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Risk Management

December 2006

Presentation to ECRI

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Skanska UK Risk Management1. Skanska Introduction2. Risk Management Structure3. Policies & Procedures4. STAP5. Tender Approval Processes6. The Tender Board7. Internal Audits8. Commercial Support9. Design & Build Risks10.PFI Risks

October 2006

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March 2006

ResidentialDevelopment

CommercialDevelopment

Construction Infrastructure Development

Skanska Denmark

Skanska Finland

Senior Executive TeamGroup staff units

Skanska UK

Skanska Latin America

Skanska USA Civil

Skanska USA Building

Skanska Commercial Development Nordic

Skanska Infrastructure Development

Skanska Norway

Skanska Sweden

Skanska Poland

Skanska Czech Republic

Skanska Commercial Development Europe

Skanska Financial Services

Skanska Project Support

Skanska Residential Development Nordic

The Skanska Group

4Top 12 European Construction CompaniesEuro Bn

1. Vinci 19.42. Bouyges 16.73. Hochtief 13.74. Skanska 13.45. Grupo Ferrovial 8.96. Effiage 8.37. BAM 7.48. Strabag 6.99. Bilfinger Berger 6.210.ACS 5.711.Balfour Beatty 5.512.Technip 5.3 December 2006

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£800m

£25.5m

(up 27% 1st 6 months 2007)

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David FisonBusiness Unit President

Construction and Services

Environment, Health & Safety

- Communications- Learning & Development

- ITSD

- Risk Management- Commercial Support

Mark GallowayLegal - EVP

Civil Engineering & SpecialistsBusiness StreamMike Putnam - EVP

PFI / PPPBusiness StreamNick Pollard - EVP

ConstructionBusiness StreamPeter Coote - EVPTrisha Jones

HR - EVP

Philip CarréFinance - EVP

Mechanical, Electrical& Hard FM

Commercial Construction& Fit-out

PFI & PPP

DesignPiling, Diaphragm Walls & Ground Engineering

Utilities Infrastructure

Ceilings & Decorative Plasterwork

Steel Decking

Civil Engineering

Skanska UK - Structure

7

Risk Management

1 November 2006

1. Risk Management Structure

8Mark GallowayLegal Director

Val BolamSecretary

Brenda TimsSecretary

JohnWestbury

Legal Adviser

MartinLenihan

Legal Adviser

Adrian Chapman

Legal Adviser

Martin CollingwoodLegal Adviser

Nigel CornwellLegal Adviser

(Dispute Resolution)

Karen MurrayCompany Secretary

SIPSk TechClark & FennRLSDCivils

SIPUK BuildingCivils

SIPSRWUK BuildingCem Foundations

SIPUtilities

Stephen Jones

Risk & Audit Manager

DonaldSivewrightHead of CSU

Alastair Easton

Commercial Adviser

NickEdney

CommercialAdviser

SteveTindallPlanningAdviser

Risk Management

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Tender Board

Internal Audit

Policies & Procedures Bonds & Guarantees

STAP Approvals

Skanska UK Risk Management

ORA

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Risk Management

1 November 2006

2. Policies & Procedures

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Skanska UK Policies & Procedures• Skanska UK Policies & Procedures Manual

accessible on the Skanska UK Intranet to allpersonnel

• 3 Levels (1) AB Level(2) BU Level(3) OU Level

• Skanska UK Policies & Procedures take precedent but are compatible with Skanska AB Group Policies & Rules

• Skanska AB Policies & Rules regularly monitored

• Regularly updated• Recent updates include STAP and Internal Audits

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Management Guidelines

• Contract Performance Procedures• Design Management Guidelines• Risk and Opportunity Guidelines

Issued to all personnel

October 2006

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Contract Performance Procedures• Winning Work– Alignment with Strategic Plan– Project selection criteria– Key project team to be involved in the bid– Availability of project team with the right skills– Bid Execution Plan• Performing Work– Transfer of knowledge from bid to project team– Project Execution Plan• Close Out– Strategy for a satisfactory project completion– Aftercare plan– Lessons learned

