Annual Financial Report
Source: RNS
Morgan Sindall Group plc ('the Company')
Annual Financial Report
23 March 2023
Further to the release of the Company's Preliminary Results announcement on 23 February 2023, the Company announces that it has today published and issued to shareholders the 2022 Annual Report and Accounts ('Annual Report'), Notice of Annual General Meeting 2023 and Form of Proxy. In addition, it has published its 2022 Responsible Business Data Sheet and 2022 Gender Pay Gap Report. The following documents can be downloaded from the Company's website:
· 2022 Annual Report - https://www.morgansindall.com/investors/reports-and-presentations
· Notice of Annual General Meeting 2023 - https://www.morgansindall.com/investors/annual-general-meeting
· 2022 Responsible Business Data Sheet - https://www.morgansindall.com/investors/reports-and-presentations
· 2022 Gender Pay Gap Report - https://www.morgansindall.com/investors/governance
The Annual Report has been prepared using the single electronic reporting format required by the Transparency Directive Regulation. The Annual Report 2022, Notice of Annual General Meeting, rules of the 2023 Long-Term Incentive Plan and 2023 Share Option Plan, and Form of Proxy 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, 4 May 2023 at the offices of Slaughter and May, One Bunhill Row, London, EC1Y 8YY.
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, 2 May 2023 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, 2 May 2023 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 23 February 2023 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's risk profile continues to be supported by a strong balance sheet and secured workload, and a continued focus on contract selectivity
Our approach
Risk is inherent in our business and cannot be completely eliminated; however, our risk governance model ensures that our principal risks
and robust internal controls are under regular review at all levels.
Group Board
The Board is responsible for setting the Group's risk appetite and for ongoing risk management, including assessing the principal risks that threaten our strategy and performance.
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Audit committee |
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The audit committee assists the Board in monitoring risk management and internal control and by conducting formal reviews of Group and divisional risk registers. |
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Divisional boards |
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Risk committee |
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Each division identifies the risks facing its business and takes measures to mitigate the impacts. Senior managers take ownership of specific risks and ensure that tolerance levels are not exceeded. |
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The risk committee consists of heads of key Group functions, including legal, company secretarial, IT, finance, internal audit, tax, treasury and commercial. The committee identifies risks for the Group risk register and reviews the Group and divisional risk registers before they are presented to the Board and audit committee. The committee ensures that inherent and emerging risks across the Group are identified and managed appropriately. |
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Risk reviews |
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Strategic planning |
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Delegated authorities |
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Divisional reporting |
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Twice a year each division carries out a detailed risk review, recording significant matters in its risk register. Each risk is evaluated, both before and after the effect of mitigation, as to its likelihood of occurrence and severity of impact on strategy. The Group head of audit and assurance follows the same process for identifying and reviewing Group risks, conferring with the risk committee. |
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Risk management is part of our annual business planning process. Each year objectives and strategies are set that align with the risk appetite defined by the Board. Any changes are reviewed at the monthly Group and divisional board meetings to ensure matters are addressed in an ongoing and timely manner. |
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Our finance director and Group head of audit and assurance have produced a schedule of delegated authorities (updated in 2021) that assigns approval of material decisions such as project selection, tender pricing and capital requirements. Board approval is required before undertaking large, complex projects. The approval system is regularly reviewed. |
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The divisional risk registers record the activities needed to manage each risk, with mitigating activities embedded in day-to-day operations for which every employee has some responsibility. Rigorous reporting procedures are in place to monitor significant risks throughout the divisions and ensure they are communicated to the Group's board reporting and delegated authorities process. |
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Internal audit |
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The Group head of audit and assurance reviews and collates the divisional risk registers and draws from them when compiling the Group risk register. An annual review across the Group is undertaken, focusing on significant projects and trends, and areas of concern. |
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Overview of the Group's risk profile
Our markets have continued to receive high levels of government 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 comfort 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 the government's sustained 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
We have witnessed significant inflationary pressures as a result of macro conditions that initially included Brexit and Covid, and more recently include the conflict in Ukraine and the energy crisis.
Despite the considerable challenges presented by these issues, our project teams have managed the impacts well, resulting in minimal disruption to our operations. Our supply chain partners have been very supportive, due partly to the Group's standing in the industry but also, importantly, to the excellent working relationships and practices we have established with them in recent years.
Our preferred and predominant two-stage and negotiated procurement routes help significantly by allowing early collaboration with our clients and supply chain. This enables us to set pricing levels at a very early stage and gives us a great degree of programme certainty. We have also used mechanisms such as contingency allowances and/or indexation provisions on contracts. During construction, we closely monitor the timing of materials deliveries and intervene with support for our supply chain where required.
Inflation has stretched budgets and resulted 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.
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 as well as providing help and assistance where appropriate. We do expect to see further disruption during 2023, but not material.
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 & Infrastructure's long-term focus on selecting the right projects has continued to deliver margins within its target range and a positive cash position and reflects its work over the past few years to improve risk management in all areas of its operation. The division's future order book remains high quality, consisting predominantly of public sector work via two-stage or negotiated procurement routes in established sectors. Contingency allowances and the ability to pass through supply chain costs have been maintained by our preferred procurement routes and our focus on delivering essential and critical infrastructure.
