REG - Morgan Sindall Grp - Annual Financial Report
21/03/2024 14:30
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RNS Number : 8408H Morgan Sindall Group PLC 21 March 2024
Morgan Sindall Group plc ('the Company')
Annual Financial Report
21 March 2024
Further to the release of the Company's Preliminary Results announcement on 22
February 2024, the Company announces that it has today published and issued to
shareholders the 2023 Annual Report and Accounts ('Annual Report'), Notice of
Annual General Meeting 2024 and Form of Proxy. In addition, it has published
its 2023 Responsible Business Data Sheet, 2023 Gender Pay Gap Report and 2023
Modern Slavery and Human Trafficking Statement. The following documents can be
downloaded from the Company's website:
· 2023 Annual Report -
https://www.morgansindall.com/investors/reports-and-presentations
(https://www.morgansindall.com/investors/reports-and-presentations)
· Notice of Annual General Meeting 2024 -
https://www.morgansindall.com/investors/annual-general-meeting
(https://www.morgansindall.com/investors/annual-general-meeting)
· 2023 Responsible Business Data Sheet -
https://www.morgansindall.com/investors/reports-and-presentations
(https://www.morgansindall.com/investors/reports-and-presentations)
· 2023 Gender Pay Gap Report -
https://www.morgansindall.com/investors/governance
(https://www.morgansindall.com/investors/governance)
· 2023 Modern Slavery and Human Trafficking Statement -
https://www.morgansindall.com (https://www.morgansindall.com)
The Annual Report has been prepared using the single electronic reporting
format required by the Transparency Directive Regulation. The Annual Report
2023, Notice of Annual General Meeting and Form of Proxy in unedited full text
have been submitted to the Financial Conduct Authority's national storage
mechanism ('NSM') and will shortly be available via the NSM website
at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) .
The Company will hold its Annual General Meeting (AGM) at 10.00am on Thursday,
2 May 2024 at the offices of Morgan Sindall Group plc, Kent House, 14-17
Market Place, London W1W 8AJ.
We are looking forward to seeing shareholders at the AGM in person. The
Company will notify shareholders of any changes to the AGM via a Regulatory
Information Service and on the AGM page of the Company's website. We
encourage shareholders who cannot attend the meeting to submit any questions
on the business of the AGM in advance of the meeting by email to
cosec@morgansindall.com (mailto:cosec@morgansindall.com) (marked for the
attention of the Company Secretary). We will endeavour to publish (on an
anonymised basis) any questions received before 10.00am on Tuesday, 30 April
2024 and our responses to those questions on our website prior to the AGM.
Following the AGM, we will publish on our website (on an anonymised basis) the
full set of questions received including those received after 10.00am on
Tuesday, 30 April 2024 and our answers to those questions. However, we
reserve the right to edit questions or not to respond where we consider it
appropriate, taking account of our legal obligations.
In accordance with the requirements of Rules 4.1 and 6.3.5 of the Disclosure
Guidance and Transparency Rules, a description of the principal risks and
uncertainties affecting the Group is set out in Appendix 1 to this
announcement. The Company's Preliminary Results announcement released on 22
February 2024 contained all other information required by DTR 6.3.5.
ENQUIRIES:
Morgan Sindall Group
plc Tel:
020 7307 9200
Clare Sheridan, Company Secretary
Appendix 1
The Group remains resilient due to our decentralised approach, long-term
partnerships, and strong balance sheet and order book.
Overview of the Group's risk profile
Our markets have continued to receive high levels of political support owing
to their contribution to the UK economy and underlying demand. In addition,
the Group's resilience and agility have been demonstrated during periods of
macro disruption, which provides reassurance for the future.
This resilience is the result of a number of factors, including our strong
balance sheet, our decentralised approach and ability to respond quickly to
change, and our long-term focus on contract selectivity, high quality of
delivery, prudent risk management and strong client and supply chain
relationships.
The macro environment
UK construction continues to benefit from sustained political commitment to
investment, as confirmed in the Autumn Statement, particularly in
regeneration, construction and infrastructure (primary areas in the UK
targeted for growth). In addition, our diversity of offering protects the
business from cyclical changes in individual markets.
