SBL Suggested Answer By Sir Hasan Dossani
September 2018 Attempt
Cofold Construction Co (CC)
Answer 1A – Financial and non-financial issues in accepting the contract (18+4 marks):
▪ Format:
Briefing Paper
FAO: Board of Directors
From: Alex Larson
Subject: Contract for Road Construction in Betal
Date: dd-mm-yy
This briefing paper analyses the financial and non-financial issues relating
to contract for road construction in Betal and discusses the difficulties in
fulfilling the criteria stated by Betal transport minister.
▪ Financial issues:
Profit margin of 9.5% is higher than the minimum margin of 8% required by the Board (p6),
however, following are financial issues which needs further discussions:
o Projections are not discounted even though it is multi years project
o No sensitivity / what-if analysis has been done (to consider worst case scenarios suchas
project delays or cost overrun)
o First payment is after one year of project start date ($ 4.2m / 20%). This may cause
significant liquidity issues. How CC will fund this working capital requirement?
o The release of progress payment is subject to any conditions? E.g. %age work completion?
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▪ Non-financial issues:
o Biggest contract ever handled by CC ($21m vs $10m handled previously) (p5)
o No experience in Betal (p2)
▪ New country (PESTEL / P5F / Culture differences)
▪ Mountainous terrain
o Construction project in Alphia became profitable in 4 years showed profit for the first time
in four years – lesson learnt? (p5)
o Why is Betal’s govt considering CC as a “preferred partner”?
o How the resources will be arranged / mobilized to Betal? (human resoruces, P&M, etc.?)
o Key risks:
▪ Project delivery (time, cost, quality)
▪ Health and safety ($ 300k fine)
▪ Community and environment
Answer 1B – Difficulties in fulfilling criteria stated by minister (8+2 marks):
▪ Low price is important factor: CC is concentrating on projects with high profit margins (8%) and
advantageous clauses (p5)
▪ Timetable as short as possible: mountainous / risky region could lead to delays
▪ Pressure of short time and low price: it could affect the quality adversely
▪ How will CC address adverse impact on some villages and habitats and limit its environmental
footprint
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Answer 2 – Critically evaluate PID and operational issues (14+4 marks):
▪ Format:
Memo USE
To: Oliver Wesonga SKEPTICISM /
From: Jo Issa NEGATIVE
Subject: Comments on Project Initiation Document
TONE
Date: dd-mm-yy
Thank you for preparing the project initiation document for Betal Road
Construction project. I have reviewed the document. At first look it looks
reasonable, however, certain key information is missing:
▪ Project Initiation Document
Issues Recommendations
Project Scope and objective missing
Information about Project team missing
Certain Key stakeholders missing, particularly::
• government
• community
Major assumptions used in the project / financial
projections missing
Project monitoring, communication and reporting
procedures missing
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▪ Operational issues:
Issues Recommendations
Project delivery risk (quality, time, cost)
Financial / liquidity risks
Business integrity and reputation risk
Environment risk did not include
• villager
• wildlife
concerns mentioned by minister
(HINT: basically refer to list of risk in Annual Report on p6)
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Answer 3A – Ethical and reputational concerns (10+2 marks):
Include 5-6 points max
▪ Format
Confidential Memo
USE
To: Imena Bhudia, Chairman BOD, CC
From: Pat Singh, External Consultant
SKEPTICISM /
Subject: Ethical and reputational concerns NEGATIVE
Date: dd-mm-yy TONE
This Memo discusses the ethical and reputational concerns arising from
comments made by Burton Vadher’s in the meeting:
CC’s Board is committed to honesty that avoids false claims and misleading statements. CC’s code of
conduct and rigorous training are designed to maintain stakeholder’s trust in company’s integrity and
avoid legal penalties and reputational risks.
However, there are several ethical and reputational concerns raised during the meeting:
▪ CEO is not meeting the protestors, due to which the protestors were unhappy and it escalated
into the break-in
▪ CEO refused to admit to any responsibilities even though there were some issues and
weaknesses at CC’s end. CEO should not put entire blame to protestors. This is a false claim /
misstatement and could become a reputational issue for CC after the investigation is complete
(p6)
▪ CEO wants to tidy up and lights fully on so that CC’s faults can be hidden. This shows integrity
issue and against the code of ethics of CC
▪ CEO plans to speak to staff to make sure that they speak the same thing and offering hardship
bonus to staff. This shows integrity issue, maybe intimidating to staff as well as internal ‘bribery’
(p6)
▪ CEO did not report health and safety issues to the board citing minor points and that there is so
much else to discuss
▪ CEO has a relaxed attitude towards health and safety and risk management weaknesses were not
remediated timely and no alternate the health and safety manger was identified to fill the long
vacancy of the sick manager
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Answer 3B – Control Weakness, consequence and recommendation (14+4 marks):
▪ Format:
Weakness Consequence Recommendation
▪ Inadequate number of guards
▪ Last week incident not reported to CC
▪ Lighting not sufficient
▪ Uncleaned patch of oil
▪ No health and safety manager since last 6 weeks
▪ Health and safety report not brought to Boards attention
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Answer 3C – Advantages of establishing a separate risk committee (8+2 marks):
▪ Format:
Briefing Paper
FAO: Board of Directors, CC
From: Pat Singh, Consultant
Subject: Separate Risk Committee
Date: dd-mm-yy
This briefing paper advises the board of the advantages of establishing a
separate risk committee.
▪ Specialized and focused:
o Audit committee is focusing more on financial statements, internal audit and external
audit.
o The committee has a “general” responsibility for promoting sound risk management and
internal control systems
o All members of audit committee has finance or accountancy qualifications
o Separate risk committee will bring specialization and the committee would focus on risks
management and internal controls
▪ More time can be spent
o Health and safety issues were never discussed in the board as board had so much other
items to discuss
▪ Combination of NEDs and EDs
o Audit committee consists of all NEDs
o For a risk committee, it is important to have a mix of NED and ED mainly because ED have
hands on knowledge of company’s operations and risks
▪ Risk and Health Safety managers
o Risk and HS managers will have proper supervision and monitoring
▪ Increased board and shareholder confidence
▪ Board can focus more on strategies and long term value creation
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Answer 4 – Benefits of big data and opportunity of infrastructure mgt in 3 countries (8+2 marks):
▪ Format:
Slide 1: Big Data Analytics
▪ Benefits:
✓ Deeper insight into traffic and road condition data
✓ Competitive edge
✓ Additional source of revenue / profitibility
▪ Costs:
✓ Costly
✓ Data storage and security
Supporting Notes:
Big data will help CC analyze in great detail all the information available on traffic volumes
and road conditions (variety of data), which would enable efficient running of operations.
CCs ability to provide integrated package of construction and support series will greatly
enhance competitive edge for CC. This would lead to a additional source of revenue and
CC would seize new opportunities to enhance shareholder wealth.
However, there Big Data requires initial investment which maybe be relatively high.
Further, CC will need to increase its IT department in order to support Big Data. Also, Big
Data leads to storage issue (due to significantly high volume of data) as well as higher
data security risks such as hacking, virus, data privacy, etc.
Slide 2: Opportunity of Infrastructure Management in 3 Countries
▪ Gain road infrastructure management contracts
▪ Government subcontracting to private sectors
▪ Fees / toll charges
Supporting Notes:
Enhanced big data capabilities will help CC gain road infrastructure management
contracts which are becoming available. Previously the governments have managed their
road networks themselves but now they are looking to subcontract to private sector. This
would lead to income in the form of fees paid by government or toll charges on road
users or a combination of both.
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