Kier : Annual Financial Report and Annual General Meeting

Risk

Mitigation

1. Contract delivery

The Group has several hundred live contracts at any point in time and the risks to which the Group is exposed are dependent on the nature of the work, the location, the duration and the legal form of the contract, amongst other matters. If these risks are not managed effectively, the Group may suffer contract losses, delays and potential reputational damage.

The Group has an increasing focus on longer-term service contracts. Potential risks are mitigated, controlled and managed through the Group's operating structure and procedures. These include regular contract reviews of financial performance against budget as well as assessing end-life forecasts. Project risk registers are also reviewed. The procurement function manages sub-contractor and supplier relationships across contracts.

Monthly reviews are supplemented by a quarterly review process, which operates across all divisions of the Group.

There has been a specific focus during the year on upgrading the key financial control environment across the Group. These improvements have had a positive impact on identifying potentially under-performing contracts.

A further development to mitigate this risk is a Group commercial training programme for all 'front line' staff, which is designed to ensure a consistent approach with respect to the management of contract risks across the Group.

2. People

The Group depends on members of its senior management team and on a flexible, highly skilled, diverse and well-motivated workforce.

If the Group does not succeed in attracting, developing and retaining skilled people, as well as understanding and embracing the diversity of those people, it may not be able to grow the business

as anticipated.

The Group monitors employee turnover closely. Pay and conditions are reviewed against the prevailing market to ensure that the Group remains competitive.

The Group has put in place succession planning and employee development processes. These include an ongoing talent review process and the completion of succession planning analysis across all business units.

Further mitigating actions to this risk include:

· Conducting an employee engagement survey in 2016, with improvements noted in the engagement and enablement scores since the previous survey in 2014;

· The completion of a refreshed leadership development programme for senior leaders. In addition, the leadership profiles and skills of the business leaders have been assessed to inform development programmes; and

· A review of employee terms and conditions across all business units and the roll-out of a revised grading system.

3. Systems

The efficient operation of the Group is increasingly dependent on the proper operation, performance, security and development of its information technology systems. The Group is maintaining legacy systems prior to implementing an ERP system. If implementation is unsuccessful, this may impact the Group's efficiency and profitability.

The Group recognises that information technology plays a fundamental role in supporting its business. Information technology activity is managed by the Group's IT department in partnership with the business and according to agreed service levels. To mitigate system risks, significant investments are being made, subject to Board review and approval, such as the implementation of the new ERP system.

There is a dedicated project team which deals with the design and implementation of the new ERP system. The project to establish a single finance shared services centre is being implemented at the same time.

Key mitigations to the risk include:

· Conducting an initial pilot for the ERP system across a small part of the Group so as to preserve business continuity;

· Assessing the learning points from the pilot;

· Conducting an independent assessment of the ERP system control environment; and

· Providing independent project assurance on the delivery of the ERP system.

The Group has introduced robust protection for cyber security threats and made a number of improvements to front-office systems during the year.

4. Tender pricing

The work for which Kier tenders is often complex and long-term with significant associated risks. Tender assumptions may be inaccurate or the risks associated with the tender may not be fully understood. If tenders are under-priced, contract losses and potential reputational damage will result. If tenders are over-priced, order books may suffer.

The Group's appetite for long-term, large, competitively-tendered construction contracts is limited. This is influenced by the desire to maintain quality of workload and to manage risk. Tenders for contracts are subject to a governance structure which includes Group-wide standing orders, with approval by the Chief Executive/Finance Director, other Executive Directors or divisional directors, depending upon the value and nature of the contract. Tenders with defined specific risks are reviewed by the Group's Risk Review Committee.

Current mitigations include the Group-wide commercial training programme for all 'front line' staff, which is designed to ensure a consistent approach with respect to the management of contract risks across the Group.

5. Funding

The Property and Residential divisions require finance to be provided by the Group and external sources. The Construction and Services divisions rely on Group bonding facilities. Without these, revenue and profit would reduce.

A Group-wide initiative has increased the focus on cash forecasting and working capital management, with regular reviews with managing directors and finance directors, identification of cash generating opportunities and improved reporting on cash performance.

Borrowing facilities have recently been renegotiated and extended. The Group has strong, long-term relationships with the providers of its bonding lines and has an in-house team which monitors headroom and advises on bond terms and conditions.

The Group's Investment Committee is responsible for approving capital investment and optimising the allocation of capital.

The Property division utilises a number of joint ventures to manage risk and enhance returns. Joint venture partners are carefully selected to mitigate operational risk within projects. By entering joint ventures, the Group can ensure that the Property division is not over-exposed to any one sector, geographical location or individual property.

The Residential division works with housing associations and is seeking to develop joint venture relationships, in each case to mitigate its funding risks.

6. The market

The Group's strategy depends on the level of expenditure within both the public and private sectors. Smaller markets will likely result in lower revenue for the Group.

The Group has:

· A wide regional network of offices across the UK, which is well integrated into local communities, the client base and the supply chain;

· A high number of framework agreements and partnerships with Government, local authorities and the private sector; and

· An integrated offer, with Property typically peaking earlier in an economic cycle and Services later, which provides a natural mitigation against the effects of a recession.

The Group also carries out monthly and quarterly reviews of its workload and forecasts its overhead levels as a percentage of future work in order to maintain an appropriate ratio of overhead costs to revenue.

There have been a number of market assessments of trading sensitivities during the year (particularly before and after the EU Referendum vote). The Group has undertaken contingency planning to consider and assess the associated market risk of the result of the EU Referendum vote.

7. Change

The Group has recently grown significantly, principally through the acquisitions of May Gurney and Mouchel. This growth has resulted in a number of areas of change within the Group. Each of these areas needs careful management.

