Principal risks

The board has carried out a robust assessment of the principal risks and uncertainties which have the potential to impact the Group's profitability and ability to achieve its strategic objectives. These are set out in the table below. This list is not intended to be exhaustive. Additional risks and uncertainties not presently known to management or deemed to be less significant at the date of this report may also have the potential to have an adverse effect on the Group.

Principal riskStrategic pillarsLink to KPIsMovementScoring

1 Health and safety

1

2

3

4

5

6

7

 

2 Commercial and market environment

1

2

3

4

5

6

7

 

3 COVID-19

1

2

3

4

5

6

7

 

4 Information technology resilience

1

2

3

4

5

6

7

 

5 Mispricing a contract (at tender)

1

2

3

4

5

6

7

 

6 Failure to mitigate onerous contract terms

1

2

3

4

5

6

7

 

7 Supply chain

1

2

3

4

5

6

7

 

8 Indian joint venture

1

2

3

4

5

6

7

 

9 People

1

2

3

4

5

6

7

 

Strategic pillar key

Growth

Clients

India

Operational excellence

People

KPI key

1 Underlying operating profit and margin (before JVs and associates)

2 Underlying basic earnings per share ('EPS')

3 Revenue growth

4 Operating cash conversion

5 Return on capital employed ('ROCE')

6 Order book

7Accident frequency rate ('AFR') / Injury frequency rate ('IFR')

Movement

Upward trend

Downward trend

No change

New

Scoring

 High

 Medium

Scoring

The scoring of each risk as high or medium is determined based on the scoring of the risk within the Group's risk register. This scoring takes into account the potential impact and likelihood associated with the crystallisation of each risk (the assessment of impact takes into account both potential and reputational issues). Only high and medium risks are considered sufficiently significant for disclosure in the annual report.


2020 principal risks

Scoring

 High

 Medium

Health and safety
1
Movement and scoring
 

Description

The Group works on significant, complex and potentially hazardous projects, which require continuous monitoring and management of health and safety risks. Ineffective governance over and management of these risks could result in serious injury, death and damage to property or equipment.

Impact

A serious health and safety incident could lead to the potential for legal proceedings, regulatory intervention, project delays, potential loss of reputation and ultimately exclusion from future business. Continued changes in legislation can result in increased risks to both individuals and the Group.

Mitigation

  • Established safety systems, site visits, safety audits, monitoring and reporting, and detailed health and safety policies and procedures are in place across the Group, all of which focus on prevention and risk reduction and elimination.
  • Thorough and regular employee training programmes.
  • Director-led safety leadership teams established to bring innovative solutions and to engage with all stakeholders to deliver continuous improvement in standards across the business and wider industry.
  • Close monitoring of subcontractor safety performance.
  • Priority board review of ongoing performance and in-depth review of both high potential and reportable incidents.
  • Regular reporting of, and investigation and root cause analysis of, accidents and near misses.
  • Behavioural safety cultural change programme.
  • Occupational health programme including mental health.
  • Achievement of challenging health and safety performance targets is a key element of management and staff remuneration.
Commercial and market environment
2
Movement and scoring
 

Description

Changes in government and client spending or other external factors could lead to programme and contract delays or cancellations, or changes in market growth. External factors include national or market trends, political or regulatory change (including the UK's exit from the EU) and the impact of pandemics (including the ongoing COVID-19 outbreak).
The impact of the COVID-19 pandemic was unforeseen and has affected the whole of the manufacturing, engineering and construction sector (see separate COVID-19 risk). The risks associated with Brexit remain due to there being no clarity on the long-term trading relationship with the EU. An unfavourable outcome from the ongoing trade negotiations could adversely impact investor and customer confidence.
Lower than anticipated demand (including as a result of COVID-19) could result in increased competition, tighter margins and the transfer of commercial, technical and financial risk down the supply chain, through more demanding contract terms and longer payment cycles.

Impact

A significant fall in construction activity and higher costs could adversely impact revenues, profits, ability to recover overheads and cash generation.

Mitigation

  • The mitigating actions undertaken by the Group in response to COVID-19 are set out in the specific 'COVID-19' risk in Principle risk Covid-19.
  • The Group closely monitors Brexit developments and specific risks and related mitigations are kept under review by the executive committee. We have taken steps to prepare for the various potential outcomes of the ongoing trade negotiations with the EU and have plans in place to ensure we can continue to deliver on current and future contractual commitments.
  • Regular reviews of market trends performed (as part of the Group's annual strategic planning and market review process) to ensure actual and anticipated impacts from macroeconomic risks are minimised and managed effectively.
  • Regular monitoring and reporting of financial performance, orders secured, prospects and the conversion rate of the pipeline of opportunities and marshalling of market opportunities is undertaken on a co-ordinated Group-wide basis.
  • Selection of opportunities that will provide sustainable margins and repeat business.
  • Strategic planning is undertaken to identify and focus on the addressable market (including new overseas and domestic opportunities).
  • Development of a pipeline of opportunities in continental Europe and in the Republic of Ireland, supported by our European business venture.
  • Maintenance and establishment of supply chain in mainland Europe.
  • Close management of capital investment and focus on maximising asset utilisation to ensure alignment of our capacity and volume demand from clients.
  • Close engagement with both customers and suppliers and monitoring of payment cycles.
  • Ongoing assessment of financial solvency and strength of counterparties throughout the life of contracts.
  • Continuing use of credit insurance to minimise impact of customer failure.
  • Strong cash position supports the business through fluctuations in the economic conditions of the sector.

