Risks and opportunities

Most important risks relate to:

• Market factors

• Primary process

• People, organisation and culture

• Health and safety

• Business conduct

• Reputation

Risk management

Risk is inherent to any business venture and the risk to which the Group is exposed is not unusual or different from what is considered acceptable in the industry. The Group’s risk management system is designed to identify and manage threats and opportunities. Effective risk management enables BAM to capitalise on opportunities in a carefully controlled environment. 

The risk management system provides a platform for sharing knowledge and expertise among the operating companies in a structured manner, making risk management a key enabler in achieving the strategic objectives. 

Risk management framework 

The Executive Board is responsible for risk management in the company and has created and implemented the Enterprise Risk Management Framework, supported by the Risk Management Department. This framework, which is based on COSO (Committee of Sponsoring Organisations of the Treadway Commission), is integrated into the regular planning and control cycle and involves achieving the strategic objectives, the effectiveness and efficiency of business processes, the reliability of information provision (including financial information) and compliance with the relevant laws and regulations. 

The first step in the risk management process is defining and planning the Group strategy. This process is conducted every three years in conjunction with all the operating companies and results in strategic objectives and implementation plans. The strategic objectives are assessed by the Executive Board and the Group’s staff directors based on the BAM Risk Register, which contains 28 pre-defined risk areas, relevant to the environment in which BAM operates and to the risk appetite specified. The purpose of this assessment is to prioritise risk factors and the corresponding implementation and improvement goals. 

The Group strategy and risk management framework is shared with the operating companies, which operate in the specific industries and geographic areas shown in the activity matrix. They adapt the Group strategy to their own specific activities and environment and subsequently assess their (derived) strategies based on the BAM Risk Register. This process helps to identify all relevant risks in the 28 risk areas and results in the prioritisation of risk areas and the corresponding implementation and improvement plans for each operating company. 

The strategic plans and risk assessments for each operating company are shared across the entire Group, resulting in a platform where best practices are shared and implementation and improvement plans are executed collectively by the operating companies where possible. Staff positions and networks of subject matter experts accelerate this process of acquiring and sharing knowledge and expertise through a consistent risk management language and approach. 

The Executive Board receives progress updates on the implementation of the strategic goals and the related implementation and improvement plans through the quarterly reports and management meetings. This is also shared regularly with the Supervisory Board.

General management measures 

The Group uses a variety of general management measures as part of its risk management and monitoring system. The first of these are the business principles, which represent the Group’s beliefs, values and expected behaviour. Along with the Code of Conduct, these principles form a key part of the internal environment in which risk management is conducted. 

Business principles

A. People:
We offer added value to clients, employees, business partners and the community.

1. Clients: We always do our utmost to exceed our client’s expectations. We work in partnership with our clients to deliver high-end projects within the timescale set, both safely and with respect for the environment. We encourage our clients to work with us to develop suitable sustainable solutions. We aim to be the preferred supplier for CO2-neutral solutions.

Dilemma: In a market where cost often takes precedence over value, especially at tender stage, incentives to reduce impacts such as value engineering and innovation are often implicitly induced and BAM’s newly developed products are not considered as proven technologies and accordingly rejected. Yet, BAM staff is encouraged to maintain a sustainable relationship with clients, based on its business principles and the opportunity to work with them in the long term.

2. Community: We promote good communications with the local community. By its very nature, our construction and renovation work has an impact on local communities, occupiers and other users of buildings and infrastructure and society as a whole. We are pro-active therefore in minimising the level of negative impact on the local environment and seek to make a positive contribution to local communities.

Dilemma: BAM often operates in communities that have not chosen the projects that BAM builds and often BAM is not responsible for the value the projects have for communities after completion. Especially outside Europe BAM’s operations are often in areas where its licence to operate depends on community engagement and CSR, not on good intention or charity.

3. Employees: We believe in our employees. We aim to create a safe and inspiring environment for our employees to develop their skills and in turn enable them to contribute to the further development and growth of our organisation. 