Two of the most significant change programmes are the implementation of the ERP system and the establishment of the single finance shared services centre. Unless carefully managed, these programmes risk diverting management's attention away from core operations, causing a loss of focus on key market opportunities, a loss of control of the existing business and an adverse effect on the Group's operational and financial performance.

The Group's change programmes are tightly controlled by appropriate project governance.

Significant progress has been made during the year with respect to the integration of the legacy Mouchel businesses. In particular, the operating models of the Kier and Mouchel businesses have, where appropriate, been integrated.

There is a steering committee for both the ERP system and single finance shared services centre projects, together with independent project assurance. There have also been regular updates to the Board on progress throughout the year.

During the year, the Board approved a new Code of Conduct, one of the aims of which is to promote a consistent set of behaviours to support the management of change throughout the Group as it continues to grow.

8. Safety

The Group's activities are inherently complex and potentially hazardous and require the continuous monitoring and management of health, safety and environmental risks.

Failure to manage these risks could result in injury to employees, sub-contractors or members of the public or damage to the environment. This could also expose the Group to significant potential liability, particularly in the light of new sentencing guidelines, and to reputational damage.

Detailed policies and procedures exist to mitigate such risks and are subject to review and monitoring by the operating businesses and SHE specialists. Each business has a director who is responsible for co-ordinating health and safety activities. The SHE audit programme identifies common areas of non-compliance across the Group, helping to drive improvements. Compliance is monitored in a number of ways including audit, leadership tours and inspections.

The Group's behavioural change programme is designed to develop behaviours at supervisor and workforce level, while the Visible Leadership Programme is encouraging engagement by management with employees working on the Group's site.

9. Reputation

The Group's ability to tender for new business and its relationship with customers, supply chain partners, employees and other stakeholders depends in large part on the good reputation that it has established and how it is perceived by others. The Group's growth targets may not be achieved if its reputation is adversely affected.

With the increasing profile of the Group, the ability to monitor and measure the Group's reputation through client and customer feedback is key.

The steps taken by the Group to maintain, protect and enhance its reputation include Group-wide customer satisfaction monitoring, maintaining relations with Government, effective leadership, community engagement and striving to operate a safe and sustainable business.

In addition, the management of the Group's principal risks, as described in this section of the Annual Report, assists to maintain and protect its reputation.

10. Property market

Following the EU Referendum vote, the Group has identified the potential for a significant decline in the UK property market as a potential risk to the Property and Residential divisions. If this decline occurred, then the financial performance of the Property and Residential divisions would likely be adversely affected.

The risk mitigation strategies include work-in-progress monitoring, carrying a robust forward order book in the Residential division and minimising exposure to the cyclical market by purchasing schemes with an appropriate lifecycle. In addition, the Government has put in place further controls since the last market downturn, such as the Mortgage Credit Directive and the Help to Buy scheme, which have assisted to mitigate the risks associated with the residential market.

On new developments, the business is careful to control speculative risk. The Kier Property division operates a largely non-speculative approach to investments.

The Group has undertaken contingency planning to consider and assess the associated market risk of the result of the EU Referendum vote.

11. Compliance

The Group is subject to a number of complex, demanding and evolving legal and regulatory requirements. A breach of laws or regulations could lead to disputes, investigations or legal proceedings, resulting in a disruption of business ranging from additional costs incurred on a project or in the overall management of the breach, to civil and/or criminal penalties as well as reputational damage.

The Group monitors and responds to legal and regulatory developments and conducts risk assessments to assess material changes to applicable law and regulation.

The Group mitigates the compliance risk in a number of ways, including requiring that all of its subsidiaries, employees, suppliers and sub-contractors comply with applicable laws and regulations, updating its policies to ensure that it complies with changes in legislation and regulation and providing training on relevant issues.

The Group operates and encourages the use of a whistleblowing helpline, enabling employees to raise concerns.

Examples of current or future changes in law and regulation which are considered as likely to be relevant to the Group include:

· The Modern Slavery Act 2015: a working group was established during the year to address the requirements of the legislation (please see further details on page 25);

· COP21: our CR Leadership Group is taking steps to ensure compliance; and

· General Data Protection Regulation: steps are being considered to ensure compliance with the regulations, which come into force in 2018.

2016

£m

2015

£m

Emoluments as analysed in the directors' remuneration report

4.9

3.3

Termination payments

-

0.2

Employer's national insurance contributions

0.7

0.5

Total short-term employment benefits

5.6

4.0

Share-based payment charge

0.8

0.3

6.4

4.3

2016

£m

2015

£m

Staff and associated costs

-

1.8

Management services

3.0

0.7

Interest on loans to joint ventures

0.3

1.0

3.3

3.5

2016

£m

2015

£m

Saudi Comedat Company Limited

(0.4)

(2.2)

Staffordshire Property Partnership

-

0.1

Kier Trade City Holdco 1 LLP

10.3

7.4

Kier Reading Holdco 1 LLP

15.0

14.6

3 Sovereign Square Holdings 1 LLP

3.0

1.8

Salford Village Limited

-

2.0

Biogen Holdings Limited

-

3.8

Kier Hammersmith Holdco Limited

-

6.2

Watford Health Campus Partnership LLP

-

0.1

Tri-Link 140 Holdings LLP

1.4

(0.8)

Kier Foley Street LLP

20.9

-

Blue3 (London) (Holdings) Limited

2.1

-

Kier (Newcastle) Investment Limited

4.8

-

Lysander Student Properties Investments Limited

3.3

-

Blue3 (Staffs) Holding Limited

2.3

-

62.7

33.0