COVID-19
3
Movement and scoring
 

Description

The recent outbreak and global spread of COVID-19 may have a significant and prolonged impact on global economic conditions, disrupt our clients and suppliers, supply chain, increase employee absenteeism and adversely impact our operations.
Governments and public bodies in affected countries have introduced temporary emergency public measures such as travel bans, quarantines and public lockdowns. Should these continue for an extended period of time, they would increase pressure on the operations of the Group.

Impact

The effect of the disease itself is on the health and safety of our people, the financial impact of implementing social distancing measures across our business and the economic slowdown that has resulted from the measures taken in the UK and abroad to combat the virus. A significant fall in demand and higher costs could adversely impact revenues, profits, ability to recover overheads and cash generation.
Mitigation

  • The safety and wellbeing of our clients and employees continues to be our overriding priority. Our executive committee are monitoring events closely with regular board oversight evaluating the impact and designing appropriate response strategies.
  • The availability of cash resources and committed facilities together with strong cash flow to support the Group's longer-term viability.
  • We have implemented a number of precautionary actions including the deferral of all non-essential and uncommitted capital expenditure, together with restrictions on discretionary operating expenditure, tight management of working capital and the deferral of certain tax and quarterly term loan repayments.
  • Our management teams have implemented specific actions to minimise the disruption on our operations during these challenging times. Our business continuity plans have been mobilised and additional measures have been implemented including changes to procedures at factories and sites (hours worked, additional security, hygiene and social distancing measures), undertaking revised risk assessments in all operating locations to ensure we could continue to operate safely, changed methods of travel to and accommodation at sites and extending support to employees at increased risk.
Information technology resilience
4
Movement and scoring
 

Description

Technology failure, cyberattack or property damage could lead to IT disruption with resultant loss of data, loss of system functionality and business interruption.
The Group's core IT systems must be managed effectively, to avoid interruptions, keep pace with new technologies and respond to threats to data and security.

Impact

Prolonged or major failure of IT systems could result in business interruption, financial losses, loss of confidential data, negative reputational impact and breaches of regulations. If the Group fails to invest in its IT systems, it will ultimately be unable to meet the future needs of the business and fulfil its strategy.

Mitigation

  • IT is the responsibility of a central function which manages the majority of the systems across the Group. Other IT systems are managed locally by experienced IT personnel.
  • Significant investments in IT systems which are subject to board approval, including anti-virus software, off-site and on-site backups, storage area networks, software maintenance agreements and virtualisation of the IT environment.
  • Specific software has been acquired to combat the risk of ransomware attacks.
  • Group IT committee ensures focussed strategic development and resolution of issues impacting the Group's technology environment.
  • Robust business continuity plans are in place and disaster recovery and penetration testing are undertaken on a systematic basis.
  • Data protection and information security policies are in place across the Group.
  • Cybercrimes and associated IT risks are assessed on a continual basis and additional technological safeguards introduced. Cyber threats and how they manifest themselves are communicated regularly to all employees (including practical guidance on how to respond to perceived risks).
  • ISO 27001 accreditation achieved for the Group's information security environment and regular employee engagement undertaken to reinforce key messages.
  • Insurance covers certain losses and is reviewed annually to establish further opportunities for affordable risk transfer with revised cover being purchased in 2019 and 2020 to reduce the financial impact of this risk.
Mispricing a contract (at tender)
5
Movement and scoring
 

Description

Failure to accurately estimate and evaluate the contract risks, costs to complete, contract duration and the impact of price increases could result in a contract being mispriced. Execution failure on a high-profile contract could result in reputational damage.

Impact

If a contract is incorrectly priced, particularly on complex contracts, this could lead to loss of profitability, adverse business performance and missed performance targets.
This could also damage relationships with clients and the supply chain.

Mitigation

  • Improved contract selectivity (those that are right for the business and which match our risk appetite) has de-risked the order book and reduced the probability of poor contract execution.
  • Estimating processes are in place with approvals by appropriate levels of management.
  • Tender settlement processes are in place to give senior management regular visibility of major tenders.
  • Use of the tender review process to mitigate the impact of rising supply chain costs.
  • Work performed under minimum standard terms (to mitigate onerous contract terms) where possible.
  • Use of Group authorisation policy to ensure appropriate contract tendering and acceptance.
  • New Group-wide project risk management framework ('PRMF') brings greater consistency and embeds good practice in identifying and managing contract risk.
  • Professional indemnity cover is in place to provide further safeguards.
Failure to mitigate onerous contract terms
6
Movement and scoring
 

Description

The Group's revenue is derived from construction contracts and related assets. Given the highly competitive environment in which we operate, contract terms need to reflect the risks arising from the nature or the work to be performed. Failure to appropriately assess those contractual terms or the acceptance of a contract with unfavourable terms could, unless properly mitigated, result in poor contract delivery, poor understanding of contract risks and legal disputes.