The commitment to our employees is demonstrated by:

  • Health and Safety – Health and Safety is the top priority of our company. We are committed to the continuous improvement of our performance in Health and Safety for all our employees and subcontractors and everyone involved with our activities, including the general public;
  • Equality and diversity – We offer a challenging working environment where everyone feels valued and respected. We are committed to offering equal opportunities and we ensure that job applicants and employees do not face discrimination on the grounds of gender, marital status, race, skin colour, ethnic origin, religious belief, sexual orientation, disability, or age;
  • Learning and development – We create a learning culture and provide opportunities for our employees to fully apply their knowledge and skills in the service of the company. We are committed to professional development and will help our employees to continue their development in the interests of the company and its objectives.

Dilemma: Despite economic pressures that result in job losses, BAM continues to invest in people by offering new and varying opportunities for work. Heavy competition drives innovation capabilities in BAM’s projects and employees accordingly. Economic pressure might also result in using fewer safety measures, like barriers or other equipment to protect workers. BAM considers savings at the expensive of safety unacceptable and qualifies reducing safety measures at the risk of employees as dangerous for all stakeholders and as unfair competition.

4. Supply chain partners: We procure responsibly. We treat our supply chain partners honestly and respectfully. We work with subcontractors and suppliers to ensure that they operate safely and in an environmentally-conscious way. Together with our preferred partners, we promote and develop sustainable solutions and best practice for the industry.

Dilemma: Low-price bidding and the decisions taken to arrive at lowest price, because of economic pressures, do not necessarily provide value for clients. BAM focuses on long-term partnerships that create intellectual capital for all in order to decrease total cost. 

B. Planet:We recognise our responsibility to future generations.

5. Energy: We strive to reduce our impact on climate change.
We will improve our energy efficiency, reduce our CO2 emissions and work with our clients to develop CO2-neutral solutions.

Dilemma:Under current market conditions, CO2-intensive markets like civil engineering outside Europe perform better than construction, mechanical and electrical and the Dutch market. This has a negative impact on climate change indicators, but does contribute to local communities, economies and social circumstances.

6. Raw materials: We are becoming more efficient in our use of materials. We believe in reducing our impact on the supply of natural raw materials used in our products. We will work with our clients and suppliers to use alternative materials and methods in order to optimise the use of raw materials. We also promote measures to recycle and reduce waste.

Dilemma: New and recycled materials tend to suffer from regulatory restrictions for acceptance in construction, which favours traditional materials. True pricing, taking into account social and environmental costs, gives transparency to the Group’s product value, which BAM trusts will yield acceptance.

7. Environment: We will limit our environmental impact. We take all possible reasonable measures to ensure that our activities are conducted in a way that minimises the impact on the local environment. We promote environmentally-friendly operations and seek opportunities to promote biodiversity on our construction sites.

Dilemma: The value of biodiversity is generally appreciated, yet hardly quantified. Monetising, or otherwise comparing value needs further research for proper assessments that are in line with public perception. Biodiversity is rarely addressed in client specifications or invitations to tender. 

C. Profit:Creating economic value.

8. Innovation: We innovate to identify balanced sustainable solutions. Innovation is essential for our development and to identify powerful sustainable solutions in the built environment. Together with our partners in the supply chain, from customers to subcontractors and suppliers, we will provide sustainable solutions in which economic, environmental and community interests are well- balanced. This approach ensures that we use materials efficiently and provide good value to our customers.

Dilemma: Innovations typically provide unique solutions for which no equivalent exists. Public procurement often prohibits patented or BAM’s unique solutions for fear of lack of competition, despite the sustainability.

9. Prosperity: We believe that sustainability results in economic value and we choose to create value by working on effective and profitable solutions for our shareholders that contribute to a sustainable future. We believe that by applying these business principles, we create value for our shareholders, clients, employees and for society as a whole.

Dilemma: Advantages of being a first-mover in the field of corporate social responsibility often seem to cause disadvantages in competition. Yet, as a first-mover BAM has the opportunity to organise the supply chain.

Management guidelines

A second general management measure involves the guidelines and instructions the Group provides to the management of the operating companies, as well as feedback. This measure defines the levels of responsibility of the operating companies and sets requirements for the quality of vital management measures and include, among other things, limits for entering into risks and commitments related to investments and bidding on projects. The guidelines are assessed – and amended if necessary – based on changes in the risk appetite for achieving the objectives, the risk profile, or changes in the internal organisation. 

