Risks and risk management

OPERATIONAL RISKS

For a building contractor, the principal risk-limitation phase is during the contract-tendering process. NCC's overall strategy is to adopt a selective approach to tendering in order to reduce the proportion of unprofitable projects. When selecting suitable contracts, NCC assigns priority to projects whose risks are identified, manageable and calculable.

Most risks, such as contract risks and technological and production-related risks, are best managed and minimized in cooperation with the customer and other players during early stages of the project. Accordingly, new cooperation formats, such as NCC Partnering, are key features of efforts to limit risk.

Project control is of decisive importance to minimizing problems and thus costs. In order to control and follow-up operations within Construction units, NCC uses a processcontrolled operational management system. Several Group units are quality and environmentally certified.

DEVELOPMENT RISKS

Proprietary project development in both residential and commercial properties includes a development risk, as well as contracting risks. Every project concept must be adapted to local market preferences and the planning requirements imposed by public authorities. State-of-the-art skills are required to optimize projects that have to be processed by, for example, local municipalities and possibly have to pass an appeals process.

To reduce these risks, NCC has successively limited the markets in which the Group operates. Proprietary residential and property projects are conducted primarily in large growth communities in the Nordic countries. NCC has also made a concerted effort to refrain from excessively nicheoriented projects for narrow target groups, since earnings in this sector have historically not corresponded with their higher inherent risks. Risk limitation is achieved through high leasing rates when a construction project is started, and tied-up capital is reduced through early sales.

The key action taken in 2004 was NCC's decision to discontinue all operations in Asia, Africa and Central America. The background is that international construction operations tie up substantial amounts of capital and are associated with major risks. As a result of this action, which NCC expects to complete no later than 2006, the Group reduces its risk exposure in areas where its local market knowledge is limited.

A fundamental element in NCC's strategy is to work in markets known to the Group, and with products and services for which the Company has advanced skills.

SEASONAL RISKS

The asphalt operations of NCC Roads are subject to considerable seasonal variations, with most procurements secured during the spring, and asphalt production and paving activities conducted during the summer half year. Warm autumn weather could have a favorable effect on production, while long, cold winters have negative effects on earnings. To offset these risks, NCC Roads offers road-related products and services that encompass the entire value chain. Repair and maintenance activities, for example, complement paving operations over the year. Construction units also show some seasonal variations.

RISK FOR ERRORS IN PROFIT RECOGNITION

NCC and other companies in the sector apply the percentage-of-completion method for recognizing profit from contracting operations, whereby profit is recognized in parallel with completion, which means before the final result is established. The risk that actual profit will deviate from percentage-of-completion profit recognition is minimized through NCC's project-management model, which ensures the necessary follow-up and control of all construction projects on which profit recognition is based. Accordingly, if the final result of a project is expected to be negative, the entire loss from the project is immediately charged against earnings, regardless of the project?s degree of completion.

Profit recognition from NCC's proprietary housing projects is based on the lower of the worked-up rate and sales rate. This eliminates the risk of recognizing profit from proprietary projects before a sale has been completed.

With the introduction of new IFRS regulations, profit recognition from proprietary housing projects will be computed in accordance with the model of multiplying the worked-up rate with the completion rate, which will result in more cautious profit recognition.

FINANCIAL RISK

The assumption of financial risk should be viewed against the background of the capital requirements of NCC's various operations. Contract operations generally do not require any tied-up capital and should be financed by means of a positive cash flow from the projects concerned.

Proprietary housing and property development operations tie up capital throughout the entire duration of the
project, from land investments and subsequent development through the final sale of the project.

NCC Roads has capital employed in fixed assets (quarries, crushing plants, asphalt plants, paving machinery, etc.).

Based on the present range of operations, the NCC Group's net indebtedness should not exceed shareholders? equity.

The Group's financial risks, such as interest-rate, currency, credit, liquidity and financing risks, are managed centrally in order to minimize and control risk exposure.