Inflation
Macro-induced inflationary pressures have eased, with projects agreed in 2022
now largely completed. Current projects are continuing to benefit from our
preferred and predominant two-stage and negotiated procurement routes. These
routes allow early collaboration with our clients and suppliers, resulting in
more realistic customer budgets and greater pricing stability within the
supply chain. In addition, we continue to benefit from mechanisms such as
contingency allowances and/or indexation provisions on contracts that enable
us to manage risk and predict outturns.
Inflation is still stretching budgets and resulting in some instances of us,
our clients and our partners delaying decisions; however, our current order
book and predominant public sector and regulated industry focus do offer some
resilience, particularly as underlying demand is still strong.
In Urban Regeneration, construction cost inflation has provided additional
challenges to the returns on some of its active developments and to the
viability of some schemes being evaluated prior to commencement.
Supply chain solvency
There is an increasing risk that our supply chain partners may be trading with
strained finances as a result of inflationary and borrowing pressures,
compounded by increases in interest rates. Our teams are acutely aware of this
and have increased their due diligence and provided help and assistance where
appropriate. In some limited circumstances, we have supported key partners
with more favourable terms to assist their cash flow while obtaining assurance
on production progress and forms of guarantee.
We mitigate our supply chain solvency risk by treating our suppliers as
partners and paying them promptly. Building long-term relationships with our
supply chain also provides us with a competitive advantage and superior
project delivery. In addition, our decentralised structure spreads the risk
across different industry sectors, markets and geographical regions.
While we have witnessed some issues in 2023 and expect to see further
disruption during 2024, these have not been material to date.
Partnerships and public sector clients
The divisions remain focused on long-term partnerships, our favoured route to
market, as it allows us to work with clients and in environments where we have
a track record in delivery, enabling more predictable outcomes. In addition, a
substantial proportion of our regeneration schemes and construction order book
are supported by public sector and regulated industry clients, via frameworks
with committed spend and joint venture arrangements secured over the medium to
longer term. Our regeneration activities consist mostly of lower-risk,
non-speculative arrangements that ensure more efficient use of capital,
underpinned by a long-term visible pipeline.
Divisional perspectives
Construction and Infrastructure's long-term focus on selecting the right
projects has continued to deliver margins within or above their target ranges
together with positive cash positions. This reflects the work of the divisions
over the past few years to improve risk management in all areas of their
operations. Their respective future order books remain high quality,
consisting predominantly of public sector work via two-stage or negotiated
procurement routes in established sectors. We have maintained contingency
allowances in contract pricing, and our preferred procurement routes allow us
to pass through increased supply chain costs.
Fit Out, while more susceptible to GDP and macroeconomic fluctuations, also
enjoys a significant proportion of two-stage/negotiated work in its future
order book with visibility into 2024. Demand remains high as offices are
repurposed and the short timescale of most projects assists with control of
any cost pressures.
Partnership Housing and Urban Regeneration have seen residential demand
plateauing in 2023. There are several macro uncertainties that could continue
to put pressure on our residential portfolio in 2024. For example, households
are faced with cost-of-living and affordability challenges, resulting in lower
confidence, and government incentives such as Help to Buy are limited. While
we work closely with our local authority partners, planning delays remain a
challenge for our development programmes. However, UK demand for affordable
housing, where most of our portfolio resides, is undiminished, employment
prospects remain positive and the incentive of all political parties is
strong.
Whatever scenarios play out, we have several options available to help
mitigate and manage potential fluctuations. For example, a large proportion of
our schemes are in public sector partnerships. These are typically earmarked
to improve and accelerate local estate regeneration and they therefore
continue to be driven by central and local government, even in declining
markets. These schemes are resilient because they are flexible; future phases
can be remodelled to meet changing market dynamics, such as changes to the
commercial and tenure mix or alternative funding structures. In addition, the
schemes are subject to viability tests, eligible for gap funding, include
profit-sharing arrangements, allow for alteration in the pace of the build,
and include robust risk and capital controls, all of which reduces risk and
helps manage expenditure by limiting exposure at key stages of development. As
a result, we expect progress in some regeneration projects to slow but not
stop.
