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Boskalis jaarverslagen 2012

Operational risks

The operational risks faced by Boskalis are diverse in nature, particularly because the group conducts various types of activities around the world within the three divisions. This means that the activities are exposed to economic, legal, tax 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 type of contract is fixed price/lump sum, under which the contractor’s price must take into account 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 not possible to charge clients for any unexpected costs. Furthermore, many contracts include milestones and associated penalty clauses if the milestones are not achieved on time. That is why much emphasis is placed on identifying, analyzing and quantifying such operating, cost and delay risks during the tendering procedure and contracting phase of a project.

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 equipment (especially dredging equipment), 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.

The following measures are taken systematically in order to control the aforementioned risks in the tender, preparation and/or execution phase:

  • During the tendering procedure and the contracting phase of projects much emphasis is placed on identifying, analyzing and quantifying execution, cost and delay risks. Contracts are classified based on their size and risk profile. This classification determines the subsequent course of the tender procedure and the requirements for authorization of the tender price and conditions. Above a certain level of risk, tender commitments require authorization at Board of Management/Group Director level.

  • In the preparation phase of a project tender and depending on the nature and risk classification of the project we use resources such as survey and soil investigations, readily accessible databases containing historical data and extensive risk analysis techniques. The results of the risk analysis are then used in calculating the cost price, determining the commercial price and in defining the tender and/or contract terms and conditions.

  • 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 the 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.

  • When a contract is awarded, an updated risk analysis is a standard part of the project preparation process based upon which measures are taken to mitigate the risks identified.

  • In addition, much attention is devoted to the education and training of staff, appropriate project planning and project management, the execution and implementation of certified quality, safety and environmental systems, and the optimal maintenance of equipment.

Within the Towage & Salvage division, the Harbour Towage business unit is characterized by a broad geographical spread of the activities, which are conducted by autonomous strategic joint ventures with third parties. Towage contracts are often carried out under long-term contracts with fees that are reviewed annually. This allows for local wage cost developments, fuel price developments and the available capacity of the equipment to be taken into account. Terminal services, which have been incorporated in the Smit Lamnalco strategic joint venture since the end of 2011, are usually performed under long-term contracts corresponding to the client’s requirements and specifications. The majority of these contracts include some form of price indexation.

Salvage activities relating to vessels in distress are often carried out under great time pressure and without an extensive tendering procedure and associated preparation activities. Such contracts are therefore often concluded based on the standard Lloyd’s Open Form (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. Experience shows that the company is usually able to make a reasonably accurate estimate of this income. Should it transpire in the course of a salvage operation that the final salvage fee may not be sufficient to cover the costs involved, then the choice can be made to convert the LOF into a contract based on a daily hire fee, thus limiting the financial risks. Contracts for salvaging sunken vessels (wrecks) are usually carried out on a lump sum basis. The contracting and execution of such projects, which in many cases do involve a tendering procedure, are subject to the customary procedures for contracting and execution activities applicable within the company.

Within the Offshore Energy division, a part of the equipment tends to be chartered out for relatively short periods (spot markets), mainly subject to standard conditions. In general the operational risks involved in such activities are relatively limited.

Local management on projects and operations must have a proper understanding of the local (working) conditions. 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 head office.

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