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