The Building Safety Act has tightened safety regulations for residential
buildings, and we are well advanced in our response to ensure that current
live project specifications are compliant. We have investigated issues on past
projects, engaged with the Department for Levelling Up, Housing and
Communities (DLUHC), signed the developers' pledge, and made provisions, with
the cash expected to be expended over the next one to two years. Some of the
cash may be recoverable, although this will take time to resolve.
Property Services has been affected in the short term by inflationary
pressures and the impact of the time lag between immediate cost increases and
the administration of contractual index-linked price adjustments.
Financing
In terms of resourcing our medium- and long-term plans, the Group remains in a
strong financial position.
People
Where we are recruiting, we are seeing significant interest in the new
positions we have created to help us achieve our strategic objectives.
However, we do recognise some challenges associated with changes in lifestyle,
cost of living, poaching and an ageing workforce, which we must carefully
manage.
A culture where people feel included and empowered continues to be a key
ingredient of our success, and our commitments to tackling climate change and
delivering social value are key to attracting and retaining the talent we need
to grow and sustain the business.
Emerging risks
While our principal risks address shorter-term issues, our strategic planning
process includes identifying emerging risks that may affect our ability to
deliver our objectives over the medium to longer term. This is supplemented by
reviews of any matters likely to impact strategy that take place as part of
our twice-yearly internal risk management process and monthly Board reporting.
The following emerging risks are currently being tracked and monitored by the
Board. The Board is satisfied with progress being made in these areas,
although it will continue to revisit them as matters develop.
· Long-term scarcity of skilled labour in the industry
· Technology's advancing pace
· People's changing work patterns
Principal risks
Our principal risks are those we consider the most significant in terms of
potential impact to the business and have been extensively reviewed.
In 2023, the Board conducted its annual review of the Group's risk appetite
and noted that macroeconomic uncertainty, inflationary and interest rate
headwinds, and supply chain solvency continue to elevate certain risks towards
the upper end of appetite. It noted that the Group's current strategy was well
suited to deal with these issues; however, given their fluidity, the Board
will closely monitor the situation during 2024 and, should the need arise,
take appropriate action.
Strategic risk
A. Economic change and uncertainty
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.
Risk description Update on risk status Mitigation Change in risk
There could be fewer or less profitable opportunities in our chosen markets, · Continued scrutiny of UK construction balance sheets underpins our · The diversity of our operations protects against fluctuations in Stable
including a decline in construction activity caused by macroeconomic shifts. competitive position in the sector and gives confidence to our clients, individual markets while our decentralised approach enables our divisions to
employees and supply chain. respond quickly to change.
· In a declining market, a strong balance sheet allows us to remain · The Board regularly reviews the economic environment in which we Responsibility
Allocating resources and capital to declining markets or less attractive agile, continue to take long-term decisions and respond to opportunities. operate to assess whether any changes to the outlook justify a reassessment of
opportunities would reduce our profitability and cash generation.
our risk appetite or business model. The Board
· The UK is continuing to invest in areas that complement our strategy
(as confirmed in the 2023 Autumn Statement and cross-party statements), · We stress-test our business plan against the current economic outlook
including affordable housing, education, critical infrastructure and urban to ensure our financial position is sufficiently flexible and resilient.
regeneration. Our business model is designed to provide a mix of earnings
Strategic priority
across different market cycles. · We are strategically focused on a high-quality order book underpinned
by a strong balance sheet and financial strength. · Increase our quality of earnings
· The Group has shown strong credentials during recent market
turbulence and we expect to navigate any subsequent market fluctuations with · A high proportion of our secured workload is with public sector and · Secure long-term workstreams
limited material disruption. regulated entities via long-term arrangements, with a healthy level of demand
and typically preferential terms. · Maintain a strong balance sheet
· Our public and regulated sector focus, pipeline and order book,
coupled with a strong underlying demand for buildings in these sectors, gives · We continue to be very selective and our procurement routes, margins,
some comfort around macroeconomic challenges, provided that government funding contract terms and secured workload remain favourable.
and commitment continues.
· 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.
Strategic risk
B. Exposure to the UK residential market
Government support for UK housing needs complements our product positioning.
While government housing incentives have reduced, the homebuyer market
continues to be supported by employment levels (including job vacancies) which
are favourable and expected to remain so over the short to medium term.