In addition to the management guidelines, there are more detailed instructions for establishing the control environment, external reporting, security policy, tax policy and treasury-related matters. 

The Group’s third general management tool is a system for budgeting, reporting and (internal) controls. The entire Group uses uniform guidelines and accounting policies, which serve as the basis for all financial, non-financial and management reporting. As part of the detailed monthly and quarterly reports, the operating companies report on changes in (projected) company revenues, financial results, working capital and liquidity, order book and sustainability. 

Lastly, the Group manages several insurance policies relating to liability, design liability (i.e. professional indemnity), construction all risks (CAR) and equipment (including floating structures) and fire. A specialised department ensures that all relevant risks are included in the insurance agreements during construction (which are entered into at the head office) and that the liability insurance policies purchased provide sufficient cover. In addition, they also inform the operating companies of their claims history in order to be able to continue improving. The Group regularly consults professional insurance brokers on its insurance cover. 

Risk appetite 

Risk appetite is defined as the level in which BAM is willing to accept risk in the ordinary course of business in order to achieve its objectives. 

Based on its knowledge and experience in the home markets, BAM is willing to tender on complex multidisciplinary projects, which involves the controlled transfer of risk between the client and BAM. In order to spread risks, BAM considers tendering for large projects in conjunction with solid and solvent partners. In projects that exceed €300 million, BAM in principle bids together with partners. In entering into PPP investments, BAM aims to generate construction output for the operating companies. The company’s intention is to sell these projects to investors after the construction phase, as was achieved in the joint venture BAM/PPP-PGGM. Since the risk profile is substantially based on volume (i.e. variable compensation), BAM generally only invests in projects based on contractual availability (i.e. fixed compensation). 

Property development also generates construction output for the operating companies and BAM continues to invest in property development projects provided they are profitable and have a plausible and profitable exit strategy that has been defined in advance. 

Outside its home markets, BAM intends to invest worldwide in niche areas, provided they are in line with the Group’s business principles. 

General risks and corresponding management measures

Construction contracts

The majority of construction work is performed on a project basis, with projects varying in their nature, size, scope, complexity and duration. The industry as a whole shows a certain imbalance (i.e. asymmetry) between risks and results, meaning the upward potential of projects tends to be more limited than the downward potential. As a result, the Group must have a strong project organisation in place, operating close to the projects and within the markets. 

Before bidding on any new project, the operating companies assess the qualitative and quantitative risk factors. Uncertainties may relate to financial and contractual aspects, safety, construction materials, plant and equipment, location (including site conditions and permits), the construction period and the work schedule as well as to clients, subcontractors and construction partners. A quantitative analysis is performed on the risk factors, based on empirical data. This analysis is used to make adjustments to the project schedule or construction methods in order to reduce project risk. The analysis may also result in adjustments to the risk premium in the contract price. 

Bids for major projects or projects involving exceptional risk are submitted and presented to the Executive Board for prior approval. During the execution, the project team periodically and systematically assesses the opportunities and risks attached to the project. If necessary, the project team implements measures to reduce newly identified risks, focusing mainly on the quality of the construction work to be completed, avoidance of construction faults and meeting the handover date. Project managers submit reports on progress, the main opportunities and downside risks associated with the project, the quality and the financial aspects of the project to their regional office managers, who, in turn, report at least on a monthly basis to the operating company managers. They, in turn, report to the Executive Board each month, through the information systems described above. 

The success of projects BAM acquires depends largely on the quality of the employees and management. In order to attract, challenge and develop talented employees in a structured and effective manner, the Group has made human resources policies a key priority, as discussed on pages 10-11 of this report. 

In order to limit legal risk, BAM uses standard legal documents required for projects wherever possible. Where a non-standard contract is used, BAM’s (in-house) lawyers and other specialists will assess the contract beforehand. Standard contracts include among other things clauses that provide that price increases in units of wages and materials may be charged on to the client during the construction period. Clients also have the option to buy off these risks. 

