutions, and forward funding where possible. |
Stable
Responsibility Executive directors, Group tax and treasury director, divisional senior management teams
Strategic priority · Maintain a strong balance sheet |
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Operational risk
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H. Poor contract selectivity and/or bidding |
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The quality of our long-term secured workload in our predominantly public and regulated industry sectors should safeguard our future performance, allowing us to continue selecting the right projects. Client budgets have become more stretched and preconstruction periods are taking longer. We continue to maintain sensible contingency levels, although these have narrowed, and there is scope for passing through inflationary costs, particularly on the essential and critical work we carry out. |
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Risk description |
Update on risk status |
Mitigation |
Change in risk |
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In a volatile market where competition is high, a division might accept a contract outside its core competencies or for which it has insufficient resources.
If a contract is incorrectly bid, this could lead to contract losses and an overall reduction in gross margin. It might also damage our relationship with the client and supply chain, leading to a reduction in work volumes. |
· Our order book consists of a high proportion of public sector, regulated industry and framework clients with typically healthier risk profiles and is secured in limited competition. · We have not changed the sectors or markets we operate in and are therefore unlikely to engage in a project outside of our capability. In construction, the majority of our work has been secured via negotiated and two-stage procurement routes1. · Input cost pressures have eased with our older inflation-impacted projects now largely completed and newer projects benefiting from more realistic customer budgets and greater pricing stability in the supply chain. · In construction, inflation is generally managed through negotiated and two-stage procurement routes, the pass through of cost, and the use of project contingencies and/or indexation that allow price increases to be recovered at a future date. |
· It is part of our strategy and culture to be selective in our work by targeting optimal markets, sectors, clients and projects. · We limit our participation in open market bids, conducting a large proportion of our projects via framework or joint venture arrangements with repeat clients who share our values. This provides a high probability of predictable and successful outcomes. · When bidding, we aim for negotiated and two-stage procurement routes that allow us early engagement and collaboration, including the early identification of the most appropriate supply chain delivery partners. · Our divisions select projects according to pre-agreed types of work, project size, contract terms and risk profile. A multi-stage process of bid review and approval includes tender review boards, risk profiling and a system of delegated authorities to ensure approval at appropriate levels of management. · We profile the skills and capabilities required for the project to ensure that we allocate the right people. · Our divisions have processes in place to select supply chain partners who match our expectations in terms of quality, sustainability and availability. · We conduct a robust review of our pipeline and bids at key stages, including rigorous due diligence and risk assessment, and obtain senior-level approval. |
Stable
Responsibility Executive directors, divisional senior management teams
Strategic priority · Increase our quality of earnings · Excel in project delivery for our clients · Secure long-term workstreams · Maintain a strong balance sheet |
1 Negotiated and two-stage procurement routes allow us early engagement in the project and greater visibility, influence and certainty over pricing and programming.
Operational risk
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I. Poor project delivery (including changes to contracts and contract disputes) |
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Our focus on project selectivity, the quality of our order book and our close engagement with our supply chain partners help reduce the probability of poor performance. Inflationary pressures have increased this risk but have been manageable, although stretched client budgets and supply chain finances and any related change in behaviours could increase the risk of disputes and/or failures. However, our longstanding relationships and focus on customer experience help us navigate significant issues when they arise. |
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Risk description |
Update on risk status |
Mitigation |
Change in risk |
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Changes to the scope of works and contract disputes could lead to costs being incurred that are not recovered, loss of profitability and delayed receipt of cash.
Failure to meet client expectations could incur costs that erode profit margins, lead to the withholding of cash payments and impact working capital. It may also result in reduction of repeat business and client referrals.
Not understanding the project risks may lead to poor delivery and could result in reputational damage and loss of opportunities.