Headwinds such as interest rate rises and inflation could impact consumer
confidence, mortgage availability and loan-to-value ratios. However, our
portfolio is geared towards the affordable market which the government is
expected to continue to incentivise.
Risk description Update on risk status Mitigation Change in risk
The UK housing sector is strongly influenced by government stimulus and · We experienced a reduction in sales activity in 2023. While average · A rigorous, three-stage formal appraisal process is undertaken before Increase
consumer confidence. sales prices reduced by c£20k, this was due to the increase in the proportion committing to development schemes and capital commitments.
of affordable plots being completed in the year.
· We work closely with public sector partners and government agencies
· In Urban Regeneration, there are short-term viability challenges to such as Homes England to secure extra development funding if required. Responsibility
Inflationary and interest rate pressures could challenge scheme viability, navigate due to current inflation and interest rates. We are working through
slowing down decision-making and project commencement. this with our partners and, where necessary, seeking additional gap funding · We use less speculative, risk-sharing development models, subject to The Board, executive directors and divisional senior management teams
and sources of finance with better terms. We expect progress in some viability conditions, that lessen negative impacts from market fluctuations.
regeneration projects to slow but not stop.
· On selected large-scale residential schemes, we seek to forward sell
If mortgage availability, affordability or consumer confidence is reduced, · Negative housing dynamics such as a reduction in consumer confidence and/or fund sections to targeted institutional investors to reduce risk. Strategic priority
this could impact on demand, make existing schemes difficult to sell and due to lower real net disposable income could impact sales.
future developments unviable, reducing profitability and tying up capital.
· Our residential portfolio has a wide geographical spread, protecting · Increase our quality of earnings
· Constrained planning remains a frustration and has the potential to against regional market variations, and is geared towards providing an
delay our schemes. However, anticipated improvements in the system could allow affordable product. · Secure long-term workstreams
further efficiencies and increase the speed at which we bring developments
forward. · Rather than building up a land bank, we target option agreements with · Maintain a strong balance sheet
landowners that limit and/or defer long-term exposure and boost return on
· Commentators suggest that household inflation should ease during capital employed.
2024, which should help alleviate affordability issues.
· We regularly monitor and forecast our pipeline of development
opportunities and secured workload, which includes monitoring key UK
statistics such as unemployment, lending and affordability.
· For a large proportion of current schemes, we have the ability to
slow (or accelerate) build rates should the need arise.
· Our partnership model provides resilience by allowing us to flex
scheme phasing, timing, tenure mix and funding structures to suit varying
market scenarios. The model can be de-risked by increasing the proportion of
contracting work in Partnership Housing, forming strategic joint ventures and
increasing the proportion of affordable units.
· Past, present and future government stimuli, such as the Help to Buy
scheme, stamp duty relief and mortgage guarantee scheme for properties up to
£600k, complement our product offering.
Operational risk
C. We cause a major health and safety incident and/or adopt a poor
safety culture
Our first priority is to protect the health and safety of our key stakeholders
and wider public. We have continued to focus on improving our safety
performance by increasing health and safety awareness and promoting safe
behaviours. Our challenge is to keep refining our approach to drive further
improvement and ensure that everyone who comes into contact with our work, on
and off site, goes home safe and well.
Risk description Update on risk status Mitigation Change in risk
Health and safety will always feature significantly in the risk profile of a · We saw an increase in safety incidents in 2023 due in part to our · The Board is responsible for health and safety, which is the first Increase
construction business. We carry out a significant portion of our work in standards and procedures not always being adhered to. item on the agenda at every Board meeting. In addition, our responsible
public areas and complex environments.
business committee focuses on our health and safety culture to drive better
Our divisions will continue to promote safety awareness and safe behaviours as behaviour and performance.
well as reviewing technological solutions to supporting site supervision.
