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Morgan Sindall Group plc ('the Company')
Legal Entity Identifier (LEI) number: 2138008339ULDGZRB345
Annual Financial Report
24 March 2022
Further to the release of the Company's Preliminary Results announcement on 24 February 2022, the Company announces that it has today published and issued to shareholders the 2021 Annual Report and Accounts ('Annual Report'), Notice of Annual General Meeting 2022 and Form of Proxy. In addition, it has published its 2021 Responsible Business data sheet and 2021 Gender pay gap report. The following documents can be downloaded from the Company's website at www.morgansindall.com:
· 2021 Annual Report - https://www.morgansindall.com/investors/reports-results-and-presentations
· Notice of Annual General Meeting 2022 - https://www.morgansindall.com/investors/shareholder-centre/agm
· 2021 Responsible Business data sheet - https://www.morgansindall.com/investors/reports-results-and-presentations
· 2021Gender pay gap report - https://www.morgansindall.com/who-we-are/governance
The Annual Report 2022 has been prepared using the single electronic reporting format required by the Transparency Directive Regulation. The Annual Report 2021, Notice of Annual General Meeting 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 at 10.00am on Thursday, 5 May 2022 at the offices of Slaughter and May, One Bunhill Row, London EC1Y 8YY.
We are looking forward to seeing shareholders in person again after last year's closed meeting. However, if Government restrictions on public gatherings are reintroduced before the date of the AGM, we may need to revisit the arrangements for the AGM, in which case an update will be issued via Regulatory Information Service and on 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 [email protected] (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, 3 May 2022 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, 3 May 2022 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 24 February 2022 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. Following initial Covid issues, all divisions are fully operational. We recognise there may be subsequent waves and remain vigilant. However the Group is well placed to maintain future activity without material disruption.
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 to appropriate levels of management. Such decisions include 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
We have not had to make any significant change to our business model or the markets in which we operate as a result of Brexit, Covid or increasing carbon regulations. Indeed our markets have largely continued to receive high levels of government support owing to their contribution to the UK economy and underlying demand. In addition, the Group has demonstrated resilience and agility during these periods, which provides comfort should future events occur.
This resilience is a result of a number of factors, including 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. Should any further restrictions come into place as a result of Covid variants, our strict adherence to safe operating procedures, together with the government's clear directive that construction activity should continue, give us confidence that future activity can be maintained without material disruption.
The macroenvironment
UK construction continues to benefit from sustained government investment commitments, confirmed in its Spending Review and National Infrastructure Strategy, both of which continue to support our business model, particularly in housebuilding and regeneration (primary UK areas targeted for growth) and construction and infrastructure. In addition, our diversity of offering protects the business from cyclical changes in individual markets.
Materials availability and inflation
We have witnessed significant materials demand and inflationary pressures as a result of the discrepancy between high demand and lagging supply, dwindling product stockpiles, logistical challenges and a particularly busy housing market. 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 the client and supply chain and providing increased price and programme certainty. Outside of these arrangements, other options available include contingency allowances and/or indexation provisions on contracts. During construction, we closely monitor the procurement and delivery of materials and intervene with support for our supply chain where required.
In limited cases, inflation has stretched budgets and resulted in us, our clients and our partners delaying decisions; however, our current order book and predominant public sector focus do offer some resilience, particularly as underlying demand is still strong.
There is a risk that some supply chain partners may be trading with strained finances as a result of inflationary pressures compounded by the introduction of the VAT reverse charge and unwind of government pandemic measures. Our teams are aware of this and are increasing their due diligence as well as providing support where appropriate. We do expect to see some disruption during 2022, 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, thereby enabling more predictable outcomes. In addition, a substantial proportion of our regeneration schemes and construction order book are supported by public sector and regulated clients, via frameworks and joint venture arrangements secured over the medium to longer term. Our regeneration activities consist mostly of lower risk, nonspeculative 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 resulted in its underlying margin and positive cash position and reflects the work of the division over the past few years to improve risk management in all areas of its operation. Construction & Infrastructure's future order book predominantly consists of public sector work via two-stage or negotiated procurement routes.
