Leighton Holdings is under pressure after revealing a trio of dodgy
contracts had ripped millions out of profits should we be surprised?
Three dodgy contracts and suddenly Leighton Holdings’ share price is
going down and down and down. It’s a miserable time for the country’s
major contractor and no doubt there’ll be a lot of overtime and weekend
work at its North Sydney headquarters for the next few months as
management struggles to right the ship.

But while there’ll be a lot of unrewarded work on these deals, Crikey
believes there is muted cheering around the Australian construction
industry about Leightons problems. And this is especially so amongst
clients.

It seems Leighton is the hardest-nosed player among a bevy of hard
noses in the contracting industry. While the construction unions
received a lot of bad press in recent years because of their own
efforts and the Cole Royal Commission, there’s a certain glee at
Leightons current woes.

The three contracts are the Southland coalmine in the Hunter Valley. No
fault or blame or anything can attach to anyone except
happenstance. A fire underground, the mine is shut and then
closed.

Leighton has to write off $28 million. But the other two, well the
Hilton Hotel contract in Sydney faces delays and higher costs over
design problems, asbestos and several other worries. And the
potentially blackest hole of all is the Spencer Street station contract
in Melbourne where the potential loss is around $50 million, on the
$167 million contract, according to Leighton CEO, Wal King on this
morning’s Business Sunday program on Nine.

The original design has been much changed. The apartment block towers
have gone, a victim of the property correction and the oversupply in
Melbourne (especially Docklands) the office tower has been more than
halved in height to eight floors and the construction conditions remain
difficult as the Victorian Government keeps the station operational
while work goes on. Spencer Street is late, over budget, and
cannot be finished in its present form without more money being thrown
at it by the client, the Victorian Government.

From what Wal King said, negotiations haven’t even started. What he
didn’t quite say was that it’s becoming a shitfight. When Wal King
talks about working together and telling the Victorian Government that
it is in “their interests to help us” you know there’s a brawl looming.

So what, you say. That’s normal in the industry, isn’t it?

Well, yes and no. Yes problems emerge from time to time on contracts
and changes are made, more money is paid, the project continues to
completion. And no, problems emerge, arguments between client and
builder, banks get involved, court action looms, money is paid, peace
breaks out.

But according to some in the industry, Leighton has refined all of this
into an art form by the aggressive and continued use of variations
claims with clients.

What Leighton does is to be the most aggressive bidder on a contract,
using its balance sheet, that of its major shareholder, Hochtief AG of
Germany and good relationships with banks such as Macquarie, to put in
highly competitive bids with low prices and thin margins.

Then once the contract is under way what Leighton does is to start
going back to the client with variations claims. They could be for
anything such as poor drawings and design, client changes and
associated costs, changes in specifications, extra work on footings
etc, weather. The list can be long and annoying.

It becomes a constant battle between client, builder, sub-contractors
(who find it almost impossible to win variations from Leightons),
architects, consulting engineers of all types, bankers, and where it’s
a government job, public servants of all sorts and politicians.

And Leighton plays them all, and driving the eventual cost to the
client higher and thereby earning a decent return on what was a finely
priced tender price.

Nothing wrong with this, it’s what makes the building and construction business such a competitive place!

And Leighton has used a couple of twists that no other company can
deploy. You see it owns Leighton Contractors, the leading contracting
arm, but it also owns the Thiess contracting business, which is mostly
based in Queensland and is big in coal, but moving into general work.
And several years ago it was allowed to buy John Holland from Janet
Holmes a Court,

That gives it three companies to run bids for major contracts. Which
upsets competitors like Baulderstone and Abi Group and several smaller
players.

Nothing wrong with that, except it’s irksome and the John Holland deal certainly shouldn’t been allowed by the mob at the ACCC.

Now Crikey has heard of a couple examples in NSW that sum up the
Leightons way of doing things and why so many in the industry are
pleasantly pleased to see it come unstuck. St Vincent’s does especially
good work in treating people with HIV/AIDS, while Kerry Packer not only
is a big user, but also a large and generous donor.

Sydney’s St Vincent’s Hospital is a great institution and has just
completed a major revamp, with Leighton Contractors the primary
contractor.

The cost of the work was always estimated at around $100 million. But
word is that Leighton put in a bid for around $90 million and has been
trying to make up the difference ever since with the NSW Health
Department, which provided most of the funding after donations, and was
the client.

The argument became so bitter that Leighton was not on the list for
preferred bidders for the $70 million project at John Hunter Hospital
in Newcastle.

But guess what, Leightons third contracting arm John Holland, put in a
bid and won the tender. And now it’s fighting with the client, again
the NSW Department of Health.

Crikey has heard of recent brawl over a series of variations claims that totalled $600,000 from John Holland.

These were put into the client, the NSW health department and its
advisers were forced to spend days checking them, checking the
drawings, plans and specs authorised for the work so far. It was time
consuming and cost the client thousands of dollars. But finally the
claims were slashed by 90 per cent and Crikey has heard that the
advisers found tens of thousands of variations on behalf of the client
that could be claimed back from John Holland and will probably be used
as a bargaining chip.

Industry insiders say negotiations over variations resemble
horsetrading and arm wrestling and victory goes to the toughest. The
contractor usually has the whip hand because if it goes slow or starts
trimming its costs, the pace of the project slows, the completion date
gets pushed back and the price eventually rises.

Leightons dispute with the health department might have stopped it
winning other Health department business until the argument was fixed
up.

But by using the John Holland arm it was able to win the John Hunter
contract, and by using the Thiess arm, it was able to win the $169
million first stage project at Westmead Hospital in Sydney.

Nice, isn’t it and that’s why the competion’s whinges have some justification.

In fact it was a very subdued Wal King on Business Sunday. This is his
biggest test. Last year the company had to swallow losses of $140
million on the NexGen optical fibre telecoms network. They took the
loss and bought the company cheaply. But with losses on Southland,
Spencer Street and the Hilton approaching $100 million, its not going
to be long before the board gets restless.

A fairly new board member is Qantas CEO, Geoff Dixon. Now would he load
and fire the gun at a fellow CEO in Wal King, knowing that according to
the rules of Business Karma, he will suffer the same fate in the future?

Shareholders don’t worry about paranormal events. These days they want
performance and higher dividends, and good business governance. Wal
King’s neck shouldn’t be the only one on the line here because in the
end this is a risk management problem and that IS a board
responsibility.

Peter Fray

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