Responsibility
· Individuals in each division, and on the Board and Group management
Accidents could result in legal action, fines, costs and insurance claims as · To address underlying trends contributing to safety incidents, we team, are given specific responsibility for health and safety matters. The Board, Group management team, divisional senior management teams,
well as project delays and damage to reputation. Poor health and safety continued to focus in 2023 on trips, slips and cuts; material handling and
protecting people forum
performance could also affect our ability to secure future work and achieve storage; and the use of powered/non-powered tools. · Our Group protecting people forum meets regularly, with
targets.
representatives from all divisions sharing best practice and exchanging
· We have continued to look for trends in safety observations made by information on emerging risks.
people on or visiting our sites and compare them to 'leading indicators' so
Strategic priority
that we can take a strategic approach to improvement. For example, a trend · We have well-established procedures in place including safety
towards reduced supervision of sites during the summer would be analysed systems, audits, site visits, incident investigation and root-cause analysis, · Secure long-term workstreams
against the pattern of leave commitments of project staff and action taken to monitoring and reporting, and reporting of near-miss incidents and incidents
ensure that appropriate cover is always maintained. that could potentially have resulted in serious injury. · Consistently deliver on our Total Commitments
· To supplement the work of our Group protecting people forum (formerly · Our regular health and safety training includes behavioural change,
the health and safety forum), we have set up monthly meetings of safety housekeeping on site, and leadership engagement in driving site standards.
leaders across the divisions, focusing on immediate issues, opportunities and
lessons learned as they arise. · Each division's health and safety policy is communicated to all its
employees, and senior managers are appointed to ensure the policies are
implemented.
· We have developed major incident management and business continuity
plans, which are periodically tested and reviewed.
· All divisions are accredited to ISO 45001 for occupational health and
safety.
· We continue to offer our colleagues a range of benefits that promote
physical and mental wellbeing.
People risk
D. We fail to attract and retain the talent we need to maintain and grow
the business
Our current success is helping us attract and retain people, and in the short
to medium term we are focusing on increasing the Group's diversity. Where
staff retention is challenged, this tends to be influenced by both social and
business-related issues, for example lifestyle changes, poaching and an ageing
workforce.
Risk description Update on risk status Mitigation Change in risk
Skills shortages in the construction industry will remain an issue for the · Improvements continue to be made to the working environment and · We give our people empowerment and responsibility together with clear Stable
foreseeable future. investment made in technology and leadership training. Our voluntary staff leadership and support.
turnover rate was 12% in 2023, compared to 15% in 2022.
· We offer them a strong Group culture and attractive benefits, working
· We are responding to the challenge of an ageing employee population environments, technology tools and wellbeing initiatives to help improve their Responsibility
If we fail to attract and retain the talent required to excel in project and undertaking work to improve our diversity and inclusion. working lives.
delivery and meet our clients' and other stakeholders' expectations, this
The Board, Group management team, divisional senior management teams
could damage our reputation and our ability to secure future work and meet our · We are considered a leader in the sector in addressing climate · We conduct employee engagement surveys and monitor joiner and
targets. emissions, which should help attract new recruits. We also offer an increasing retention metrics including voluntary staff turnover. We carry out annual
digital emphasis and improved working environments, practices and employment appraisals that provide two-way feedback on performance, and conduct exit
packages. However, it is recognised that the sector has work to do in terms of interviews when people leave. Strategic priority
being attractive and the first choice for young people.
· Our succession planning includes identifying and developing future · Secure long-term workstreams
skills.
· Excel in project delivery for our clients
· We provide training and development to build skills and experience,
such as our leadership development and graduate, trainee and apprenticeship · Consistently deliver on our Total Commitments
programmes.
Financial and operational risk
E. Partner insolvency and/or adverse behavioural change
Some partners may have been trading with stretched finances following the
pandemic, the unwind of government measures introduced to support business
recovery, and the reverse charge VAT initiative. More recent inflation and
interest rate increases have likely put further pressure on their balance
sheets, leading to a greater likelihood of failure.
Risk description Update on risk status Mitigation Change in risk
An insolvency of a key client, subcontractor, joint venture partner or · Currently the main risk is supply chain insolvency. Some councils' · Our business model and order book are predominantly focused on public Increase
supplier could disrupt project works, cause delay and incur the costs of financial issues could delay new opportunities; however, they appear to be sector and regulated industries and commercial customers in sound market
finding a replacement, resulting in significant financial loss. supporting ongoing schemes and priority projects such as regeneration and sectors, reducing the likelihood of a material customer failure.
education that align with our business model.
