Balfour Beatty plc Annual report and Accounts 2014

What impact it might have

Failure to manage these risks could result in harm to, or even the death of, employees, subcontractor staff and members of the public, as well as potential criminal prosecutions, debarment and reputational damage.

How it is mitigated

Balfour Beatty has detailed health and safety policies and procedures to minimise such risks. These are reviewed and monitored by management and external verification bodies.

Each division has experienced health and safety professionals who provide advice and support and undertake regular reviews. A Safety Executive committee meets regularly throughout the year to develop a consistent approach to health and safety best practice.

During 2014, business units continued their work on implementing the Group's Global Safety Principles across all of their operations and projects (see page 36).

What impact it might have

Any significant changes in the level or timing of customer spending or investment plans could adversely impact the future order book. Such changes could arise from changes in government policy or customers' failure to secure financing for future projects or for future stages of existing projects.

Failure of a customer, including any government or public sector body, could result in not collecting amounts owed.

How it is mitigated

The Group's strategy to focus on the more resilient and stable infrastructure markets and geographies will help mitigate this risk.

The effect of spending changes in any one market is mitigated by the Group's broad exposure to infrastructure markets across the

globe and the continued need for infrastructure spending. It also mitigates the effects of such market conditions by continuing to adapt its business model.

It is essential that the financial solvency and strength of counterparties is always considered before contracts are signed and this is a specific focus in the current economic climate. During the life of a contract such assessments are updated and reviewed whenever possible. The business also seeks to ensure that it is not over-reliant on any one counterparty.

What impact it might have

Failure to estimate accurately the risks, costs, time to complete, impact of inflation and contractual terms and how best to manage them could cause financial losses.

In the event of disagreement with, failure of, or poor delivery performance by a joint venture partner, the Group could face financial and reputational risks.

If any of the assumptions behind investment decisions prove incorrect, the profitability of those investments could be reduced.

How it is mitigated

All bids are subject to rigorous estimating and tendering processes within the risk management framework.

This revised framework comprises a number of approval and review gates that cover the business lifecycle from initial project pursuit through to completion (see page 30).

The Group has defined delegated authority levels for approving all tenders and infrastructure investments.

Reviews are conducted following all tenders to ensure lessons are learnt and applied to future tenders.

Before entering into a joint venture agreement the Group reviews the relevant skills, experience, resources and values of joint venture partners to understand how they complement its own.

Investment appraisals are performed and reviewed by experienced professionals. The Group analyses the risks associated with revenues and costs and, where appropriate, establishes contractual and other risk mitigations.

What impact it might have

Failure to manage or deliver against contracted customer requirements on time and to an appropriate quality could result in issues such as contract disputes, rejected claims, design issues, liquidated damages, cost overruns or failure to achieve customer savings - which in turn harm Balfour Beatty's profitability and reputation.

Execution failure on a high-profile project could result in significant reputational damage and costs.

How it is mitigated

It is essential that each business area has defined operating procedures to address the risks inherent in project delivery. In addition, the revision of the Group risk management framework and increased controls aid identification and quantification of specific risks on projects and the mitigating actions required.

This has been further reinforced through the implementation of common minimum standards in project and commercial management.

Projects are subject to management, commercial function and internal audit review at all levels to monitor progress and to review steps put in place to address specific risks identified on those projects. The Group also has public indemnity cover to provide further safeguards.

Balfour Beatty monitors the performance of joint ventures, joint venture partners, subcontractors and suppliers throughout the lifecycle of a project.

What impact it might have

Failure of a subcontractor or supplier would result in the Group having to find a replacement or undertaking the task itself. This could result in delays and additional costs.

The Group will be commercially as well as reputationally responsible for performance shortcomings by suppliers and subcontractors, whether in terms of quality, safety, technical or ethical standards.

Mistreatment of suppliers, subcontractors and their staff, or poor ethical standards in the supply chain, could lead to significant reputational harm for Balfour Beatty.

How it is mitigated

The Group aims to develop long-term relationships with key subcontractors, working closely with them to understand their operations. It develops contingency plans to address subcontractor failure, and also obtains project retentions, bonds and/or letters of credit from subcontractors, where appropriate to mitigate the impact of any insolvency.

Balfour Beatty aims to work as much as possible with preferred suppliers and subcontractors who undergo rigorous, risk-based prequalification processes and share its values. It also aims to avoid becoming over-reliant on any one supplier or subcontractor.

What impact it might have

Failure to recruit and retain appropriately skilled people could harm the Group's ability to win or perform specific contracts and grow its business.

How it is mitigated

All potential recruits for key roles in the organisation are measured against a competency and leadership framework. Divisions undertake organisation and people reviews to review the roles, competencies, performance and potential of personnel. The Group's succession planning process to identify and develop high-potential personnel is reviewed regularly within the organisation and by the Board. Balfour Beatty has appropriate remuneration and incentive packages to help it attract and retain key employees (see page 37).

What impact it might have

Failure by the Group, or employees and third parties acting on its behalf or in partnership, to observe the highest standards of integrity and conduct could result in civil and/or criminal penalties, debarment and reputational damage (see page 38).

How it is mitigated

Balfour Beatty has a proactive approach to assessing and addressing corruption risks. It promotes compliance with its Code of Conduct and in areas such as competition and false claims fraud.

Each business area has a compliance officer responsible for the application and monitoring of these programmes.

The risk of business conduct/compliance breaches by third parties is harder to control, but the Group has a range of risk assessment, due diligence and procurement controls that are designed to identify and minimise such risks. Balfour Beatty works with very few agents, all of whom undergo a rigorous due diligence and approval process.

What impact it might have

A breach of local laws and regulations could lead to legal proceedings, investigations or disputes resulting in business disruption ranging from additional project costs to potential debarment and reputational damage. Increasingly, businesses are the target of cybercrime, which can result in loss of confidential, personal or commercial data, disruption to operations and associated costs. Sometimes Balfour Beatty may be the target of statesponsored cyber activities purely because of its customer base.

How it is mitigated

The Group monitors and responds to legal and regulatory developments in the territories in which it operates. Local legal and regulatory frameworks are considered as part of any Group decision to conduct business in a new country. Data protection and information security programmes are in place across the Group, and cybercrime and other information security risks are assessed

on a regular basis.

What impact it might have

Failure to address these risks and to execute projects sustainably could result in significant potential liabilities, reputational damage and inability to win future work.

How it is mitigated

The Group's sustainability strategy provides a framework for its operating businesses to accommodate and embed sustainability

into operations. Sustainability issues such as climate change are considered in risk management activities at divisional as well as project level.

Balfour Beatty's internal audit processes are used to identify potential risks and opportunities for the business. These take the form of sustainability audits and internal data assurance audits. The Group also has external audits undertaken by third parties against its management systems that are in place to manage some of the aforementioned risks. Scope 1 and 2 GHG emissions are also externally assured (see page 39) to ensure that the data is correct.

What impact it might have

A breach of local law and standards could lead to investigations, disputes and prosecution with associated reputational damage and increased costs, which could impact adversely on Balfour Beatty's continuing businesses.

How it is mitigated

•     Experienced professionals, supported by external advisers, manage disposal processes to ensure that the legal documentation covering disposals protects the Group's position as well as can be foreseen

•     Use of project management capabilities in managing any transitional service arrangements and migration activities to ensure that risk exposure is tolerable

•     Where appropriate ensure there is a wind-down plan in place and that progress against this is appropriately overseen.