October 2006

14Risk & Opportunity Management Guidelines• Supporting Behaviours– Systematic approach - Identifying assessing and ranking of risks• Systematic Approach to Risk– Identify assess and rank risks– Focus on major risks– Informed decision making– Minimise potential impact– Control uncertain aspects– Clarify and formalise roles• Tolerable Exposure to Risk – asking the right questions– What can go wrong?– How likely are the problems to occur?– How severe might the problems be?– Is the risk tolerable?– What mitigating action should be taken?– What action should be taken towards opportunities?• Assessing Risk– Covers three important principles – Documentation processes– Risk priorities for the project• Risk Review / Reporting– Reviews– Communication / Learning– Reporting

October 2006

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Risk Management

1 November 2006

3. STAP

16Skanska Tender Approval Procedures

Why was STAP introduced?

• To Filter out the potential loss makers at an early stage

• Previously SET found it was too late to say “No”

• To Communicate attractive project opportunities to SET

• To identify high risk issues that may have been missed the past

• To address Stu Graham’s “ 3 Deadly Sins ”

17Skanska Tender Approval Procedures

STAP Procedures recognise Stu Grahams 3 Deadly Sins:

Wrong People

Wrong Place

Wrong Customer

18Skanska Tender Approval ProceduresHeat Maps relate to the Business Sectors that

each OU operates in and are based on 4 Core Criteria:

1. Competency2. Geography3. Contract Type4. Contract Size

If the Sector complies with all four criteria – the Heat Map is Green

If the Sector complies with three criteria – the Heat Map is Yellow

If the Sector complies with two or less criteria – the Heat Map is Red

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Skanska Tender Approval ProceduresTypical OU Heat Map

a) b) c) d) e) f) g) h) i) j) k) l)** PFI projects in Core Core Core Core Risk SET Contract Joint & ProductionFinancial Code of BU specificJV's with SRW - total competence contract geography role / zone** reporting value Several or output risks conduct risksproject value shown size contract type Green limit in question liability warranties risks SPV

yellow /red ClientSegment Y/N £m Y/N £m £m Y/N Y/N Y/N Y/N Y/N

Healthcare**PFI - Design & Build Y 350 UK Y AllDesign & Build Y 350 UK Y 50Frameworks N 30 pa UK N 50

Education**PFI - Design & Build Y 30 UK Y AllDesign & Build Y 30 UK Y 50Frameworks Y 30 pa UK N 50

Custodial**PFI - Design & Build Y 50 UK Y AllDesign & Build Y 50 UK Y 50Frameworks Y 30 pa UK Y 50

Defence**PFI - Design & Build Y 350 UK Y AllDesign & Build Y 350 UK Y 50Frameworks N/A N/A N/A N/A 50

Core attributes Critical risks

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Procedural Rules - Skanska Tender Approval Procedure

BU action - before work on tender startsApply Triggers:

1 SET action

Three(1-3) 1

STAPTriggersfor the 2need of No further involvement

SET of SET requiredpre-approvalof Contrac-

ting Commit-ments 3 3

If noSTAP Triggeris present or

apparent

Tender to SkanskaAB Board, as the

case may be

Skanska AB

2

Full ORA inclRequest for Approval

to SET, furtherreviews etc

'No bid' decision

'Go' decision,may or may not be

conditioned

Pre-ORA to be sent to SET

3 alternative decisions:

Tender approvedby SET

'Go' decision,full ORA/Request

for Approval needed

BU internal procedure for

are present

tender approval

If Project falls inthe Red or Yellow

Risk Zones

If Project value exceeds the SETReporting Limit

If one or moreCritical Risks

Critical Risk Triggers:• Joint Ventures with non Skanska partner• Production or output warranties• Project Financing• Potential Breach of Skanska Code of Conduct• SPV Client

21STAP Procedure

Clients People Technical Legal Financial Public

Skanska AB

SET

BU

OU

Pre-ORA

Pre-ORA

Project Risks in Tender

Pre-ORA

Approval to Start Bidding Process

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Risk Management

1 November 2006

4. Tender Approval Processes

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Risk Management

1 November 2006

5. Tender Board

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Skanska UK Tender Board

• Risk Focused Review • Board includes EVP Finance, EVP Legal & BU Risk

Manager• Reviews Tenders over £30m or over £20m with

onerous / unusual Contract Conditions• Any tender at the discretion of Operating Unit MD

