RISKS

The risks for ARCADIS can be separated into market, operational, financial, and other risks.

Market risks
Economic activity. A cyclical downturn can have a very negative
effect on the investments of companies and, therefore, on the
revenue of ARCADIS. Events expected to have a negative effect on the economic climate can result in signed contracts being deferred or withdrawn. The buildings segment, where most investments are from private-sector companies, is the most sensitive to economic activity. Although government investments are more stable, when there is a cyclical downturn, the government's tax revenues fall, which can limit the resources available for public investment.

Decline in the financial markets. A sharp decline in the capital
market can have a very negative effect on companies' abilities to
invest. This occurred most recently in the telecommunications
segment, where investments declined considerably in a very short period, resulting in a substantial decrease in ARCADIS' revenue in the communications segment for a number of years.

Political priorities. Changes in political priorities can considerably influence public spending and, therefore, ARCADIS' work. Projects for which ARCADIS is well positioned can be cancelled or deferred. Elections can result in shifts in political relationships leading to delays in the awarding of new contracts. The infrastructure segment is the most sensitive to this risk.

Legislation and regulations. Some of ARCADIS' work is based on legislation and regulations. This covers a large part of environmental revenues, but also the property valuation activities in The Netherlands. With changes in legislation and regulations, certain activities may no longer apply or may experience reduced revenues. This can also occur if proper enforcement of regulations is lacking.

Political instability. As a result of political instability, contract awards can cease or employee security can be at issue, resulting in the halt of contract work. This risk arises particularly in the donor-financed market, in which ARCADIS achieves only a limited part of its revenues (about 6%).

Bidding behavior. Changes in the bidding pattern of clients can
have a considerable effect on ARCADIS' revenues. Due to European regulations, a trend is developing in a number of countries to more open bidding where price competition is more important. Construction fraud in The Netherlands has resulted in greater scrutiny of the bidding procedures and has resulted in delays in contract awards. Centralization and strengthening of the purchasing function in large companies may also affect ARCADIS' opportunities to secure profitable revenues.

Consolidation/increase in proportion. With the consolidation of
companies, clients can disappear, and the purchasing power of
customers can increase. The same phenomenon can occur with the government. The amalgamation of municipalities and water boards results in fewer, but more powerful, administrative units that, in a number of cases, now conduct activities that formerly were put out to bid.

Operational risks

Liability. The services provided by ARCADIS can be associated with considerable liability risks. These can arise from errors in executing activities such as design or calculation errors, incorrect estimates of contamination, not meeting agreed schedules, exceeding cost estimates and implementing budgets, not complying with legislation and regulations, or omissions in quality guarantees that have been given. To protect against these risks, ARCADIS has general and professional liability insurance policies. These policies cover errors and omissions in the executing of projects and provide insurance against possible claims that arise during the coverage period. If the insurance carrier does not renew coverage at the end of the policy term and ARCADIS is unable to obtain replacement insurance with retroactive coverage, it is possible that claims will be denied even though the claims are related to events or actions that occurred while coverage existed. Because insurance policies contain certain exclusions and have a maximum amount per claim, not all risks are covered. Another risk stems from the insurance carrier being unable to meet his obligations. For professional liability, ARCADIS currently has a worldwide policy with an excess of US$ 1 million per claim. Virtually all operating companies have reduced this excess to a lesser sum through additional insurance policies.

Project losses. In part depending on the type of contract, losses can occur in projects as a result of inaccurate time and cost estimates, new techniques with undocumented cost and performance results, inexperienced staff, performance delays, additional consulting services, the absence of information that was assumed would be available, or other unforeseen circumstances. Although many contracts also contain conditions regarding payment of additional costs in the event of unforeseen circumstances, substantial project losses can occur, having a negative effect on ARCADIS' results.

Underutilization. Many ARCADIS employees are permanently
employed by the Company. If ARCADIS is not or insufficiently able to charge for employees at the usual rates (i.e., insufficient work is available), this can have a considerable negative effect on the Company's profitability.

Partners, subcontractors. About 30% of ARCADIS' revenue is
derived from partnering or subcontractors. If ARCADIS is unable to find the correct suppliers or if these suppliers are unable to meet their obligations (i.e., provide substandard quality), this can involve risk for ARCADIS.

Work in progress and receivables. Services are usually invoiced
according to the progress of the work. Exposure arises in projects from work in progress (services performed which have not yet been invoiced) and accounts receivable. When performing construction and turnkey contracts, advance payments may be made, resulting in a small risk. When services are completed, disputes about the work performed may make it impossible, depending on the contract, to invoice for activities or payment may not be received. It is also possible that clients are unable to meet their obligations.

Specific project risks. Certain types of contract (i.e., turnkey and
DBFO contracts) present greater risk. In these cases, the work or product delivered must meet specifications established beforehand. With DBFO contracts, the parties contracted for the operations phase also present a risk. To limit this risk, ARCADIS usually has a limited stake in DBFO projects.

Information and Communication Technology systems. The
Company's operation and management are largely dependent on the use of Information and Communication Technology (ICT)
systems. Limited access and/or malfunctioning of these systems – both hardware and software – can negatively effect operations and management. Measures have been taken to limit the effects of external influences (such as power failures and ICT crime) on the systems and include the backup of data, as well as the use of firewalls, virus scanners, and access security.

