Boskalis jaarverslagen 2011

Operational risks

The operational risks faced by Boskalis are varied in nature, particularly as the group operates in various activity segments around the world. This means that the activities are exposed to economic, legal and political risks in the countries where the company operates.

The main operational risks for Boskalis concern the acceptance and execution of projects from clients, as outlined above. For most of our activities, particularly in the Dredging & Earthmoving and Maritime Infrastructure segments as well as several activities in the other segments, such as salvaging sunken or stranded vessels, the most common type of contract is ‘fixed price/lump sum’. With this type of contract, the contractor must include nearly all the operating and (procurement and sub-contracting) cost risks in the price. Opportunities to claim payment from the client for any unexpected costs arising during the course of a project tend to be scarce or non-existent. Furthermore, many contracts include ‘milestones’ as well as penalty clauses if they are not achieved. For these reasons, considerable emphasis is placed on identifying, analyzing and quantifying operating, cost and delay risks of this kind when calculating the cost price and during the tendering procedure.

Operating risks mainly concern unexpected soil and settlement conditions, variable weather or working conditions, technical suitability of the equipment, wear and tear due to the processing of dredged materials, damage to equipment and property of third parties and performance of sub-contractors. Boskalis focuses on proactively controlling such risks, first of all by adopting a structured approach in the tender phase to identify risks and their possible consequences. Each tender is assigned to a particular risk category based on its size and risk profile. Procedures exist for each risk category which prescribe how the tenders should be processed, and which management level is entitled to authorize the tender and set the relevant price and conditions.

During preparations for the tender, and depending on the risk classification and nature of the projects, we use resources such as soil investigations, readily accessible databases containing historical data, and extensive risk analysis techniques. The results of the risk analysis are then used as a factor in determining the cost price and/or selling price, and in setting the tender and/or contract conditions. When a contract is awarded, an updated risk analysis is part of the thorough project preparation process, leading to concrete actions being taken where necessary. In addition, there is a strong focus on instruction and training of staff, a certified quality and safety program, and optimal equipment maintenance. Where possible, certain risks are insured.

The ability to manage operating risks effectively and responsibly is key to the company’s professionalism and expertise.

Risks related to price developments on the procurement side, such as costs of materials, sub-contracting costs and fuel, as well as increases in cost of labor, are taken into account in cost-price calculations. Wherever possible and especially on projects with a long completion time, cost indexation clauses are included in the contract, particularly with regard to labor and fuel costs.

Within SMIT’s Salvage activities related to shipping accidents, contracts with insurance companies concerning vessels in distress are often concluded based on a standardized ‘Lloyd’s Open Form’ (LOF). In that case, compensation is based on a valuation mechanism related to various factors including the salvage value of the ship and its cargo, the technical complexity of the salvage operation, environmental risks and the use of own equipment and subcontractors. This valuation produces a lump sum, which is finalized through negotiations with the client or an arbitration process. Should it transpire in the course of a salvage operation that the final salvage fee will not be sufficient to cover the costs involved, then the LOF (contract) can be converted to a contract based on a daily hire fee. This limits the financial risks.

The other major operating risks at the Harbour Towage division are characterized by a broad geographical spread of the activities, with towage contracts often being carried out under long-term contracts with fees being reviewed each year. This allows for changes in local wage cost developments, fuel price developments and the available capacity of the equipment involved – for example tugboats – to be reflected. Terminal services are usually performed under long-term contracts with a fixed price for the contract period, corresponding to the wishes and specifications of the client. 
Most contracts include some form of price indexation.

Within the Transport & Heavy Lift segment, equipment often tends to be leased for relatively short periods (spot markets), meaning that the operational risks in general, certainly when compared to the other activities, are relatively limited. Local management on projects and operations is expected to have a grasp of the complexity of working under the specific local circumstances. The scale of local operations is often too small to warrant a fully fledged organization, complete with extensive support services and staff departments. Regular visits by responsible managers and employees from the relevant business units and support from highly qualified central staff departments at the head office make up for this.

Added to My report add to My report Source: Annual review 2011, Report of the Board of Management, page 50