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Boskalis jaarverslagen 2012

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 contracting and execution of projects for clients, as outlined above. For most of our project activities the most common contract type is ‘fixed price/lump sum’. With this type of contract, the contractor’s price must include virtually all the operational risks as well as the cost risks associated with the procurement of materials and subcontractor services. In most cases it is impossible to charge clients for any unexpected costs arising during the course of a project. Furthermore, many contracts include ‘milestones’ as well as associated penalty clauses if these are not achieved. For these reasons, considerable emphasis is placed on identifying, analyzing and quantifying operating, cost and delay risks during the tendering and contracting phases of projects and in calculating cost prices.

Operational risks mainly relate to variable weather or working conditions, technical suitability and availability of the equipment, unexpected soil and settlement conditions, wear and tear on dredging equipment due to the excavation and processing of dredged materials, damage to third-party equipment and property, the performance of subcontractors and suppliers and the timely availability of cargo or services provided by the client in case of heavy marine transport and/or installation activities.

Boskalis focuses on pro-actively controlling such risks, first of all by adopting a structured approach in the tender phase to identify risks and their possible consequences. Contracts are classified by risk category, based on size and risk profile. The exact tender procedure and requirements for authorization of tender price and condition are dependent on this classification. Above a certain level of risk, tender commitments require to be authorized at Board of Management/Group Director level.

In the preparation phase of a project tender, and depending on the risk classification and nature of the projects, we use resources such as subsea and 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 defining the tender and/or contract terms and conditions. When a contract is awarded, an updated risk analysis is part of the project preparation process, based upon which concrete actions are taken as necessary, in order to mitigate the risks identified. In addition, proper attention is devoted to the education and training of staff, appropriate project planning and project management, implementation of a certified quality and safety program, and optimal maintenance of equipment. When appropriate and possible, certain risks are insured.

The ability to manage operational 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 and services, sub-contracting costs and fuel prices, as well as increases in cost of labor, are all taken into account in calculating cost prices. Wherever possible, and especially on projects with a long execution time, cost indexation clauses are included in the contract, particularly with regard to labor and fuel costs.

Within the Towage & Salvage segment, the Harbour Towage division is characterized by a broad geographical spread of the activities, with towage contracts often being carried out under long-term contracts in which fees are reviewed annually. This allows for taking into account local wage cost developments, fuel price developments and the available capacity of the equipment – for example tugboats – concerned. Terminal services, most of which have been incorporated into the joint venture Smit Lamnalco (50% stake) since the end of 2011, are usually performed under long-term contracts with a fixed price for the contract period, corresponding to the requirements and specifications of the client. The majority of these contracts include some form of price indexation.

For the Salvage activities, contracts with clients concerning vessels in distress are often concluded based on a standard ‘Lloyd’s Open Form’ contract (LOF). This means that compensation is based on a valuation mechanism related to various factors, including the salvage value of the vessel and its cargo, the technical complexity of the salvage operation, environmental risks and the use of own equipment and subcontractors. This valuation results in a lump sum, which is finalized through negotiations with the client or through 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 can be converted to a contract based on a daily hire fee, thus limiting the financial risks.

Within the Offshore Energy segment, the transport & heavy lift equipment of the Marine Services division tends to be chartered out for relatively short periods (spot markets), on mostly standard conditions. The operational risks in general of such activities are relatively limited.

Local management on projects and in operations is expected to have a proper understanding 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. This is compensated for by regular visits by responsible managers and employees from the relevant business units and support from highly qualified central staff departments at the head-office.

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