Fit Out, while more susceptible to GDP and macroeconomic fluctuations, also enjoys a high level of two-stage/negotiated work within its order book. Despite predictions of the demise of the office as a result of the pandemic, the division has not witnessed any significant change in client behaviour; on the contrary, its order book is at record levels and its pipeline shows good visibility into the early part of 2022.
Property Services has resumed normal levels of activity following Covid restrictions. Any future challenges around access to properties should be manageable by adhering to strict operating procedures.
Partnership Housing and Urban Regeneration continue to witness high levels of residential demand with sales exceeding expectations across a broad UK portfolio. Following the challenges that accompanied the start of the pandemic, the speed of decision-making by potential partners for new development schemes improved during 2020 and is now back to normal levels. While we work closely with our local authority partners, challenges relating to planning delays continue to have the potential to impact development programmes. Our work in preparation for the government's Building Safety Bill, which will tighten safety regulations for residential buildings, is well advanced, with key divisions having reviewed and updated their methodology and approach to ensure that project specifications are compliant and quality is maintained.
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, remain in demand. This is currently reflected in the high level of forward reservations into 2022.
There are a number of macro uncertainties, such as inflation, reductions in government incentives and increases in interest rates that could put pressure on our residential portfolio. However, mortgage availability and employment prospects remain positive and options are available to help mitigate and manage any negative fluctuations should they arise. The majority of our schemes are subject to viability conditions, are eligible for gap funding and include profit-sharing arrangements which reduce our risk. In addition, future phases can be remodelled or deferred, the pace of build can be accelerated or reduced, robust risk and capital controls are in place to manage exposure, and there is the possibility of further government interventions to help stimulate the market.
Financing
In terms of resourcing our medium- and long-term plans, the Group remains in a strong financial position.
People
Voluntary employee turnover within the divisions is at healthy levels and where we are recruiting, we are witnessing significant interest in the new positions we have created to help us achieve our strategic objectives. A culture where people feel included and empowered continues to be a key ingredient of our success and initiatives such as our commitment to reduce climate impacts and tackle responsible business topics are considered key in our ability to attract and retain the talent we need to grow the business.
Emerging risks
The Group's 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 additional reviews that take place as part of our twice-yearly internal risk management process and monthly Board reporting, which focus on any matters likely to impact the Group's strategy. We consider the following emerging risks to be significant but not to require any adjustment to our strategy. However, we will continue to monitor these risks for any significant changes.
· Covid's impact on office demand
· Long-term scarcity of skilled labour in the industry
· Technology's advancing pace
· Government's approach to building safety
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. The risks have not changed significantly: those that have changed reflect UK macroeconomic uncertainty and inflationary headwinds that require navigating, which the Group is well placed to manage. In 2021, the Board conducted its annual review of the Group's risk appetite and concluded that no significant changes had occurred.
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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 and/or further UK lockdowns.
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 possible economic headwinds, our market sectors remain structurally secure which, together with our strong balance sheet and short- to medium-term secured workload, provides comfort. We believe the quality and volume of our pipeline of opportunities and secured workload in both regeneration and construction will provide a level of insulation against any specific adverse market conditions should they occur. · The continued scrutiny of UK construction balance sheets underpins our competitive position in the sector and gives confidence to our clients, employees and supply chain. · The UK is expected to continue investing in areas that complement our strategy, including affordable housing, infrastructure and regeneration. Our business model is designed to provide a mix of earnings across different market cycles. · The Group has shown strong credentials throughout the pandemic and we expect to navigate any subsequent variant waves without material disruption. · Our public and regulated sector focus, pipeline and order book, coupled with a strong underlying demand for buildings in these sectors, provides some comfort around inflationary challenges provided government funding continues to accommodate price 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, 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 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 housing and the dynamics of underlying demand complement our product positioning. Cost inflation continues to challenge viability, although it has been manageable to date. While government housing incentives have reduced, homebuyers continue to be supported by mortgage availability, employment levels (including high job vacancies), wage growth and loan-to-value ratios which are favourable and expected to remain so over the short to medium term. · Residential sales and volumes have returned to pre-Covid levels and, on certain schemes, we have accelerated build to meet increased demand. · Some tapering is expected into 2022 but underlying demand is still expected to be healthy which, combined with the geographical characteristics of our residential portfolio, should help even out any regional imbalances, should they occur. · There continues to be clear government support for new affordable housing, which supports our business model and market positioning. · In Urban Regeneration, there are short-term viability challenges to navigate while inflationary costs get absorbed into the consumer market. · Negative housing dynamics such as a reduction in consumer confidence (or the prospect of increased interest rates) could impact sales; however, government stimuli, such as 'Help to Buy: Equity Loan' and the recently introduced 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 the speed at which we bring development forward. · There are some headwinds to navigate including the prospect of a further increase in interest rates, although this is from historic lows and expected to remain gradual if applied (all highly uncertain as the government seeks various options to tackle the post-pandemic economy). In terms of household inflation, commentators suggest that this should ease in the second half of 2022 which should help alleviate affordability issues. |