In the construction industry, clients commonly demand guarantees by way of security that the project will be completed successfully. This guarantee may be provided by the parent company or, alternatively, by external parties such as banks and surety institutions. The Group has strict procedures in place to ensure that the contractual terms of the guarantees provided comply with the company’s specific guidelines. 

On an annual basis, the Group procures more than 75 per cent of its revenue from suppliers and subcontractors. These companies have a major impact on the projects, both in financial and in technical terms. The Group aims to build strong partnerships with its suppliers and subcontractors in order to ensure that the construction process runs as smoothly as possible and to achieve the optimum lowest possible costs and high quality of products. For collaboration and management of price risks to work well, suppliers need to be involved in the project at an early stage. This collaboration is set out in partnerships and framework contracts, which contain agreements about fees and conditions (such as delivery times, invoicing, risks and bonus discounts). Project-specific orders can then be placed under the framework contracts. 

The comprehensive knowledge and extensive experience of its operating companies enable the Group to complete major projects successfully on its own. Nonetheless, it can be advantageous – including from the point of view of spreading the risks – to work in a joint arrangement when dealing with larger projects. This usually involves establishing a general partnership (a legal form in which all parties are jointly and severally liable for mutual commitments connected with the performance of the project). The Group mitigates the risk arising from these activities to its construction partners by entering into joint arrangements only with solid and solvent partners. If the risk to which the partner is exposed is nevertheless assessed to be too high, the BAM operating company concerned demands other securities which can take the form of a bank guarantee or of the partner leaving sufficient cash invested in the joint arrangement. 

Operating companies limit payment risks of projects as much as possible by agreeing on contractual payment schedules. This ensures that the client’s payments are at least in balance with the progress cost of the work performed. For projects completed in emerging markets and developing countries, adequate security is agreed or export credit insurance is purchased prior to the start of the project in order to hedge political risk and payment risk. When entering into financing arrangements, BAM performs a credit check on clients. The Group also focuses in particular on the security provided by banks and the payment systems used by government bodies. 

Property

If the Group intends to take on property development risk, this requires the prior consent of the Executive Board. The latter takes a decision regarding these risks, based on the project proposals from the operating company concerned and associated analyses performed by the Group’s Property Investment Director. The general rule is that construction does not start until a substantial number of properties have been sold or, for non-residential, a large part of the project has been let or sold. However, the United Kingdom – where BAM only operates in the non-residential property sector – is an exception to this. There, the inventory risk is mitigated by implementing a system of phased project execution. The Dutch property portfolio still includes a number of residential construction projects from the past where there is an unconditional obligation to build.

PPP

Entering into PPP and concession contracts always requires the prior consent of the Executive Board. In its assessment of the risks attached to PPP and concession contracts, the Executive Board is assisted by the management of BAM PPP. This operating company optimises the utilisation of the know-how and experience available within the Group, both for acquiring new projects and for properly assessing the specific risks connected with concessions. 

Specific risks and corresponding management measures 

Besides the general risks outlined above, several specific risk areas and measures have been identified in relation to the objectives of the updated strategy. The main risks and opportunities in these risk areas relate to changing market factors impacting the primary process. The identified improvement activities to manage risks and capitalise on opportunities will be further developed and aligned throughout the Group. Follow-up and feedback forms part of the regular management reporting cycle. These risk and opportunity areas are specified here.

Market factors

Risks: The current market has been heavily affected by the economic crisis in Europe, resulting in intense competition for the shrinking number of projects available in the Group’s home markets. This has created a buyer’s market, where margins are down and design and contract risks are shifted increasingly to construction companies. 

With many property development projects being cancelled or deferred, the value of BAM’s property portfolio has been under pressure. 

The limited availability of capital constitutes a substantial risk across the entire value chain. As a result of tighter guidelines for banks under Basel III, banks are less willing to provide finance for property development, construction and PPP projects. In addition, the pre-financing of projects by customers has also been compromised (i.e. working capital).

Management measures: In order to deal with these market conditions, as well as to seize the opportunities they create, BAM has launched or enhanced a variety of initiatives based on the activity matrix and the Best in class programme. The main initiatives are increasing BAM’s market share in niche markets and other geographic areas; forward integration and a client-oriented approach; switching to complex/multidisciplinary projects; and providing alternative property development and financing methods.