/EVP/ BUP or the Tender Board• Recommends with / without Pre-conditions • Can advise against bidding

25Tender BoardKey Risk Issues Reviewed• Financial Strength of Client• Experience & Availability of Project Team• Form of Contract & any onerous amendments• Inflation Risk• Cash Flow• Programme Risk• Health Safety & Environmental Risks• Liquidated not General or Consequential Damages• Cap on Damages

26Tender Board

• Aims to Add Value to the process of winning profitable work

• Reviews each stage of two or more stage bids• Supports Operating Units in identifying Key Risks • Reviews Risk & Reward from a Group perspective • Assists in evaluating Winning Factors• Tender Board report forwarded to OU MD with

Recommended Actions• Risk Issues identified and reviewed during Audit

27Typical Major Tender Flow ChartBid Opportunity

Tender Board Review

Tender Preparation MD Review

Tender Board Report with actions

BUP/ EVP/MD Review

Skanska AB Board Project

Review Committee

SET Approval to Bid

Tender Submission

Pre-ORA to SET

SET Approval to prepare tender SET Review

RFA to SET

Identify Risk Triggers

Heat MapComparison

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Risk Management

1 November 2006

6. Internal Audit

29Mark GallowayLegal Director

Val BolamSecretary

Brenda TimsSecretary

JohnWestbury

Legal Adviser

MartinLenihan

Legal Adviser

Adrian Chapman

Legal Adviser

Martin CollingwoodLegal Adviser

Nigel CornwellLegal Adviser

(Dispute Resolution)

Karen MurrayCompany Secretary

SIPSk TechClark & FennRLSDCivils

SIPUK BuildingCivils

SIPSRWUK BuildingCem Foundations

SIPUtilities

Stephen Jones

Risk & Audit Manager

DonaldSivewrightHead of CSU

Alastair Easton

Commercial Adviser

NickEdney

CommercialAdviser

SteveTindallPlanningAdviser

Audit

Project Managers/ Commercial Managers / Accountants from Skanska UK Operating Units invited on Project

Risk Based Audits

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Risk Management

Internal Audit Programme• Risk based audits throughout Skanska UK• Project audits• Reviews how risks are being managed on site• Open style with participation of project teams• Audit teams include managers from other OU’s• Promotes & Communicates Best Practice• Now in the 2nd year and receiving positive

feedback

October 2006

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Risk Management

Internal Audit Programme• Procedures include asking BU President &

EVPs for any issues they wish the audit to cover• Audit report agreed with the project team before

released• OU MD has to respond to points raised• Final report with MD’s response to Board• Re-visits• Lessons learned fed back through bids

October 2006

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Risk Management

1 November 2006

7. Commercial Support

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David FisonBusiness Unit President

Construction and Services

Environment, Health & Safety

- Communications- Learning & Development

- ITSD

- Risk Management- Commercial Support

Mark GallowayLegal - EVP

Civil Engineering & SpecialistsBusiness StreamMike Putnam - EVP

PFI / PPPBusiness StreamNick Pollard - EVP

ConstructionBusiness StreamPeter Coote - EVPTrisha Jones

HR - EVP

Philip CarréFinance - EVP

Mechanical, Electrical& Hard FM

Commercial Construction& Fit-out

PFI & PPP

DesignPiling, Diaphragm Walls & Ground Engineering

Utilities Infrastructure

Ceilings & Decorative Plasterwork

Steel Decking

Civil Engineering

Skanska UK - Structure

34Mark GallowayLegal Director

Val BolamSecretary

Brenda TimsSecretary

JohnWestbury

Legal Adviser

MartinLenihan

Legal Adviser

Adrian Chapman

Legal Adviser

Martin CollingwoodLegal Adviser

Nigel CornwellLegal Adviser

(Dispute Resolution)