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· A rigorous, three-stage formal appraisal approval 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 any negative impacts from market fluctuations. · On selected large-scale residential schemes, we seek to forward sell and/or fund sections to targeted institutional investors in order to reduce risk. · Our residential portfolio has a wide geographical spread, offering protection against regional market variations, and is geared towards providing an affordable product. · Rather than building up a land bank, we prefer to 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 in our portfolio, we have the ability to slow down (or accelerate) build rates should the need arise. |
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Climate change The Group's key environmental impact is via the carbon emissions and waste that we produce.
Our activities can be impacted by changes in temperature, high winds from increasing severity of storms and flooding.
We have not needed to change our business model in response to any longer-term impacts associated with climate change. However, we do need to ensure that we can adapt to the changing needs of our clients and maintain the necessary credentials to be awarded work.
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. · We are considered leaders in our sector in addressing climate change and have been independently recognised as such, having received a leadership score of A from CDP. · We introduced an internal carbon charge in 2020 to help encourage our divisions to reduce their own emissions. The money raised will be used to fund future climate change initiatives. · We are working with our supply chain to encourage and support them in reporting their own emissions so that we can have a better understanding of our wider Scope 3 emissions and can introduce meaningful reduction plans. · During 2020, we introduced CarboniCa, a tool that calculates building carbon footprints and lifecycle emissions and suggests alternative lower-carbon methods. We are currently optimising the tool with a software solution and discussing its future development with leading industry and technology innovators. · Our credentials in responding to climate change ensure we can support clients with the tools and capability needed to meet their requirements and maintain and/or grow our work-winning capability and market share. · We retain a cautious approach in using new products and techniques to reduce the impact of climate change until sufficiently proven. This is to avoid overpromising and possible latent defects that could ultimately prove costly. |
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· Our divisions are responsible for delivering relevant actions to meet our net zero target and for day-to-day management of climate-related risks and opportunities. · Our carbon action panel shares best practice on climate-related matters. · We have accredited science-based targets. · All our construction divisions have ISO 14001-compliant environmental management systems in place. · Engaging with consultants and specialists during our project planning phase to ensure that climate impacts such as flood risk are considered. · Avoid building on floodplains and areas at high risk of increased physical climate impacts and are actively involved in securing pipeline projects relating to climate-change adaptation (such as flood resilience projects). · Climate change presents opportunities for the Group including government plans to increase spend in infrastructure, repurposing existing buildings and the ability to attract clients through our track record in delivering climate-related solutions. |
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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 Health, safety and environment committee Divisional senior management teams |
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Stable We were disappointed with our safety performance in the first half of 2021 and took steps to remedy this. As a result, we witnessed improvements during the second half, when the number of RIDDOR and lost time incidents reduced. · We continued to manage the challenges posed by Covid and changes to government guidance, ensuring we remained aligned to the Construction Leadership Council's site operating procedures. · We have applied the principles of 'safe by design', where safety is considered throughout the design process. · The divisions took renewed steps in the year to increase safety awareness and promote safe behaviours, including campaigns to prevent hand injuries and remind people of the need to tether tools and maintain tidy sites. Construction developed an animation, 'Introduction to 100% Safe', and developed new 'Behavioural Essentials' e-learning modules for its employees and supply chain. · We increased our occupational health surveillance with the end objective of eradicating incidents of hand-arm vibration and noise-induced hearing loss. · Our divisions will continue to share learning, innovation and best practices and work together to reduce the overall number of accidents, with the following initiatives being considered in 2022: · Construction: visualisation of information and guides, which the division has found to result in better uptake than text-based versions; - Infrastructure: shifting the focus from accidents to high potential incidents; - Fit Out: new safety improvement plan on the theme of 'site conditions'; - Property services: prioritising reducing hand injuries, with particular attention to cuts; and - Partnership Housing: improving adherence to high-risk trade supervisor-to-worker ratios and maintaining absolute focus on root cause investigation and escalation procedures. |
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· We have a Board health, safety and environment committee that 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 share 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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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 we are focusing on increasing the Group's diversity. · 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.