BAM also assesses and redefines predictive risk indicators (i.e. leading indicators) so as to be able to effectively compete in the rapidly changing environment.

Specific market risks (e.g. financial risks), including interest rate risk, price risk, credit risk and liquidity risk are stated in section 3 (Financial risk management) of the financial statements in conjunction with the management measures implemented by the Group. 

Primary process

Risks: The primary process constitutes the core of construction activities, which include tendering, procurement, contract management, project management and the corresponding value chain. The results of projects are determined mainly during the tender stage. During this stage, the changing contract types and conditions (contract management) constitute a risk as well as an opportunity in terms of the potential for differentiation. Contract management is vital, both during the tender stage as well as during implementation. 

The risks described above may lead to fluctuations in the project results. The sector is known for having an asymmetrical risk profile – in which several successful projects are required in order to compensate for one unsuccessful (project management).

Management measures: Based on the Best in class programme, a variety of initiatives were launched or further enhanced in order to address these risks and to capitalise on the associated opportunities.

These initiatives include: promoting internal research networks that actively exchange knowledge and expertise; further applying lean and BIM to integrated projects; more stringent project monitoring and performance management; and concept and process innovation related to sustainability and lean construction.

The company also increases contract knowledge and risk awareness of operational employees through education and training. Reviews of project-related contracts are conducted by BAM’s (in-house) legal experts and contribute to awareness and continuous improvement. These reviews are conducted both during the tender stage to assess contractual risks and after completion to capture lessons learnt.

Employees, organisation and culture

Risks: Employees are BAM’s most vital asset and by using their full potential the Group can respond more effectively to changes in the market. 

Specific challenges in this process include, first of all, a change in leadership style and the competencies required. Secondly, new types of contracts make it necessary to further train employees in contract and risk management. 

Thirdly, competencies such as sustainability, customer focus, establishing integrated partnerships, exchanging knowledge, Best in class operations and diversity have become increasingly important in achieving BAM’s strategic objectives.

Finally, it is essential that BAM remains a preferred employer, in order to be able to continue to attract top talent.

Management measures: Various initiatives and activities of BAM’s Best in class strategy are aligned with these risks.

First of all, BAM will continue to invest in further developing employees so they can: contribute to achieving the strategic objectives; prepare a sufficient number of candidates for key positions and improve (inclusive) leadership.

Secondly, the company aims to foster an open culture of learning and exchanging knowledge in the form of training and education, building on the knowledge and expertise available.

Thirdly, BAM aims to increase the mobility of BAM employees in core businesses. This is facilitated by the international recruitment site, publishing all vacancies and career opportunities within the Group.

Fourthly, BAM operates in the labour market by working with recruitment agencies, through advertising and by collaborating with various training institutes.

Health and safety

Health and safety risks and opportunities and associated management measures are further shared under paragraph Material themes on pages 53-55.

CSR

CSR risks and opportunities and associated management measures are further shared under paragraph Material themes on pages 64-76.

Business conduct 

The trust placed by clients, shareholders, lenders, construction partners and employees in the Group is vital in order to be able to ensure the company’s continuity. The Group accordingly adheres to generally accepted standards and values and complies with local statutory and other rules and regulations, particularly with respect to the acquisition and performance of contracts. This principle is set out in the Group’s Business Principles and Code of Conduct. All employees are required to act fairly, to honour agreements and to act with care towards clients and business partners, including suppliers and subcontractors. This is kept under constant review in order to make integrity a fundamental part of day-today activities. 

The Executive Board has appointed a Group Compliance Officer, who promotes compliance with the Code of Conduct and provides advice on issues involving integrity. The operating companies, too, have their compliance officers, to whom breaches of the Code of Conduct can and must be reported. For this, the Group has a whistleblower policy in place. 

The Group believes it is important that employees can report any suspicions of wrongdoings within the Group and that they are able to report such matters without fear of reprisals. 

Both the Code of Conduct and the whistleblower policy are easily accessible to employees. For example, they can be found on the Group’s intranet site and on its website. 