Vacant property. ARCADIS leases its offices generally for five to ten years. If there is a downturn in activities, a property may become vacant, which can have a negative effect on results.

Financial risks

Seasonal risks. ARCADIS' quarterly results may fluctuate
considerably, often the result of seasonal variations. These are
determined above all by the number of operational days, the
number of staff on leave, and weather conditions. Rain, wind, and frost affect construction implementation, including project
oversight. Pressure from clients to have work completed before the end of the calendar year or before the holiday period also affects the seasonal pattern.

Acquisitions. Part of ARCADIS' strategy is aimed at expanding its
activities by acquisitions. This also brings risks that can affect the Company's results. Examples include not being able to find the right candidates for acquisition or not being able to complete
acquisitions successfully. The profit potential of acquired companies could also fall short of expectations or problems with integration could occur, because of unforeseen differences in culture. It might also be difficult to keep key staff. The balance sheet of the acquired company may contain problems that are not covered by guarantees. Each acquisition is preceded by a due diligence study in which the risks are evaluated.

Exchange rate differences. Because costs and income are often in the same currency, the effect of exchange rate differences on the Company is limited. In the donor-financed market, payments can be made in a currency different from the currency in which the costs were incurred. In that case hedging can be worthwhile. Investment in acquisitions is generally financed locally. The currency risk on dividend flow is limited. Profits in the United States are mainly used locally for acquisitions or for dividend payments to American shareholders. Profits in South America are needed to finance growth. The currency risk in ARCADIS is, therefore, mainly a translation risk. This risk is not covered. Changes in the exchange rate against the euro do indeed lead to adjustments in the value of investments in the non-euro countries, as reported on the balance sheet. Despite the considerable differences in exchange rates recently, the effect of this on the Company's balance sheet position
has been limited.

Interest rates. An increase in interest rates means that the interest charges increase. Only a limited proportion of the activities is currently financed by borrowed capital; therefore, this effect is limited. An increase in interest rates may well have a negative effect on the opportunities for making acquisitions. An increase in interest rates can also affect ARCADIS indirectly, as interest rates affect the investment decisions of companies and governments.

Goodwill. When making acquisitions ARCADIS generally pays a
substantial part of the purchase price for goodwill. Since 2001, this goodwill has been shown as an asset on the balance sheet and amortized over its economic life. If the profitability of the acquired company no longer justifies the goodwill shown as an asset, it may be necessary to revalue this downward (impairment).

Development risks. The ARCADIS strategy is focused on becoming involved in DBFO projects. In this type of project, ARCADIS, often as part of a consortium, participates in the development on its own account and at its own risk. This can entail investing in certain assets and/or that the development effort is capitalized. If, in the end, the project is not developed or yields less profit than expected, it may be necessary to depreciate the development costs or other investments at an accelerated rate. At present, investments in this type of project are limited.

Percentage of completion. ARCADIS' profit from projects is
determined using the percentage-of-completion method: the
expected profit is taken pro rata on the progress of the project.
Losses are taken in their entirety as soon as they are identified.
Incorrectly estimating project progress can lead to an incorrect
valuation of the work in progress that has to be corrected later.

Tax. In the commercial profit and loss account, taxes to be paid are calculated based on estimates. Deductible costs are also estimated. When the actual taxes are paid a few years later, (considerable) corrections may have to be made to the previous estimates.

Liquidity. Over the course of the year, considerable fluctuations
occur in the working capital needed to finance operations. As a
result, the limits in the financing agreements with banks can be
exceeded (temporarily). With regard to ARCADIS' current balance sheet, this risk is limited. Acquisitions may lead to considerable increases in borrowed capital, placing ARCADIS at risk of not satisfying the bank's criteria. ARCADIS strives to have a good liquidity position at all times, strictly controlling working capital and maintaining a healthy interest cover and debt/profit ratio.

Pensions. The pensions of most Dutch ARCADIS employees are in the Stichting Pensioenfonds ARCADIS Nederland (ARCADIS Nederland Pension Fund). At the end of 2003, this pension fund's obligation coverage was about 114%. The current pension scheme in The Netherlands is based on the defined benefit system; therefore, financial developments in the pension fund can, depending on the accounting rules that apply, have a great effect on the Company's results. ARCADIS' policy is, therefore, aimed at converting the pension scheme into the defined contribution system.

Options. Exercising outstanding options can lead to a reduction in the profit per share. Click here for an overview of outstanding options and the accompanying exercise prices. To limit dilution, shares are purchased to cover some of the option obligations.

Other risks

Employment market. ARCADIS' success is largely dependent on attracting and keeping good employees. If for any reason the
Company is not able to recruit enough people with the necessary expertise and skills from the employment market, or keep them in the Company, this can negatively affect revenues and results. The departure of (experienced) employees to competitors or selfemployment can be accompanied by the loss of clients and lead to a loss of work for ARCADIS. To position the Company as an attractive employer, much emphasis is placed on the human resources policy.

Reputation. Because of the Company's one-firm concept, most
Company activities use the ARCADIS brand. This concept increases risk as any damage to the Company's reputation can have a farreaching impact.

Integrity. Employees working in companies in which ARCADIS has a majority interest are committed to abide by the Company's code of conduct. Violation of these rules can have serious consequences for the Company's reputation and can lead to ARCADIS being excluded from bidding procedures. For this reason, great emphasis is placed on adherence to the code of conduct. Penalties for any violation can include dismissal.