ELEKTROBUDOWA Group is exposed to price risk which arises from current economic situation in the power industry, chemical, building and metallurgy sectors, and mainly concerns prices of electrical materials and equipment and steel products. The entities in the Group do not enter into long-term contracts with sub-suppliers; the scope of supplies and delivery is individually agreed in accordance with the procedures in place in the entities.
The strategy of managing the price risk associated with goods and services is based on the intention to enter into such contracts with suppliers of goods and services which would guarantee purchase of materials and services at prices that enable the entities in the Group to execute a contract according to its budget and within the agreed time frame.
Adequate policy, organisational structure and procedures as well as actions related to risk management support the process of negotiating and establishing prices at optimum level.
Period of executing a trade contract, from order acceptance to contract completion, usually is not long
(1 year at average), so adequate average pricing is possible.
Price risk particularly affects contracts for investment projects in new areas which are difficult to investigate in domestic market environment. Estimated prices are often based on pricing made according to own assumptions and concepts as well as the level of complexity of facilities to be provided. Such pricing involves risk of exceeding the scheduled costs or completion time.
The Group is exposed to price risk, particularly the risk caused by extending the time of performance of contractual works for the reasons beyond its control. The extended period of a contract performance generates additional fixed costs which cannot be predicted at the moment of quotation.
Building up its competences of a general contractor, the parent company ELEKTROBUDOWA SA is exposed to risk resulting from high prices of contracts performed on relatively low margins, created by wide competition. Strong competition within the branch as well as insufficient demand which restricts investing plans, produce growing uncertainty and increased effects of price risk, mainly the drop in profitability of performed works.
The company reviews, on a current basis, performance of budgets of the contracts in progress, both in the scope of variable and fixed costs, and prepares a forecast of costs and performance until the end of each project.
Any deviations from planned profit margins of the contracts in progress are taken into account for the forecast being prepared. Estimated losses on the contracts to be incurred until the end of their performance are immediately recognized in operating expenses, by creating a provision for expected losses. As at 31 December 2017, the parent company recognized and created provisions for expected losses on contracts in progress in the amount of 1 512 thousand PLN. The provisions created as at 31 December 2016 for expected losses on contracts amounted to 1 299 thousand PLN (Note 28).
The parent company ELEKTROBUDOWA SA has implemented actions in order to reduce price risk connected with contract performance and implemented internal procedures (Director’s Regulations), regulating current monitoring of contracts, updating the forecasts and an obligation to report “project end costs”, periodical verification of documentation in respect of formal and substantive correctness and correctness of classifying and recording on appropriate accounts.
The parent company estimates that the provisions created as at 31 December 2017 for expected losses on the contracts cover the whole risk of generating the losses until completion of the contracts, basing on its knowledge as at the date of drafting these financial statements.
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