Reputation risk 

BAM’s reputation may be damaged if one or more of the risks described above occur. This means that reputation risk is not a separate, defined risk area, but rather the result of specific risks occurring. 

Outstanding claims and procedures 

Companies operating in the construction industry are involved in discussions on the financial settlement of construction projects, including contract variations, the time of completion and the quality level of the work. Most of these discussions are concluded to the satisfaction of all concerned. However, in some cases it is impossible to avoid a discussion ending in legal proceedings. BAM is also involved in a number of lawsuits. Financial claims that the Group has pending against third parties are generally not capitalised unless it is reasonably certain that the amount in question will be paid. The Group takes great care to prevent such legal proceedings by implementing quality programmes and providing training for its employees. Some examples of major legal proceedings involving BAM are given briefly below.

In 2005, during the construction of a drilled tunnel for the SMART North tunnel project in Kuala Lumpur, engineering firm Wayss & Freytag Ingenieurbau was faced with ground conditions that varied from the information provided by the client. Wayss & Freytag Ingenieurbau terminated the contract in early 2006 as a result of the client’s failure to fulfil its payment obligations and refusal to deal with Wayss & Freytag’s claims for an extension of the construction period and reimbursement of costs. The client, in turn, also terminated the contract in January 2006. Wayss & Freytag Ingenieurbau lodged a claim against the client for more than €20 million as compensation for costs incurred. The client lodged provisional counterclaims amounting to €5 million. An independent dispute adjudicator, in the contractually prescribed procedure, has ruled that Wayss & Freytag Ingenieurbau was entitled to terminate the contract. This verdict has been confirmed by an arbitration. The client has attempted to set aside this arbitration award before the high court in Malaysia. In the first instance, the arbitration award was confirmed by the court. The client appealed from this verdict. Based on the information currently available, the Group considers the valuation of the claim to be adequate.

On 3 March 2009, during the construction of a section of the Cologne metro system, several adjacent buildings, including the building of the City Archives of the City of Cologne, collapsed. Two persons were killed as a result of this accident. Wayss & Freytag Ingenieurbau is a one-third partner in the consortium carrying out this project but was not directly involved in the work performed at the site of the accident. The customer has instituted a judicial inquiry (known as a Beweisverfahren) before the district court (the Landgericht in Cologne). As part of these proceedings, a number of specialists are investigating the cause of the accident, which is expected to take some time. Only when their investigation is complete will it be possible to determine if and to what extend the consortium might be held responsible for the accident. The German Public Prosecution Service is also carrying out its own investigation to determine whether any criminal offences have been committed.

The damage to property is considerable and the parties involved have claimed under several different insurance policies. 

Intensifying risk management 

In order to enhance the Group’s risk management, BAM intends to achieve the following objectives: 

  • Accurate and complete identification of key opportunities and threats at strategic, tactical and operational level; 
  • Strengthening the link of the strategic objectives between the Group and its operating companies; 
  • Avoiding surprises; 
  • Creating a shared risk management language; 
  • Supporting a learning and sharing environment. 

The Group has a standardised evaluation method to identify and prioritise risks and improvement potential at operating companies and regions. There is a Group-wide focus on risk management in the primary process, prompted by increasing complexity and growing competition. The potential for improvement relates to developing and sharing best practices on project selection, new business development, implementation and management. Supportive to the primary process, there is a focus on developing employees’ relevant competencies and skills in this changing environment. 

Both the Enterprise Risk Management and the internal governance framework have been enhanced by translating the Group strategy into strategic planning and associated dashboard for monitoring the initiatives and strengthening the company principles and management guidelines.

Lastly, BAM has included the risk management philosophy in its curriculum of BAM Business School, the in-house training institute. Key attention areas are risk awareness and risk attitude. 

In 2015, the Group improved the tender stage gate procedure (> figure 6). All larger tenders and tenders with specific risks, have been assessed by the corporate Tender Desk and approved by the Executive Board. Lessons learned from these tenders have been shared with the management of the operating companies focusing on product type, client relationship, geographical location, contract type and required partners for the tender at hand.

Several peer reviews have been performed during the tender phase of major projects. These peer reviews mobilise the full knowledge of the Group and contribute in robustness of the proposal made to the client.