Impact

Loss of profitability on contracts as costs incurred may not be recovered, and potential reputational damage for the Group.

Mitigation

  • The Group has identified minimum standard terms which mitigate contract risk.
  • Robust tendering process with detailed legal and commercial review and approval of proposed contractual terms at a senior level (including the risk committee) are required before contract acceptance so that onerous terms are challenged, removed or mitigated as appropriate.
  • Regular contract audits are performed to ensure contract acceptance and approval procedures have been adhered to.
  • We have worked with the British Constructional Steelwork Association to raise awareness of onerous terms across the industry.
  • Through regular project reviews we capture early those occasions where onerous terms could have an adverse impact and are able to implement appropriate mitigating action at the earliest stage.
Supply chain
7
Movement and scoring
 

Description

The Group is reliant on certain key supply chain partners for the successful operational delivery of contracts to meet client expectations. The failure of a key supplier or a breakdown in relationships with a key supplier could result in some short-term delay and disruption to the Group's operations. There is also a risk that credit checks undertaken in the past may no longer be valid.
The sale of British Steel to Jingye Group, China's third largest privately owned steel producer, was completed in March 2020, helping to provide stability to the steel supply market in the UK.

Impact

Interruption of supply or poor performance by a supply chain partner could impact the Group's execution of existing contracts (including the costs of finding a replacement), its ability to bid for future contracts and its reputation, thereby adversely impacting financial performance.
Mitigation

  • Initiatives are in place to select supply chain partners that match our expectations in terms of quality, sustainability and commitment to client service. New sources of supply are quality controlled.
  • Implementation of best practice improvement initiatives including automated supplier accreditation processes.
  • Strong relationships maintained with key suppliers including a programme of regular meetings and reviews.
  • Contingency plans developed to address supplier and subcontractor failure.
  • Ongoing reassessment of the strategic value of supply relationships and the potential to utilise alternative arrangements, in particular for steel supply.
  • Key supplier audits are performed within projects to ensure they are in a position to deliver consistently against requirements.
  • Monthly review process to facilitate early warning of issues and subsequent mitigation strategies.
Indian joint venture
8
Movement and scoring
 

Description

The growth, effective management and performance of our Indian joint venture ('JSSL') is a key element of the Group's overall strategy. The Indian market has continued to expand rapidly in recent years and the factory in Bellary has been expanded to meet current and anticipated future market growth.
The COVID-19 pandemic is impacting JSSL in 2021. In light of the slow easing of the nationwide lockdown announced by the Indian government in March 2020 and the developing impact of COVID-19 on the Indian economy, JSSL's operations have been disrupted in the first quarter of 2021, a situation which is likely to continue over a period of several months.

Impact

Failure to effectively manage our operations in India could lead to financial loss, reputational damage and a drain on cash resources to fund the operations.

Mitigation

  • In line with the response of the Group, local management in India have implemented a number of precautionary cash conservation actions and are closely monitoring cash flows and debt repayments, together with adopting specific actions to minimise the disruption on the joint venture operations during these challenging times.
  • Robust joint venture agreement and strong governance structure is in place.
  • In 2020, senior management team strengthened further, subcontracting capability expanded and workforce upskilled to support expanded operations.
  • Regular schedule of annual visits to India by UK executive and senior management to review operations and ensure appropriate oversight (suspended during the COVID-19 outbreak and conducted by video conference)
  • Two members of the Group's board of directors are members of the joint venture board.
  • Regular formal and informal meetings held with both joint venture management and joint venture partners.
  • Contract risk assessment, engagement and execution process now embedded in the joint venture.
  • Operational improvement programmes remain ongoing.
  • Ongoing review of controls environment and risk management processes undertaken by Group senior management.
People
9
Movement and scoring
 

Description

The ability to identify, attract, develop and retain talent is crucial to satisfy the current and future needs of the business. Skills shortages in the construction industry are likely to remain an issue for the foreseeable future and it can become increasingly difficult to recruit capable people and retain key employees, especially those targeted by competitors.

Impact

Loss of key people could adversely impact the Group's existing market position and reputation. Insufficient growth and development of its people and skill sets could adversely affect its ability to deliver its strategic objectives.
A high level of staff turnover or low employee engagement could result in a decrease of confidence in the business within the market, customer relationships being lost and an inability to focus on business improvements.
Mitigation

  • Training and development schemes to build skills and experience, such as our successful graduate, trainee and apprenticeship programmes.
  • Second wave of our Severfield Development Programme delivered in 2020 and the launch of an 'early careers' initiative which builds readiness for more senior positions.
  • Attractive working environments, remuneration packages, technology tools and wellbeing initiatives to help improve employees' working lives.
  • Annual appraisal process providing two-way feedback on performance.
  • Internal communications continually improved.
  • Interviews with leavers and joiners to understand the reasons for their decision.