We are responsible for subcontractors' actions on the implemented contracts. Therefore, building long-term relationships with them, based on mutual trust, is treated as an investment in the future. Good cooperation with subcontractors is also a guarantee of efficient and timely implementation of projects by the company. The remaining companies of Budimex Group carry out assignments as general contractors, therefore, they coordinate the activities of subcontractors or operate as subcontractors. Sometimes they perform the investor's role. This is the case of Budimex Nieruchomości. The Budimex Group's subcontractors are obliged not only to meet business obligations towards the Group companies, but also to respect its environmental and OHS regulations. While concluding a cooperation contract, each contractor of the Budimex Group must comply with:

• Requirements related to occupational health and safety;
• Environmental protection requirements;
• "Set of Rules for Contractors";

The Budimex subcontractors are verified in terms of their compliance with the standards of the Group, particularly within the scope of quality and safety of works, as well as ethics. Their activities are constantly monitored throughout the cooperation, and upon its completion the summative evaluation is carried out. Because of risks such as low quality of works or delays at subcontractors, there are also conducted audits.

The next group with which companies in the Budimex Group cooperate is constituted by suppliers of basic materials and raw materials and specialist services, while the main suppliers include the producers of:

• road bitumen (Orlen Asfalt, Lotos Asfalt),
• steel reinforcement, reinforcing bars and metallurgical products (Arcelor Mittal Distribution Solutions Polska, Konsorcjum Stali SA, ThyssenKrupp Energostal SA, Vimex SA),
• aggregates and concrete (Cemex Polska Sp. z o.o., Dyckerhoff Polska Sp. z o.o., Lafarge Cement SA, KGHM Metraco SA, Kopalnie Dolomitu w Sandomierzu SA, Nordkalk Sp. z o.o., PGP Bazalt SA, ZPK Rupińscy Sp. j.),
• road and bridge barriers (Stalprodukt SA),
• fuels – heating oil, heavy oil (Lotos Paliwa Sp. z o.o., PKN Orlen SA, Lausitz Energie Bergbau AG),
• culvert elements (Viacon Polska Sp. z o.o),
• concrete products – reservoirs, retaining walls (PGP Bazalt SA),
• electrical energy (Energa Obrót SA, Tauron Sprzedaż Sp. z o.o.),
• geosynthetic materials (Biuro Inżynierii Drogowej Drotest sp.j.).

In 2018 none of the suppliers of materials or services exceeded 10% of the Group’s sales value.

Risk management in the supply chain

The Budimex Group's supply chain covers thousands of suppliers and contractors, with whom we cooperate every day. As a general contractor, we are responsible for the actions undertaken by them, supplied materials and working conditions. The main risks identified in the supply chain include:

• occupational health and safety,
• terms and conditions of employment,
• environmental protection,
• timeliness and quality of works performed,
• finance.

Financial risks include primarily credit risks and despite the introduction of restrictive procedures for control of receivables in the Group, we still consider the investor-related default risk, but also delays on their side in the process of acceptance and invoicing of performed works. Delays in timely payment of receivables may negatively affect the Group's financial results. Detailed information on the financial risk is presented in the report on the Group’s activities for the year ended on 31 December 2018. Some of the identified risks may occur already during the performance of a given contract and the method of their management shall determine whether works will be performed as planned. Such risks include, for example:

• increase in prices of construction materials, petroleum materials and energy,
• increase in prices of subcontractors' services,
• increase in employees' employment costs,
• staff availability and maintenance,
• delays in timely performance of or insufficient quality of the subcontractors' works.

In order to monitor those risks in 2018, audits listed in the table below were carried out at the Budimex subcontractors. Every new contractor, at the first stage of cooperation, is subject to an initial assessment based on the qualification survey. The survey consists of a supplier’s declaration of compliance with applicable regulations within the scope of labour law, OHS and environmental protection, etc. Approval of this declaration conditions the supplier’s initial qualification ¹. Eventually, all key suppliers and subcontractors (100%) are subject to initial assessment (qualification). In the case of ending cooperation with a given supplier, we conduct the final assessment, where we consider such issues as quality, timeliness, actual technical capacity, OHS, environmental issues and issues related to human rights, including employees’ rights. Assessment is conducted by contract managers, who must indicate any irregularities or events that may constitute a threat, or actions inconsistent with the principles applicable to sub-suppliers in the Budimex Group. Results of qualification surveys and final assessments are gathered in the Central Database. Internal auditors have access to these data and use them to assess sub-suppliers. Auditors have also access to offers of suppliers, based on which the contract has been signed. When analysing the offer, the contract history and the result of the final assessment, they may compare things to which the given supplier undertook at the offer level and how the cooperation actually processed and ended. For our part, after the end of a given contract, we send the Satisfaction Survey to an investor on the basis of which our work is assessed. Results and conclusions with assessment are then reviewed by management during annual management reviews.

Based on the initial qualification and final assessments, subcontractors are divided as follows:

• recommended (top ratings),
• qualified (positive ratings, but slightly lower than in the case of recommended suppliers),
• rejected (low ratings, but qualification is conditional, i.e. cooperation can be started if e.g. a business partner introduces corrective actions),
• disqualified (cooperation with a given partner is impossible, e.g. due to its financial situation or previous gross breach of cooperation rules, e.g. in the area of ethics or environmental protection, i.e. a bribery attempt or causing significant environmental damage).

The Budimex Group seeks that significant agreements with key contractors, often despite the Company’s lower negotiating power, are supplemented with an ethical appendix.

Results of initial (qualifying surveys) and final assessments at sub-suppliers in 2018:

In comparison with the previous years, the number of identified irregularities increased, as in 2018 75% more assessments were conducted compared to 2017, which statistically affected the larger number of identified irregularities. The largest increase in the number of negative assessments concerned the meeting of deadlines. It could be associated with a too large number of works carried out at the same time in Poland and, consequently, an increased demand for materials and services, not followed by supply.