Business Review

Our principal risks and uncertainties

Our principal risks and uncertainties

As with any business, Taylor Wimpey faces a number of risks and uncertainties in the course of its day to day operations. By effectively identifying and managing these risks, we are able to improve our returns, thereby adding value for shareholders.

The largest single risk faced by the Company during 2008 was a potential breach of its financial covenants as a result of the downturn in our operating environment. A revised set of financial and operational covenants has now been agreed with our lenders (view Group Financial Review section of this report) and whilst we still have to comply with these covenants, the risk of breach is significantly reduced. As a result, the table below focuses on the ongoing operational issues facing the Company.

      Economic and market environment      
Land purchasing
 
  Description of risk   Demand is heavily dependent on consumer confidence in the wider economy, which is influenced by factors such as unemployment levels, availability of credit and interest rates, which are outside of the Group’s control.   Description of risk   Land is the major ‘raw material’ for the Group and, as such, mis-priced or poor quality land would have a detrimental effect on our profitability.  
  Impact   2008 saw unprecedented global economic conditions, with a significant reduction in both credit availability and consumer confidence. As such the level of demand for new housing was significantly reduced, impacting both profitability and cash generation.   Impact   Whilst we remain cautious regarding land purchases in both the UK and North America in the current market conditions, attractive opportunities are starting to emerge. Correctly timing new investment in land will enhance the Group’s ability to deliver strong profit growth as housing markets recover.  
  Mitigation   We use the detailed knowledge of our local teams to select the locations and home designs that best meet existing customer demand. We continue to evaluate our site opening programme on the basis of local market conditions. We minimise the level of speculative build that we undertake by opening a sales outlet at an early stage of development, and then matching build to actual sales.   Mitigation   We operate an investment appraisal process for significant land purchases, which ensures that such projects are subject to appropriate review and authorisation dependent on the proposed scale of expenditure.  
 
 
 
      Availability of sub-contractors       Site safety  
  Description of risk   The vast majority of work carried out on site is performed by subcontractors. If they are not able to recruit sufficient numbers of skilled employees, our developments may suffer from delays or quality issues.   Description of risk   Building sites are inherently dangerous places and our management of health and safety issues is of paramount importance to us.  
  Impact   The difficult operating environment during 2008 has resulted in the failure of some sub-contractors’ businesses. In addition, reduced levels of homebuilding have led to some skilled tradesmen leaving the industry to take jobs in other sectors.   Impact   We want all of our people – whether employee or sub-contractor – to go home at the end of the day safe and healthy.  
  Mitigation   We vet all suppliers thoroughly prior to working with them to ensure that they meet our requirements for environmental impact, health and safety, quality and financial stability. We also play our part in addressing the skills shortage in the building industry through apprenticeship schemes and membership of the Construction Industry Training Board.   Mitigation   We have a comprehensive HSE management system, supported by policies and procedures to ensure that we live up to our intention of providing a safe and healthy working environment. A detailed description of the measures introduced in 2008 is available on Health, safety and environmental management section of our Corporate Responsibility Report.  
 
 
 
      Construction and cost management      
Government regulations
 
  Description of risk   Construction work can be subject to delays and additional cost for a variety of reasons. These include adverse ground conditions, changes to the original design once build has commenced and adverse weather conditions.   Description of risk   Obtaining permission to build homes is dependent on our ability to meet a wide variety of requirements in areas such as design, sustainability and product mix.  
  Impact   Reductions in house prices in both the UK and North America as a result of market weakness during 2008 mean that cost management is an even greater focus for our business.   Impact   Inability to obtain suitable consents could impact on the number of homes that we are able to build or the profitability of a site. During 2008, we undertook a detailed analysis of the implications for our UK business of the Code for Sustainable Homes and upcoming changes to building regulations. Further information is available within our Corporate Responsibility Report and on our Web site.  
  Mitigation   We monitor both cost and risk closely throughout the life of a project from initial viability assessment to post completion review. This is achieved through the use of detailed risk registers and regular site valuations, which are reviewed and approved at the appropriate level.   Mitigation   We consult with the UK Government on upcoming legislation, both directly and as a member of industry groups, to highlight potential issues. At a local level our land specialists work closely with the relevant planning authorities and structure land purchase agreements to mitigate such risk.