Karen MurrayCompany Secretary

SIPSk TechClark & FennRLSDCivils

SIPUK BuildingCivils

SIPSRWUK BuildingCem Foundations

SIPUtilities

Stephen Jones

Risk Manager

DonaldSivewrightHead of CSU

Alastair Easton

Commercial Adviser

NickEdney

CommercialAdviser

SteveTindallPlanningAdviser

Commercial Support Unit

35Commercial Support UnitCSU provides services to all Skanska UK Operating Units including Contractual Advice and Dispute Avoidance

• Review of Contracts – Pre and Post Tender Stages

• Programme and Planning advice

• Claims avoidance advice

• Formulation of dispute management strategy

•Approach to Change Management

•General commercial and contractual advice on specific problems

• Guidance on variation entitlement

• Guidance on Record Keeping procedures

• Commercial / Contractual Workshops

• Commercial and Planning support to Internal Audits

36Commercial Support UnitClaims and Dispute Resolution

• Analysis of the background of a claim

• Contractual advice

• Drafting of contractual notices for E.O.T / variation claims

• Preparation / defence of claims

• Preparation of referrals for Adjudication, Mediation etc

• Detailed preparation of Loss & Expense claims

• Analysis of records and preparation for use in claims for variations

• Lessons Learned reports

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Risk Management

1 November 2006

8. Design & Build Risks

38DESIGN & BUILD• Design & Build dominates our business

• PFI – 100% Design risk

• Building – Two stage bid process reduces design development risk

• Civils – ECI Highways contracts allow early design on fee basis

• Specialist Business rarely take on design development risk

• “Fit for Purpose” unacceptable risk

• If no alternative, purpose must be clearly defined

• Design risk mitigated by using proven design consultants

• Design Manager mandatory on all Design & Build projects

39DESIGN & BUILD• Skanska Technology in – house design group

• Adds value to our design & build commitments

• Provides a design checking service to mitigate risk

•Core Business is “Engineering design for Construction”

• Small and focused - Revenue – circa £4.75 million

•Circa 85% of commission value is to PFI and UK Civils

• Civil and structural engineering works – no architectural

• Basis of agreements is limited to “reasonable skill, care & diligence”

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Design Management Guidelines• Why Design Management is Important• Design Management Process– Assembling the team– Briefing– Designing– Assurance– Leadership– Impact of Change• Design Stages– Relationship with the project cycle– Purpose of each design stage– When interventions are required– Key activities needed at each stage• Design Management Chart– Covers each stage of project cycle and key activities required

October 2006

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Risk Management

1 November 2006

9. PFI Risks

42PFI Risks (Healthcare Projects)

• Design Development / Creep– Mitigated by achieving signed off Room Data Sheets before Financial Close– Buildability into design– Understanding scope

• High Bid Costs– Bid costs between Preferred Bidder & Financial Close underwritten– Limited competition or don’t bid– Focus on winning

• Maintaining Budget– Packaging work with proven subcontractors– Realistic programming – zero option on delays due to high LD’s & performance bond– Cap on total liability – no more than 50%– Cap on LD’s – no more than 20%

• Client Relationships– Skanska ID always an SPV partner

• Risk Mitigation– Fit for Purpose obligation mitigated by signed off Room Data Sheets which define clinical

functionality– Risk allocation / sharing must be clearly defined between the D&B contractor and the SPV– 12 year defects liability mitigated by Skanska Hard FM Services on site

November 2006

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Investment Design

Quality ProductLongevity

Facility Management provider25-30 year concession

Early design involvement

Design and Build contractor

Skanska has up to 50% investment interest

PFI Risk Mitigation - Skanska has a Vested Interest

Skanska ID

Skanska Integrated Projects Skanska RW FS

Skanska Technology

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Package Risk ManagementPack

Pack

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Prelims Acute CSB MHU Infra

Project Sector Risk Management

PFI RISK MANAGEMENT MODEL

Project Risk Strategy and Management

“ORA”Operational

Risk Assessment

Business BoardLevel

Risk & Opportunity Management

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Project Executive Team

Project Directors

Works Managers