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 2023. Demand remains high as offices are repurposed and the short timescale of most projects assists with control of inflationary measures.
Partnership Housing and Urban Regeneration have continued to see high levels of residential demand during 2022 with sales exceeding expectations across a broad UK portfolio. In the medium term, we are reassured that our housing capability is geared towards the UK's underlying need for housing, and the fact that the homes we build, aimed at the affordable end of the market, should remain in demand.
Looking forward to 2023, there are several macro uncertainties that could put pressure on our residential portfolio. For example, households are faced with rising prices (most notably energy costs), resulting in lower consumer confidence, and government incentives are set to reduce. However, UK structural demand for affordable housing, where most of our portfolio resides, is undiminished, employment prospects remain positive and the political incentive is strong.
Whatever scenarios play out, we have several options available to help mitigate and manage negative fluctuations should they arise. 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 testing, 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.
While we work closely with our local authority partners, challenges relating to planning delays remain an issue for our development programmes.
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 and made provisions, with the cash expected to be expended over the next two to three 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. Given the prevailing circumstances, in most instances we have negotiated with our customers compensation above standard Consumer Price Index, although there will be a lag before the full impact of this is felt.
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 2022, the Board conducted its annual review of the Group's risk appetite and noted that macroeconomic uncertainty, together with inflationary and interest rate headwinds, continues 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 would closely monitor the situation during 2023 and, should the need arise, take appropriate action which the Group is well placed to manage.
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Risk and potential impact |
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Update on risk status |
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Mitigating activities |
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Economic change and uncertainty There could be fewer or less profitable opportunities in our chosen markets including a decline in construction activity caused by macroeconomic weakness.
Allocating resources and capital to declining markets or less attractive opportunities would reduce our profitability and cash generation.
Responsibility: The Board
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Increase 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. · 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 Autumn Statement), 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 throughout the 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 inflationary and interest rate challenges provided government funding continues to accommodate increases. |
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· 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. |
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Risk and potential impact |
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Update on risk status |
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Mitigating activities |
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Exposure to the UK residential market The UK housing sector is strongly influenced by government stimulus and consumer confidence.
Inflationary and interest rate pressures could challenge scheme viability, slowing down our secured order book conversion.
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.
Responsibility: The Board Executive directors Divisional senior management teams |
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Increase 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 high 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. · During 2022, residential sales and volumes returned to pre-Covid levels and, on certain schemes, we accelerated build to meet increased demand. · We have experienced a reduction in sales activity in the fourth quarter of 2022 in line with the rest of the UK housing industry, but underlying demand combined with the geographical characteristics of our portfolio and our affordable housing offering provide some comfort. · Clear government support for new affordable housing continues, which supports our business model and market positioning. · 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; however, current and future government stimuli, such as the stamp duty reliefs and mortgage guarantee scheme for properties up to £600k, complement our product offering. · 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 in the second half of 2023, which should help alleviate affordability issues. |
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· 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 mostly non-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 some 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. |
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Risk and potential impact |
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Update on risk status |
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Mitigating activities |
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We cause a major health and safety incident and/or adopt a poor safety culture Our number one priority is to protect the health and safety of our key stakeholders and the wider public.
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.
Responsibility: The Board Group management team Divisional senior management teams Health and safety forum |
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Stable We made improvements in our safety performance in the first half of 2022, having taken steps to increase health and safety awareness and promote safe behaviours. Our challenge now is 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. · We have continued to reinforce the principles of 'safe by design', where safety is considered throughout the design process. · To address underlying trends contributing to safety incidents, we focused on three areas in 2022: trips, slips and cuts; material handling and storage; and the use of powered/non-powered tools. · We continued to meet the ISO 45001 standard for occupational health and safety. · The divisions took steps to increase awareness and promote safe behaviours. |
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· 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 health and safety forum meets quarterly, 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. · We continue to offer our colleagues a range of benefits that promote physical and mental wellbeing. |
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Risk and potential impact |
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Update on risk status |
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Mitigating activities |
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We fail to attract and retain the talent we need to maintain and grow the business Talented people are needed to provide excellence in project delivery and client service.
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 meet our clients' and other stakeholders' expectations, this could damage our reputation and our ability to secure future work and meet our targets.
Responsibility: The Board Group management team Divisional senior management teams
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Stable 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. Current staff retention is challenged by both social and business-related issues, for example lifestyle changes, poaching and an ageing workforce. · Improvements continue to be made to the working environment and investment made in technology and leadership training. · 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 younger 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. |
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· We give our people empowerment and responsibility together with clear leadership and support. · We offer them a strong Group culture and attractive working environments, remuneration packages, 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. |
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Partner insolvency and/or adverse behavioural change
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.
There is a risk that credit checks undertaken in the past may no longer be valid.
