Review of 2010 – USD version - Skanska

Material risks and uncertainty factors
The construction business is largely about risk management. Practically
every project is unique, with size, shape and environment varying
for each new assignment. The construction industry differs in this way
from a typical manufacturing company that has permanent facilities and
serial production.
In Skanska’s operations there are many different types of contractual
mechanisms. The degree of risk associated with the price of goods and
services varies greatly depending on the contract type.
Sharp increases in prices of materials may pose a risk, especially
in long projects with fixed-price commitments. Shortages of human
resources as well as certain intermediate goods may potentially have an
adverse impact on operations. Delays in the design phase or changes in
design are other circumstances that may adversely affect projects.
Certain counterparties − for example customers, subcontractors or
suppliers − may have difficulty living up to their contractual obligations.
Skanska regularly makes assessments of counterparty risks in order to be
prepared for this.
To ensure a systematic and uniform assessment of construction projects,
Skanska uses a common model for identifying and managing risks
throughout the Group. With the help of this model, Skanska evaluates
construction projects continuously, from tender preparations to completion
of the assignment, with regard to technical, legal and financial risks.
In Residential Development operations, there are risks in all phases
from concept to completed project. Such external factors as interest rates
and the willingness of customers to buy homes are of crucial importance
to all decisions in the process. Homes are built to be sold individually. To
minimize risks, the goal is to completely develop and sell the units in a
given project during a single economic cycle, when variations in market
conditions are small and predictable. New projects are started when a
predetermined percentage of homes is sold or pre-booked.
Greater standardization, with shorter lead times, reduces the period
of exposure and thus the risk of fluctuations in market demand.
Due to lengthy planning and permitting processes, ample lead time is
required to ensure a supply of building rights (a “land bank”) for construction
that will meet demand.
Commercial Property Development manages risks connected
with external factors, customers’ leasing needs and the willingness of
investors to buy commercial properties. By means of frequent customer
contacts, Skanska tracks the leasing requirements of customers
continuously.
Risks are limited because the business stream has an established ceiling
on how much capital may be tied up in projects that have not been
pre-leased or sold. Investments made in Infrastructure Development
require efficient risk management during the development phase, that is,
before and after financial close.
During the construction phase, the greatest risk is that the asset cannot
go into service on schedule and that quality standards are not met.
Depending on the type of asset, there are risks during the entire
steady state phase, which may extend over decades. Examples of such
risks are external factors − demographic, environmentally related and
financial − that are managed during the service life of a project. There is
also a risk that life-cycle costs and operating and maintenance costs will
exceed the forecasts that were made.
For a further account of material risks and uncertainty factors, see
the section on market outlook as well as Note 2, “Key estimates and
judgments.” Financial risks are described in Note 6, “Financial instruments
and financial risk management.” Ongoing litigation is described
in Note 33, “Assets pledged, contingent liabilities and contingent assets.”
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