Ultimately, we may need to resort to legal action to resolve disputes, which can prove costly with uncertain outcomes as well as damaging relationships. |
· Inflationary pressures have eased, with impacted projects procured in 2022 now largely completed. Newer projects are benefiting from customer budgets that are more aligned with the impacts of inflation; however, in some instances it can take time to remodel a scheme to ensure it is viable and this can lengthen the preconstruction period. · There is a recognised shortfall in the construction labour market, exacerbated by impacts from Covid and Brexit. However, in the short term, while we have seen issues, we, together with our supply chain, are managing the situation. · We have responded to the Building Safety Act, which primarily deals with building regulations and fire safety, with Construction, Partnership Housing and Urban Regeneration having updated their methodology to ensure that project specifications remain compliant. This includes a complete refresh of design management and procedures, increased on-site scrutiny and records, and engagement of independent fire consultants on more complex schemes. · In terms of the Building Safety Act and related legacy issues, we completed in-depth analyses of our portfolios, engaged with the DLUHC, signed the developers' pledge and made provisions, with the cash expected to be expended over the next one to two years. Some of the cash may be recoverable, although this will take time to resolve. Where there have been concerns over the compliance of cladding materials or with the overall fire safety of buildings, and we have committed to rectifying them, appropriate remedial activity has or will be undertaken and/or expenditure provided for. |
· We have well-established systems of measuring and reporting project progress and estimated outturns that take into account contract variations and their impact on programme, cost and quality. · The strength of our supply chain relationships and preference to work with selected partners reduces the probability of project failure and helps to ensure we deliver predictable outcomes. · Where legal action is necessary, we notify the Board, take appropriate advice and make suitable provision for costs. · Formal internal peer risk reviews highlight areas of improvement and share best practice and lessons learned. · Various Perfect Delivery1 initiatives focus on improvements in product quality and predictability and client experience. · Regular formal and informal stakeholder feedback allows us to intervene when required and refine our offering to provide exceptional outcomes. · We continue to use and enhance our digital project management tools and commercial metrics that highlight areas for focus and provide early warnings, enabling early intervention in the construction cycle. · Our divisions have worked closely with our supply chain for many years, providing predictable workloads and prompt payment. Maintaining good supply chain relationships has helped us navigate labour and/or materials availability issues. |
Stable
Responsibility Executive directors, divisional senior management teams
Strategic priority · Increase our quality of earnings · Excel in project delivery for our clients · Secure long-term workstreams · Maintain a strong balance sheet |
1 Perfect Delivery status is granted to Construction, Infrastructure and Fit Out projects that meet all four client service criteria specified by the division.
Operational risk
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J. Cyber activity and failure to invest in IT |
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To protect against increasing cyber attacks, we invest in security controls and partners, including liaising with government security advisers. |
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Risk description |
Update on risk status |
Mitigation |
Change in risk |
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Investment in IT is necessary to meet the future needs of the business in terms of expected mobility, growth, security and innovation to enable its long-term success.
It is also essential to avoid a cyber incident that could cause reputational and operational impacts and/or a loss of data or intellectual property that could result in significant fines and/or prosecution.
Criminal activity continues to increase and, while we are confident in our security strategy, it is continually checked and challenged. |
· During the year, we re-certified to ISO 27001 and the government's Cyber Essentials Plus Scheme. · We have continued to enhance our visibility of security events and 'indicators of compromise' (signs of a data breach) using the latest technologies. · The Board has agreed a rolling security strategy, supported by continuous improvement and review, to ensure we remain aligned with emerging risks and changes to the threats we face. Our IT security steering group is provided with additional funding as needed. · As part of our 'Digital Resilience' programme, we ran several workshops, hosted by industry experts, to educate key stakeholders around incident response best practices. These focused on business impacts of a major incident as well as technical and legal aspects. · Big data, digital construction and analytics are at the forefront of our latest technological developments, and we continue to develop the use of these, in addition to exploring Generative AI. Having used leading indicators for some time, we are trialling predictive tools to help identify issues early in the construction cycle, including programme, technical and commercial issues, and to enhance our current safety practices. · In 2023, we invested in technology and business innovation, cyber security, cloud computing, operational and commercial systems enhancement, customer engagement technologies, and carbon and sustainability management. |
· We have a dedicated Group team focused on providing a stable and resilient IT environment with continued investment in core infrastructure, security and applications. Our divisional IT teams focus on business- specific product support. · Our IT security steering group presents an update to the Board on a biannual basis to ensure oversight and challenge. · We adopt best practices to secure our people and data. We adhere to the National Institute of Standards and Technology Cybersecurity Framework. · We commission an external industry expert to conduct regular cyber risk analysis on every device used in our network. The data collected is independent of our other security systems and acts as an audit of our security controls and their effectiveness. · We engage with industry-leading partners to adopt appropriate technologies to protect the Group. · Our IT security steering group provides governance and oversight of the Group's cyber strategy and strength, resources and funding. · We run regular audits using different parties (both technical and non-technical) to confirm that our controls remain effective. Audit reports are shared with the IT security steering group. · We train all our employees in data protection and information security including awareness and responsibilities. · Our investment in IT enables all our people to work remotely and securely with minimal inconvenience. |
Stable
Responsibility The Board, Group management team, IT security steering group (reporting to the Group finance director)
Strategic priority · Increase our quality of earnings · Excel in project delivery for our clients · Secure long-term workstreams · Maintain a strong balance sheet |
Strategic and operational risk
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K. Climate change |
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We have been recognised as leaders in our sector for our work in reducing carbon emissions. However, there is still much to do as we progress towards our 2045 goal of net zero. |
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Risk description |
Update on risk status |
Mitigation |
Change in risk |
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For detailed information on our climate change risks, mitigations and opportunities, see our 2023 annual report on our website for our Task Force on Climate-related Financial Disclosures. Our 2023 annual report sets out our climate governance, indicating Board oversight and management's responsibilities. |
Stable
Strategic priority · Secure long-term workstreams · Consistently deliver on our Total Commitments |
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