· We carry out rigorous due diligence preconstruction, particularly on Responsibility
· As we are less able to rely on historical supply chain credit checks, commercial clients and key supply chain partners, including a focus on payment
our teams have heightened sensitivity and are looking for signs of stress that behaviours, cash terms and profiling, and likely liquidity outcomes. The Board, Group management team, divisional senior management teams
would enable early intervention and options to resolve. This includes measures Mitigation could include obtaining, where necessary, relevant securities in
to gain transparency and, should a failure occur, afford us a greater ability the form of guarantees, bonds, escrows and/or more favourable payment terms,
to step in if needed. or even, in some cases, declining a project.
Strategic priority
· Current UK macroeconomic issues have stretched many of our supply · Formal due diligence is carried out when selecting joint venture
chain partners' balance sheets. However, the strength of our balance sheet partners, including seeking protection in the event of default by one of the · Maintain a strong balance sheet
gives us the option to step in and help them manage short-term issues, such as partners. Joint ventures require executive director approval.
cash flow, if and as deemed appropriate.
· We work with preferred or approved suppliers where possible, which
· Our strategy has been to reduce payment days and our supply chain aids visibility of both financial and workload commitments.
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 · Our business model reduces the concentration of supply chain risk as
which helps reduce their cash flow pressures and the likelihood of failure. our divisions operate in different markets and geographical regions, using
local supply chains. This helps ensure we do not overstress suppliers'
finances or operational resources.
· We rigorously monitor work in progress, debts and retentions.
Financial risk
F. Inadequate funding
Our committed bank facilities of £180m are in place, £165m until October
2026 and £15m to June 2026, which, coupled with our strong cash position,
provide significant headroom.
Risk description Update on risk status Mitigation Change in risk
A lack of liquidity could impact our ability to continue to trade, or restrict · £180m of bank facilities remained available but undrawn throughout · We have a Group-led, disciplined capital allocation process for Stable
our ability to achieve market growth or invest in regeneration schemes. 2023 and were extended by one year. significant project-related capital, which takes into consideration future
requirements and return on investment.
· During the reporting period and for the foreseeable future, our
average net daily cash continues to be healthy and indicates the cash-backed · We monitor our cash levels daily and conduct regular forecasting of Responsibility
nature of the business. future cash balances and facility headroom.
Executive directors, Group tax and treasury director, divisional senior
· Our balance sheet continues to provide assurance for our stakeholders · Our long-term cash forecasts are regularly stress-tested. management teams
and allows us to continue investing in regeneration schemes while remaining
selective in construction.
Strategic priority
· Maintain a strong balance sheet
Financial risk
G. Mismanagement of working capital and investments
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.
Risk description Update on risk status Mitigation Change in risk
Poor management of working capital and investments leads to insufficient · Our ongoing focus on working capital management has enabled us to · Our delegated authorities require that capital and investment Stable
liquidity and funding problems. maintain levels similar to prior years while continuing to maintain payment commitments are notified and signed off at key stages with senior-level
practices that are favourable to our supply chain and investment in approval.
regeneration.
· We reinforce a culture within our bidding and project teams of Responsibility
· Our cash position is not supported by any form of supply chain debtor focusing on cash returns to ensure they meet expectations.
finance and gives a clear indication of our financial health.
Executive directors, Group tax and treasury director, divisional senior
· We monitor and manage our working capital with an acute focus on any management teams
· We continue to maintain a positive momentum in cash management in overdue work in progress, debtors or retentions.
construction due to a combination of improved returns, cash optimisation and
cash conversion. · We monitor cash levels daily and produce regular cash forecasts.
Strategic priority
· Our average net daily cash for the period demonstrates our · We manage our capital on regeneration schemes efficiently, for
disciplined working capital management. example through phased delivery, institutional and government funding · Maintain a strong balance sheet
solutions, and forward funding where possible.
Operational risk
H. Poor contract selectivity and/or bidding
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.
Risk description Update on risk status Mitigation Change in risk
In a volatile market where competition is high, a division might accept a · Our order book consists of a high proportion of public sector, · It is part of our strategy and culture to be selective in our work by Stable
contract outside its core competencies or for which it has insufficient regulated industry and framework clients with typically healthier risk targeting optimal markets, sectors, clients and projects.
resources. profiles and is secured in limited competition.
