Strong and effective risk management is at the heart of how the directors run the business and supports the achievement of the Group's strategic objectives. The board believes that ongoing consideration of and regular updates to the risk management framework enable the effective balancing of risk and reward.

The Group's ongoing operations and growth plans are subject to a number of different risks and uncertainties. Although we cannot eliminate such risks and uncertainties completely, we have established risk and internal control systems and procedures to mitigate their impact and the likelihood of them occurring. Further details of the Group's risk management processes are set out in the corporate governance report.

We strive to ensure that risk management is embedded into day-to-day business processes and operations such that it is effective at all levels of the organisation; this ensures that potential risks are identified at an early stage and mitigations are put in place to manage such risks. Through the risk management process and communication, there is a robust, periodic risk review involving Group management and all businesses.

The board formally reviews risks and mitigations for the Group and each of the businesses on a biannual basis. The review focuses on identifying potential risks that could significantly impact the business and considers in detail the various impacts of the risks and the mitigations in place.

The boardThe board has overall responsibility for the Group's risk management and internal controls, sets the strategic objectives, defines the risk appetite and monitors the risk exposure.

The nomination committeeThis committee ensures that the board has the appropriate balance of skills and knowledge required to assess and address risk and that appropriate succession plans are in place.

The businessesLocal management are responsible for the identification, reporting and ongoing management of risks in their respective businesses.

The audit committeeThis committee oversees the effectiveness of the Group's internal control function and risk management systems.

The executive risk committee and executive committeeThe executive committees are responsible for the identification, reporting and ongoing management of risks and for the stewardship of the risk management approach.

Other assuranceIndependent assurance is provided by the independent auditor, internal auditor, and various external advisers. External consultants and advisers support management and the board through ad hoc consulting activities, as required.

Risk management policyFurther details of the Group's risk management policies and processes are set out in the corporate governance report

Business Risk

Severfield (UK) Limited

Severfield (design & build limited)

Severfield (NI) limited

jsw Severfield structures limited

The businesses

The executive risk committee and executive committee

The audit committee

The board

The nomination committee

The board has identified the following principal risks and uncertainties which have the potential to impact the Group's profitability and ability to achieve its strategic objectives.

Risk/explanationRisk changeDescription/impactMitigation

Commercial and market environment

The UK construction market shows continued signs of improvement, however some market tension remains as main contractors continue to work through legacy contracts. There is also still some sensitivity in predicting the longer-term outlook. This continues to place pressure on certain elements of the supply chain, from end customers through to material suppliers and subcontractors.

Through our different businesses we seek to win profitable work through successful tender processes. This success depends on our ability to identify, price and execute appropriate contracts to maintain a profitable order book.

Link to KPIs:

  • Order book
  • Underlying basic EPS
  • Underlying operating profit / margin
  • Operating cash conversion
  • ROCE

Challenging trading conditions and lack of growth

Changes in government and client spending or other external factors could lead to programme/contract delays or cancellations, or changes in market growth.

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 could impact revenues, profits and the ability to recover overheads. Cash generation could also be impacted resulting in breaches of banking facilities or failure to deliver on strategic objectives.

Continued strengthening of senior management to improve processes and discipline around contract risk assessment, engagement and execution.

Recruitment of a Group strategic business development director to focus on markets and opportunities that fit the Group's risk appetite.

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 balance sheet, including refinanced banking facilities, supports the business through fluctuations in the economic conditions for the sector.

Inadequate contract pricing, cost management and variation management

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.

As contracts progress, there are likely to be changes to the work packages being undertaken which could result in the Group not being appropriately reimbursed for the cost of these variations as a result of poor commercial controls, disagreements or disputes.

Failure to achieve targeted profitability of contracts resulting in a reduction in Group margins and missed growth targets. The Group may need to resort to legal action to resolve disputes, which can be costly and may damage client relationships.

Business planning identifies the markets and clients that the Group will target.

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.

Work performed under standard terms (to mitigate onerous contract terms) where possible.

Established system of monthly reviews to measure and report contract progress and estimated out-turns, including contract variations.

Use of delegated authorities to ensure appropriate contract tendering and acceptance.

Inadequate supply chain management

We are heavily reliant on our supply chain partners for successful operational delivery of contracts to meet client expectations. We will be commercially, as well as reputationally, responsible for performance shortcomings by suppliers and subcontractors whether in terms of quality, safety, technical or ethical standards.

Insolvency or poor performance of a key supplier or subcontractor could expose the Group to liability for defective workmanship, materials or design. This may affect contract profitability, cash flow, reputation and the Group's ability to win repeat business.

Strong relationships maintained with key suppliers including a programme of regular meetings and reviews.

Contingency plans developed to address supplier and subcontractor failure.

Contracts only entered into with suppliers and subcontractors after review at the appropriate level of delegated authority.

Monthly review process to facilitate early warning of issues and subsequent mitigation strategies.

Initiatives have been implemented to select supply chain partners that match our commitment to quality.

People

The Group has established a market-leading position over many years due in large part to the experience and skills of its key people. The Group prides itself on its industry-leading practices and works in some high profile and technically challenging environments.

Link to KPIs:

  • Order book
  • Underlying basic EPS
  • Underlying operating profit / margin
  • ROCE

Recruitment and retention of talented people

In the current improving economic environment, it can become increasingly difficult to recruit capable people and retain key employees, especially those targeted by competitors.