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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 be trading with stretched finances following the pandemic and the unwind of government measures that were introduced to support business recovery. More recent inflationary effects are likely to have increased the pressure on our partners' balance sheets which could lead 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. · The reverse-charge VAT initiative has stretched many of our supply chain partners' balance sheets. However, the strength of our balance sheet gives us the option to step in and cover short-term supply chain issues, such as cash flow, if deemed appropriate. · Our strategy has been to reduce payment days (our average time to pay is 27 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 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 and liquidity. · Formal due diligence is carried out when selecting joint ventures, 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: The Board Group tax and treasury director Divisional senior management teams |
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Decrease Our committed bank facilities and strong cash position provide significant headroom. · £180m of bank facilities are undrawn and are committed until 2024. · 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 schemes while remaining selective in construction.
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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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Decrease 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 government's introduction of the VAT reverse-charge has positively impacted our year-end net cash by c£66m.
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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 should safeguard our future performance, allowing us to continue selecting the right projects. · 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, a high proportion 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, inflationary influences have in general been isolated to projects secured in the first quarter of 2021 and starting in the second. The main impact has been the full expenditure of project contingencies to accommodate the inflation. Projects procured during and after the second quarter have incorporated inflation allowances and supply chain commitments.
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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 routes1 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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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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Stable Our focus on project selectivity and the quality of our order book and supply chain partners reduce the probability of poor performance. Inflationary pressures increase the risk but are considered manageable. · The high proportion of repeat, framework-related, two-stage and negotiated work in our current order book continues to reduce the likelihood of 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 a limited number of issues, we, together with our supply chain, are managing the situation. · 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. · In advance of the proposed Building Safety Bill which primarily deals with building regulations and fire safety, Construction and Urban Regeneration have updated their methodology to ensure that project specifications remain compliant. This includes a complete refresh of design management and procedures, increased onsite scrutiny and records and engagement of independent fire consultants on more complex schemes.
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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 allow 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. · Following the Grenfell Tower tragedy, all our divisions undertook an in-depth analysis of their portfolios. Expert advice was sought to review compliance with legislation at the time of construction and in the context of amendments made to the building regulations in 2018. Where there have been concerns over the compliance of cladding materials or with the overall fire-safety of buildings, appropriate remedial activity and expenditure has been undertaken to rectify these. · In common with the rest of the industry, the Group will begin paying the Residential Property Developer Tax in 2022.
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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 information technology 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 significant 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.
There continues to be an exponential increase in unlawful activity 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 UK cyber-attacks, we invest in security controls and partners, including government security advisers. · During the period we achieved re-certification to ISO 27001 and the government's Cyber Essentials Plus Scheme. · We have enhanced our visibility of security metrics using new technology. · We have an established security improvement plan in place and, to ensure we keep pace with change, have provided our security steering group with additional funding to introduce new cyber tools as needed. · All our people have undertaken cyber security awareness training during the year. · 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. · Big data, digital construction and analytics are at the forefront of our latest technological developments and we continue to develop the use of these. The next steps will be to develop 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 Science and Technology's Cybersecurity Framework. · We engage with industry-leading partners to adopt appropriate technologies to protect the Group. · Our 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 security steering group. · We train all our people in data protection and information security including awareness and responsibilities. · Our investment in IT enables all our people to work remotely with minimal inconvenience.
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