In addition, compliance with these procedures are assured by the operational audit function. To ensure the effectiveness of this process, key staff have been appointed at Group level.

The operational audit function started to perform Stage Gate 5 reviews (reality checks) in 2015 on newly won projects to ensure compliance with the tender stage gate procedure, that measures to manage risks during execution, are in place. This will be further intensified in 2016.

With the new strategy BAM is taking the next step in enterprise risk management. The Group will further strengthen governance and have a stronger focus on where BAM can win. In addition there will be a stronger focus on cultural values, further supporting the BAM brand and strategy;

  • Based on Corporate Strategy 2016-2020, risk assessments and dialogue will take place at each operating company on their derived strategy. This will result in actions and activities that will be followed-up;
  • Based on the corporate strategy leading indicators will be refined and followed up;
  • BAM will further develop Projects in Control, which is a strong foundation in BAM’s governance in project selection and execution. As from 1 January 2016, all tenders and new projects are categorised with regard to their risk profile. The stage gates are tailored to each category and the governance structure is tailored to each category.

Management letter from the independent auditor

The independent auditor assesses BAM’s internal control environment as an integral part of its audit procedures, mainly focusing on the key financial processes and reporting systems underlying the information contained in the financial statements. 

Based on the ambition of BAM, its Group strategy and the current (market) developments, the auditor has put specific attention to the following subjects:

  • Progress of the Back in Shape programme;
  • Project control and risk management;
  • Other internal control procedures;
  • IT governance, security and continuity;
  • Maturity of the sustainability reporting process.

Differences in approach and quality across the operating companies are inherent to BAM’s model. The independent auditor consequently forms an impression of each operating company. The independent auditor concluded that the quality of the internal control environment on the operating company level varies between normal and strong. None of the operating companies was assessed as being weak despite the significant organisational changes following the Back in Shape programme. However, the independent auditor has identified the uniformity of internal control procedures within BAM and the increase of automated control measures in business processes as areas for further improvement.

The independent auditor concludes that project control from a compliance perspective is classified as normal and management is further implementing measures to strengthen this. In 2015 BAM has implemented the procedures in connection with project control, being the stage gate tender and peer review procedure, throughout the Group with a stronger focus on earlier stages before actual tender submission to rationalise tender cost and further reduce risk on acquiring projects that could turn into a loss. These procedures combined with the operational audit function in place is in line with the Group strategy and the current (market) developments. The independent auditor recommends to further strengthen the operating effectiveness of the stage gate tender procedure.

In connection with the other internal control procedures mainly relating to support functions, such as group sourcing, payables, cash management and human resources, the independent auditor concludes that the quality of these procedures on the operating company level varies between normal and strong notwithstanding that at a limited number of operating companies improvements can be achieved.

The independent auditor recognises that the overall IT governance of BAM has improved as a result of the measures taken following the Back in Shape programme. Standardised IT systems and procedures will further increase efficiency in operations and improve the quality of the control environment.

The independent auditor concludes that the improved relevance and robustness of the sustainability reporting has accelerated BAM’s path to integrated reporting with its first publication last year. Challenges have been identified with respect to connectivity of the material themes as part of the value creation process of BAM. However, the independent auditor has reported findings in connection with the quality of worked hours registration of subcontractors related to the safety indicator and in connection with the quality of compliance reporting related to the integrity indicator. BAM has carried out appropriate actions to remediate these matters in 2016. 

Assessment of risk management and monitoring systems 

The risk management and monitoring systems worked adequately during the year under review and no deficiencies were identified in relation to these systems and their operation that could have potential material implications in the financial year 2015.

BAM can reasonably state that there are no indications that the risk management and monitoring systems will not function adequately during the financial year 2016. No other significant changes are planned for these systems, except the further enhancement of risk management, as detailed above. The Group cannot guarantee that no risks will materialise and the Group continiously strives to improve the risk management and monitoring systems. 

The optimisation of internal risk management and monitoring systems remains a key focus for the Executive Board and it may result in the systems being improved or expanded. The aforementioned intensifying of risk management is one example. 

Name

Company