Loss of key people could adversely impact the Group's existing market position and reputation. Insufficient growth and development of its people and skillsets could restrict its growth ambitions both in the UK and overseas.

Remuneration policy is regularly reviewed to ensure that it is competitive and strikes the appropriate balance between short and long term rewards and incentives.

Skills gaps are continually identified and actions put in place to bridge these by training, development or external recruitment.

In 2015/16 we will conduct a Group-wide review of emerging talent to ensure consistency and visibility of talent, succession planning and career opportunity.

Performance management tools and processes were redefined in the current year.

Leadership and management training plans are now in place.

Further investment made in graduate, trainee and apprenticeship schemes to safeguard an inflow of new talent.

Interruption to fabrication facilities

The Group's state-of-the-art production facilities are at the core of its business and the Group relies on their smooth continued operation, both in terms of the facilities themselves and the highly skilled employees who operate them.

Link to KPIs:

  • Order book
  • Underlying basic EPS
  • Underlying operating profit / margin
  • Operating cash flow
  • ROCE

Inadequate business continuity planning

Every business faces the potential risk of its operations being impacted by disruption due to loss of supply, industrial disputes, failure with technology, unplanned outages and physical damage as a result of fire or other such event.

Interruption could impact the Group's performance on existing contracts, its ability to bid for future contracts and its reputation, thereby impacting its financial performance.

The Group has four main production facilities so interruption at one facility could to some extent be absorbed by increasing capacity at a sister facility.

Detailed maintenance programmes are in place at each of the Group's facilities.

A wide network of subcontract fabricators is used on a recurring basis, both for short-term peak capacity requirements and for more specialised fabrication. This network could also be used to mitigate disruption to the Group's own fabrication facilities.

Appropriate levels of business interruption insurance cover are maintained and reviewed regularly with the assistance of independent advisers and brokers.

Industrial action

The Group (and the industry in general) has a significant number of employees who are members of trade unions. Industrial action taken by employees could impact on the ability of the Group to maintain effective levels of production.

Interruption could impact the Group's performance on existing contracts, its ability to bid for future contracts and its reputation, thereby impacting its financial performance.

Employee and union engagement takes place on a regular basis.

The Group has four main production facilities so interruption at one facility could to some extent be absorbed by increasing capacity at a sister facility.

Processes are in place to mitigate disruptions as a result of industrial action.

Indian joint venture

The Group has invested in a joint venture in India, where the growth prospects are believed to be substantial.

Link to KPIs:

  • Underlying basic EPS
  • ROCE

Performance of the joint venture

The growth, management and performance of the business is a key element of the Group's overall performance. Effective management of the joint venture is therefore important to the Group's continuing success.

Crucial to the long-term success of the joint venture is the development of the market for steel (rather than concrete) construction.

Failure to identify, understand and evaluate the risks of operating in India could lead to financial loss, reputational damage and a drain on cash resources to fund the operations.

Robust joint venture agreement.

Two members of the Group's board of directors are members of the joint venture board.

Strong governance in place at the joint venture.

Regular formal and informal meetings held with both joint venture management and joint venture partners.

Contract risk assessment, engagement and execution process now embedded.

Overhead reduction and operational improvement plans being implemented by new management team.

Health and safety

The construction industry sets very high standards of health and safety which the Group aims to exceed to maintain the health and well-being of its employees.

Link to KPIs:

  • Order book
  • Underlying basic EPS
  • Underlying operating profit / margin
  • Operating cash flow
  • ROCE
  • Accident frequency rate (AFR)

Serious health and safety incident

Construction activities can result in injury or death to employees, leading to the potential for legal proceedings, regulatory intervention, project delays and, where at fault, potential loss of reputation.

Loss of profitability and ultimately exclusion from future business.

Established safety systems, site visits, monitoring and reporting, and detailed health and safety policies and procedures, are in place across the Group.

Thorough and regular employee training programmes, including new behavioural safety training initiatives, under the leadership of the new Group SHE director.

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.

Priority board review of ongoing performance.

Regular reporting of and investigation and root cause analysis of accidents and near misses.

Achievement of challenging health and safety performance targets is a key element of management remuneration.

Information technology (IT)

The Group's complex and interdependent IT systems support the effective and efficient running of the business. Ensuring our systems are reliable strengthens the day-to-day operations of the Group.

Link to KPIs:

  • Underlying basic EPS
  • Underlying operating profit / margin
  • Operating cash flow
  • ROCE

IT failure or disruption

With insufficient IT disaster recovery planning, cyber-attack 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.

Prolonged or major failure of IT systems could pose significant risk to the ability of the Group to operate and trade, thereby impacting its financial performance. 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.

IT is the responsibility of a central function which manages the systems across the Group.

Significant investments in IT systems are subject to board approval.

Group IT committee now in place ensuring focused strategic development and resolution of issues impacting the Group's technology environment.

Data protection and information security policies are in place across the Group including anti-virus software, off-site and on-site backups, storage area networks, software maintenance agreements and virtualisation of the IT environment.

Cyber-crimes and associated IT risks are assessed on a continual basis.

ISO 27001 certification project is ongoing to further improve the Group's technology environment.

The 2014 annual report disclosed 'failure to mitigate onerous contract terms' within the existing risk category 'commercial and market environment' (see table above). This item is now considered lower risk (and is classified as such in the Group risk register) as a result of improvements made to the Group's legal and commercial review processes and the implementation of a more standard approach to client engagement.