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Principal and emerging risks

The board has carried out a robust assessment of the principal and emerging 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. In reviewing our risk registers we consider our principal and emerging risks and in assessing those risks, we take into account the correlation between different risks and ensure they are weighted appropriately. This exercise informs our scenario analysis used in the viability statement. 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

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2 Supply chain

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3 People

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4 Commercial and market environment

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5 Mispricing a contract (at tender)

1234567

 

 

6 Cyber security

1234567

 

 

7 Failure to mitigate onerous contract terms

1234567

 

 

8 Indian joint venture

1234567

 

 

9 Sustainable and responsible business

1234567

 

 

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.

Strategic pillar key

Growth

Clients

Operational excellence

People

India

Movement

Upward trend

Downward trend

No change

New

Scoring

 High

 Medium

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

7

Accident frequency rate (‘AFR’) / Injury frequency rate (‘IFR’)

1 Health and safety
DescriptionPotential impactMitigation
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.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.
  • 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, incidents and high potential 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.
  • Detailed due diligence on new acquisitions and effective integration of SHE processes and systems.
  • A detailed gap analysis and strategy review was undertaken in 2022.

Trend
 

Link to strategy

Link to KPIs
123567

Scoring
High

2Supply chain
DescriptionPotential impactMitigation
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, a breakdown in relationships with a key supplier or the failure of a key supplier to meet its contractual obligations could potentially result in some short to mediumterm price increases and other short-term delay and disruption to the Group’s projects and operations. There is also a risk that credit checks undertaken in the past may no longer be valid.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 replacement supply), its ability to bid for future contracts and its reputation, thereby adversely impacting financial performance.
  • Process 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.
  • Ongoing reassessment of the strategic value of supply relationships and the potential to utilise alternative arrangements, including for steel supply.
  • Contingency plans developed to address supplier and subcontractor issues (including the failure of a supplier or subcontractor).
  • Monthly review process to facilitate early warning of issues and subsequent mitigation strategies.
  • Strong relationships maintained with key suppliers, including a programme of regular meetings and reviews.
  • Implementation of best practice improvement initiatives, including automated supplier accreditation processes.
  • Key supplier audits are performed within projects to ensure they can deliver consistently against requirements.

Trend
 

Link to strategy

Link to KPIs
123456

Scoring
High

3People
DescriptionPotential impactMitigation
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. This has been exacerbated in the last 12 months due to macro-economic factors such as the impact of inflation and shortages of labour.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.
  • Training and development schemes to build skills and experience, such as our successful graduate, trainee and apprenticeship programmes.
  • Detailed succession planning exercise completed in 2022 identifying for development future senior leaders within the business.
  • Attractive working environments, remuneration packages, technology tools and wellbeing initiatives to help improve employees’ working lives and above average inflation pay review in 2021.
  • 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.
  • A new HR structure implemented in 2021 and updated HR systems rolled out covering payroll and a new employee portal.
  • Three-year goals have been defined around HR operational efficiency, evolving our approach to performance, development and careers and creating an environment where Severfield employees feel listened to and are fairly recognised and rewarded for their contribution to the Group.
  • A review of the Company approach to flexible working practices has been undertaken in the light of our experiences of remote working during the COVID-19 pandemic.

Trend
 

Link to strategy

Link to KPIs
12356

Scoring
High

4Commercial and market environment
DescriptionPotential impactMitigation
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 trading relationship with the EU), the impact of worldwide events such as war (including the impact of the Ukraine crisis) and the impact of pandemics (including the ongoing COVID-19 pandemic).

Lower than anticipated demand 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.
A significant fall in construction activity and higher costs could adversely impact revenues, profits, ability to recover overheads and cash generation.
  • 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).
  • Monitoring our pipeline of opportunities in continental Europe and in the Republic of Ireland, supported by our European business venture.
  • The Group closely monitors the flows of goods and people across borders for ongoing work with the EU and specific risks and related mitigations are kept under review by the executive committee. We have taken steps to ensure we can continue to deliver on current and future contractual commitments.
  • 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 model and balance sheet supports the business through fluctuations in the economic conditions of the sector.
  • Acquisition of Harry Peers and DAM Structures has broadened our reach and cross-selling opportunities, resulting in improved market resilience.

Trend
 

Link to strategy

Link to KPIs
123456

Scoring
Medium

5Mispricing a contract (at tender)
DescriptionPotential impactMitigation
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.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.
  • Improved contract selectivity (those that are right for the business and which match our risk appetite) has derisked 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.
  • Adoption of 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.

Trend
 

Link to strategy

Link to KPIs
123456

Scoring
Medium

6Cyber security
DescriptionPotential impactMitigation
Cyber-attack 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 keep pace with new technologies and respond to threats to data and security
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.
  • 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 focused 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.
  • Cyber-crimes 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 to reduce the financial impact of this risk.

Trend
 

Link to strategy

Link to KPIs
1245

Scoring
Medium

7Failure to mitigate onerous contract terms
DescriptionPotential impactMitigation
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.Loss of profitability on contracts as costs incurred may not be recovered, and potential reputational damage for the Group.
  • 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 continue to work 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

Trend
 

Link to strategy

Link to KPIs
12345

Scoring
Medium

8Indian joint venture
DescriptionPotential impactMitigation
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 has impacted JSSL and recovery is continuing.
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.
  • In line with the response of the Group to COVID-19, local management in India continue to closely monitor cash flows and debt repayments, together with adopting specific actions to minimise the disruption on the joint venture operations during the Indian economy’s recovery period.
  • Restructuring undertaken in 2021 to reduce overheads without compromising future growth plans.
  • Robust joint venture agreement and strong governance structure is in place.
  • Regular schedule of annual visits to India by UK executive and senior management to review operations and ensure appropriate oversight
  • 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.

Trend
 

Link to strategy

Link to KPIs
25

Scoring
Medium

9Sustainable and responsible business
DescriptionPotential impactMitigation
Risk of not being able to meet stakeholder expectations in the light of uncertainty as to the direction in which stakeholder expectations will develop.Loss of position as market leader and wider losses of future opportunities in the short term.
  • We have demonstrated a commitment to reducing our carbon footprint by becoming carbon neutral and established other stakeholder influenced sustainability related targets, such as net zero by 2040.
  • We are rated A- by CDP in the leadership band.
  • We have a dedicated sustainability manager who monitors current legislation and expectations and develops Group strategy to facilitate and implement plans for compliance.
  • We are raising internal awareness of the steps we are taking and developing closer working relationships with clients and suppliers.
  • We monitor shareholder comments on the annual report and accounts and in one-to-one meetings.

Trend
 

Link to strategy

Link to KPIs
1236

Scoring
Medium