Responsibility: Executive directors Divisional senior management teams
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Increase 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 our partners' balance sheets, leading to a greater likelihood of failure. · As we are less able to rely on historical 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 greater control and transparency. · 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.
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· 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, particularly on commercial clients and supply chain partners, obtaining where necessary relevant securities in the form of guarantees, bonds, escrows and/or more favourable payment terms. · We conduct a formal, multi-stage tender review and approval process before entering into contracts, with a focus on client payment behaviours, cash terms and profiling, and liquidity. · 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. · We monitor our supply chain utilisation to ensure we do not overstress their finances or operational resource. · We rigorously monitor work in progress, debts and retentions.
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Risk and potential impact |
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Update on risk status |
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Mitigating activities |
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Inadequate funding 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.
Responsibility: Executive directors Group tax and treasury director Divisional senior management teams |
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Stable Our committed bank facilities of £180m are in place, £165m until October 2025 and £15m to March 2024, which, coupled with our strong cash position, provide significant headroom. · £180m of bank facilities remained available but undrawn throughout the year. · During the reporting period and for the foreseeable future, our average net daily cash continues to be healthy and clearly 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. |
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· 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. |
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Mismanagement of working capital and investments
Poor management of working capital and investments leads to insufficient liquidity and funding problems.
Responsibility: Executive directors Group tax and treasury director Divisional senior management teams
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Stable 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. · Our ongoing focus on working capital management has enabled us to maintain levels similar to prior years while continuing to improve our supply chain payment practices 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. · The introduction of the VAT reverse charge for construction services in March 2021 had the effect of significantly improving our net cash position. |
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· 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 weekly 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. |
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Risk and potential impact |
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Update on risk status |
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Mitigating activities |
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Poor contract selectivity and/or bidding 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.
Responsibility: Executive directors Divisional senior management teams
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Increase 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 · 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 routes. · Materials availability and inflation have been challenging in the period, requiring significant additional management, but have not resulted in any major issues. This is due largely to our standing in the market, the dedication of our people and supply chain, and our focus on preferred procurement routes. · In construction, inflation is generally managed through negotiated and two-stage procurement routes and the use of project contingencies and/or indexation that allow price increases to be recovered.
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· It is part of our strategy and culture to be selective in our work. · We target 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. · 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. |
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Risk and potential impact |
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Update on risk status |
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Mitigating activities |
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Poor project delivery (including changes to contracts and contract disputes) Changes to contracts 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.
Responsibility: Executive directors Divisional senior management teams
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Increase Our focus on project selectivity, the quality of our order book and our close engagement with our supply chain partners helps reduce the probability of poor performance. Inflationary pressures increase the risk but are considered 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 should help navigate us through significant issues, should they arise. · The pressure on client budgets has increased due to impacts from inflation, which in turn can lengthen preconstruction periods. · The high proportion of repeat, framework-related, two-stage and negotiated work in our current order book continues to reduce the likelihood of forecasting impacts due to delays, unforeseen changes and disputes, meaning we are more likely to achieve sustainable and predictable outcomes. · 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 existing Building Safety Act and related legacy issues, we have completed an in-depth analysis of our portfolios and sought internal and external expert advice. Where there have been concerns over the compliance of cladding materials or with the overall fire safety of buildings, and we are committed to rectifying them, appropriate remedial activity has or will be undertaken and/or expenditure provided for. |
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· 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 Delivery initiatives delivered in Construction and Urban Regeneration 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.
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Risk and potential impact |
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Update on risk status |
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Mitigating activities |
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UK cyber activity and failure to invest in IT 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.
Unlwaactivity continues to increase and, while we are confident in our security strategy, it is continually checked and challenged.
Responsibility: The Board Group management team IT security steering group (reporting to the Group finance director)
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Stable To protect against increasing cyber attacks, we invest in security controls and partners, including liaising with government security advisers. · During the year, we achieved re-certification to ISO 27001 and the government's Cyber Essentials Plus Scheme. · We continue 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 five-year security strategy, to be supported by continuous improvements and annual improvement planning. To ensure we keep pace with change, we provide our IT security steering group with additional funding for new cyber tools as needed. · All our employees have undertaken cyber security training during the year, which includes phishing awareness and testing and focused training for users in key roles. · 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. · Big data, digital construction and analytics are at the forefront of our latest technological developments, and we continue to develop the use of these. Having used leading indicators for some time, we are now 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.
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· 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. · We adopt best practices to secure our people and data. We adhere to the National Institute of Standards and Technology Cybersecurity Framework. · 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. · In 2022, we invested £3.7m in technology and business innovation, £0.6m in cyber security, £1.0m in cloud computing, £1.7m in operational and commercial systems enhancement, £0.4m in customer engagement technologies, and £0.1m in carbon and sustainability management. |
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Risk and potential impact |
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Update on risk status and mitigating activities. |
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Climate change
Responsibility: Executive directors Group management team Divisional senior management teams Group climate action panel |
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Stable 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 2030 goal of net zero.
For detailed information on our climate change governance, risks, mitigations and opportunities, see our Task Force on Climate-related Financial Disclosures on pages 80 to 91 of our annual report.
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