· We limit our participation in open market bids, conducting a large
· We have not changed the sectors or markets we operate in and are proportion of our projects via framework or joint venture arrangements with Responsibility
therefore unlikely to engage in a project outside of our capability. In repeat clients who share our values. This provides a high probability of
If a contract is incorrectly bid, this could lead to contract losses and an construction, the majority of our work has been secured via negotiated and predictable and successful outcomes. Executive directors, divisional senior management teams
overall reduction in gross margin. It might also damage our relationship with two-stage procurement routes(1).
the client and supply chain, leading to a reduction in work volumes.
· When bidding, we aim for negotiated and two-stage procurement routes
· Input cost pressures have eased with our older inflation-impacted that allow us early engagement and collaboration, including the early
projects now largely completed and newer projects benefiting from more identification of the most appropriate supply chain delivery partners. Strategic priority
realistic customer budgets and greater pricing stability in the supply chain.
· Our divisions select projects according to pre-agreed types of work, · Increase our quality of earnings
· In construction, inflation is generally managed through negotiated project size, contract terms and risk profile. A multi-stage process of bid
and two-stage procurement routes, the pass through of cost, and the use of review and approval includes tender review boards, risk profiling and a system · Excel in project delivery for our clients
project contingencies and/or indexation that allow price increases to be of delegated authorities to ensure approval at appropriate levels of
recovered at a future date. management. · Secure long-term workstreams
· We profile the skills and capabilities required for the project to · Maintain a strong balance sheet
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.
1 Negotiated and two-stage procurement routes allow us early engagement in the
project and greater visibility, influence and certainty over pricing and
programming.
Operational risk
I. Poor project delivery (including changes to contracts and contract
disputes)
Our focus on project selectivity, the quality of our order book and our close
engagement with our supply chain partners help reduce the probability of poor
performance. Inflationary pressures have increased this risk but have been
manageable, although stretched client budgets and supply chain finances and
any related change in behaviours could increase the risk of disputes and/or
failures. However, our longstanding relationships and focus on customer
experience help us navigate significant issues when they arise.
Risk description Update on risk status Mitigation Change in risk
Changes to the scope of works and contract disputes could lead to costs being · Inflationary pressures have eased, with impacted projects procured in · We have well-established systems of measuring and reporting project Stable
incurred that are not recovered, loss of profitability and delayed receipt of 2022 now largely completed. Newer projects are benefiting from customer progress and estimated outturns that take into account contract variations and
cash. budgets that are more aligned with the impacts of inflation; however, in some their impact on programme, cost and quality.
instances it can take time to remodel a scheme to ensure it is viable and this
can lengthen the preconstruction period. · The strength of our supply chain relationships and preference to work Responsibility
with selected partners reduces the probability of project failure and helps to
Failure to meet client expectations could incur costs that erode profit · There is a recognised shortfall in the construction labour market, ensure we deliver predictable outcomes. Executive directors, divisional senior management teams
margins, lead to the withholding of cash payments and impact working capital. exacerbated by impacts from Covid and Brexit. However, in the short term,
It may also result in reduction of repeat business and client referrals. while we have seen issues, we, together with our supply chain, are managing · Where legal action is necessary, we notify the Board, take
the situation. appropriate advice and make suitable provision for costs.
Strategic priority
· We have responded to the Building Safety Act, which primarily deals · Formal internal peer risk reviews highlight areas of improvement and
Not understanding the project risks may lead to poor delivery and could result with building regulations and fire safety, with Construction, Partnership share best practice and lessons learned. · Increase our quality of earnings
in reputational damage and loss of opportunities. Housing and Urban Regeneration having updated their methodology to ensure that
project specifications remain compliant. This includes a complete refresh of · Various Perfect Delivery(1) initiatives focus on improvements in · Excel in project delivery for our clients
design management and procedures, increased on-site scrutiny and records, and product quality and predictability and client experience.
engagement of independent fire consultants on more complex schemes.
