How low-ball bids are hurting the construction industry as the rise in raw material and labour and equipment costs keeps eating into the slim margins.
Australia’s in the midst of a multi-billion dollars building and construction boom, not to mention a boom of similar proportions in mining of all types, and yet amid all this money, signs are growing of serious financial strains.
It would seem that the companies have not budgeted on the sharp increases in the price of steel, concrete, the sharp rise in hire costs(much of the equipment is hired for jobs) or on the slow and remorseless rise in labour costs, particularly for plant operators and other skilled positions.
The German-owned company, Walter Construction group failure, two weeks after the mid-sized contract mining and mining industry contractor, Henry Walker Eltin, has set off a chain of concern in the industries.
Then Leighton Holdings, the industry’s biggest player and its 1000 pound gorilla, is hammered on the stockmarket after revealing an accounting procedure change that will enable the company to meet previous profit estimates for the 2005 year.
And on closer analysis (as in the above story) Leighton’s seems to be $30 million short of profits this financial year, a shortfall that will be covered by that timely change in accounting policies.
Leighton reveals its interim result this Wednesday but already industry players are wondering whether the industry is in the early days of a shake-out, despite all the good times and huge contracts.
They wonder if margins are under pressure in the booming building, construction and mining industries simply because some companies have bid low or unprofitable proves simply to get the work in. They can’t help themselves and that they justify these low prices by claiming to make up the shortfall in variations with the clients, or in economies of scale and financing, using their balance sheet to buy future work rather than future profits.
These low ball bids were put in and now the rise in raw material and labour and equipment costs is eating into margins.
The collapse of the German-owned Walter Construction Group (the old Concrete Constructions) and Henry Walker Eltin might prompt observers to agree that margins are under pressure, especially with news that only three of the firm’s major contracts are profitable.
Others however hope the two collapses will help restore those margins for the surviving players.
But then you look at the above story on Leighton Holdings’ little accounting trick, revealed last Thursday and the way it is being used to cover up a drop in earnings and the first thought is that margins are under pressure, even at the industry leader.
Complicating the problems is the ownership of Leighton and another major player, Abigroup.
Leighton’s major shareholder is the German construction giant, Hocthief. It is profitable and doing well, according to reports.
Its competitor, Abigroup was taken over last year by the industry Number Two in Germany, Bilfinger, which had had a big stake in Abi for some time.
Normally to be owned by such large German groups would not raise an eyebrow among rivals and bankers, but after Walter Bau cut adrift Walter Constructions, after refusing to repay around $38 million owed to the local arm, some are questioning the arrangements between the German companies and their Australian subsidiaries.
The actual events that led to the parent owing the Australian arm $38 million, have not been detailed yet, but need to be.
Certainly Australian bankers would not be blamed for inquiring of both Leighton and Abi about the health of the respective major shareholders and a little proof.
Complicating matters for the bankers to Walter Constructions is the attitude of the German parent and some Australian clients, most notably the NSW Government, which is playing hardball, according to industry sources.
There is mystery why the German parent would not or could not stump up the millions it owed the Australian company and why it had left the local company without any ongoing cash or with reserves to meet entitlements to employees and contractors.
There is also concern as to whether this is limited to Walter or is repeated in other Australian companies with foreign parents, that the local company is drained of cash each day by the foreign parent, or that the proper reserves for the local arm are maintained in accounting terms, but not in actual money or securities.
Then there’s the performance of Walter with the NSW Government contract with the Parramatta Rail Link (rebuilding the Parramatta Rail station and associated transport infrastructure).
There are suggestions that the company is in breach or was in breach of a NSW Government requirement that all subcontractors have to be paid before the Government will release further progress payments.
The Government says Walter has been paid $3 million to be paid to subcontractors. That money has not been passed on.
The Administrators of Walter claim the government owes it money, but sub-contractors will not resume work on the project until the $3 million is paid.
The NSW Government is refusing to pay them because it says Walter did not follow an agreement it signed to have enough money on hand to pay the subbies.
The administrators have to get someone to pay the $3 million in either a direct manner or a subordinated payment to be fulfilled in the future. Without that the project will grind to a halt, subbies will go elsewhere and the profitable project will not be able to be sold.