· Secure long-term workstreams
Ultimately, we may need to resort to legal action to resolve disputes, which
· Regular formal and informal stakeholder feedback allows us to
can prove costly with uncertain outcomes as well as damaging relationships. · In terms of the Building Safety Act and related legacy issues, we intervene when required and refine our offering to provide exceptional · Maintain a strong balance sheet
completed in-depth analyses of our portfolios, engaged with the DLUHC, signed outcomes.
the developers' pledge and made provisions, with the cash expected to be
expended over the next one to two years. Some of the cash may be recoverable, · We continue to use and enhance our digital project management tools
although this will take time to resolve. Where there have been concerns over and commercial metrics that highlight areas for focus and provide early
the compliance of cladding materials or with the overall fire safety of warnings, enabling early intervention in the construction cycle.
buildings, and we have committed to rectifying them, appropriate remedial
activity has or will be undertaken and/or expenditure provided for. · 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.
1 Perfect Delivery status is granted to Construction, Infrastructure and Fit
Out projects that meet all four client service criteria specified by the
division.
Operational risk
J. Cyber activity and failure to invest in IT
To protect against increasing cyber attacks, we invest in security controls
and partners, including liaising with government security advisers.
Risk description Update on risk status Mitigation Change in risk
Investment in IT is necessary to meet the future needs of the business in · During the year, we re-certified to ISO 27001 and the government's · We have a dedicated Group team focused on providing a stable and Stable
terms of expected mobility, growth, security and innovation to enable its Cyber Essentials Plus Scheme. resilient IT environment with continued investment in core infrastructure,
long-term success.
security and applications. Our divisional IT teams focus on business- specific
· We have continued to enhance our visibility of security events and product support.
'indicators of compromise' (signs of a data breach) using the latest
Responsibility
technologies. · Our IT security steering group presents an update to the Board on a
It is also essential to avoid a cyber incident that could cause reputational
biannual basis to ensure oversight and challenge. The Board, Group management team, IT security steering group (reporting to the
and operational impacts and/or a loss of data or intellectual property that · The Board has agreed a rolling security strategy, supported by
Group finance director)
could result in significant fines and/or prosecution. continuous improvement and review, to ensure we remain aligned with emerging · We adopt best practices to secure our people and data. We adhere to
risks and changes to the threats we face. Our IT security steering group is the National Institute of Standards and Technology Cybersecurity Framework.
provided with additional funding as needed.
· We commission an external industry expert to conduct regular cyber Strategic priority
Criminal activity continues to increase and, while we are confident in our · As part of our 'Digital Resilience' programme, we ran several risk analysis on every device used in our network. The data collected is
security strategy, it is continually checked and challenged. workshops, hosted by industry experts, to educate key stakeholders around independent of our other security systems and acts as an audit of our security · Increase our quality of earnings
incident response best practices. These focused on business impacts of a major controls and their effectiveness.
incident as well as technical and legal aspects.
· Excel in project delivery for our clients
· We engage with industry-leading partners to adopt appropriate
· Big data, digital construction and analytics are at the forefront of technologies to protect the Group. · Secure long-term workstreams
our latest technological developments, and we continue to develop the use of
these, in addition to exploring Generative AI. Having used leading indicators · Our IT security steering group provides governance and oversight of · Maintain a strong balance sheet
for some time, we are trialling predictive tools to help identify issues early the Group's cyber strategy and strength, resources and funding.
in the construction cycle, including programme, technical and commercial
issues, and to enhance our current safety practices. · We run regular audits using different parties (both technical and
non-technical) to confirm that our controls remain effective. Audit reports
· In 2023, we invested in technology and business innovation, cyber are shared with the IT security steering group.
security, cloud computing, operational and commercial systems enhancement,
customer engagement technologies, and carbon and sustainability management. · 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.
Strategic and operational risk
K. Climate change
We have been recognised as leaders in our sector for our work in reducing
carbon emissions. However, there is still much to do as we progress towards
our 2045 goal of net zero.
Risk description Update on risk status Mitigation Change in risk
For detailed information on our climate change risks, mitigations and Stable
opportunities, see our 2023 annual report on our website for our Task Force on
Climate-related Financial Disclosures. Our 2023 annual report sets out our
climate governance, indicating Board oversight and management's
responsibilities. Strategic priority
· Secure long-term workstreams
· Consistently deliver on our Total Commitments
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