OPINION: The appointment of administrators to Clough on 5 December 2022 is the latest blow to an industry dealing with the multiple time and cost challenges of supply chain disruption, severe escalation in prices of key materials, labour shortages and Covid-related absenteeism and La Niña weather impacts.
Media outlets have recently reported that filings with the Australian Securities and Investments Commission show Clough owes creditors $248 million, with over one third of that ($88.7m) owed in relation to the troubled Snowy 2.0 project.
The troubles facing Clough were well known in the industry.
On 17 October 2022 Murray & Roberts, Clough’s South African parent, told the Johannesburg Stock Exchange that margin deterioration had been recorded on Clough’s Waitsia project, and that the Group’s working capital requirements were especially acute in its energy, resources and infrastructure business platform – primarily the Clough business.
In early November, it was announced that Murray & Roberts had agreed terms with Italian construction major WeBuild for a sale of all of the shares in Clough. This was seen as a lifeline for Clough, and good news for the infrastructure and construction market.
The sale was subject to a number of conditions, including satisfactory due diligence and confirmation that Clough’s existing contracts would continue. However, the sale process ended with an announcement from WeBuild that the companies had “jointly determined and agreed that there is no reasonable prospect of that acquisition proceeding through to a successful completion”. Clough was placed in voluntary administration almost immediately.
In mid-December, media reported that WeBuild has subsequently agreed with Clough’s Administrator to purchase Clough’s interest in the Snowy 2.0 and Inland Rail projects for $17.6 million, in which WeBuild and Clough were already in joint venture. With this purchase WeBuild gains not only full control of construction of the Snowy 2.0 and Inland Rail projects, but also the scarce skilled employees currently employed by Clough. WeBuild’s deal with the administrator also includes an option to purchase Clough’s interest in other projects, with the date for exercise of this option extended from an initial date of 21 December 2022 until 25 January 2023.
Major projects have been troubled territory in recent years, with projects such as Melbourne Metro, West Gate Tunnel and Sydney Light Rail suffering extensive delays and cost blowouts. Lendlease has exited the infrastructure sector, and other major contractors have suffered significant losses in the sector. Furthermore, the collapse of renewables contractor RCR Tomlinson and difficulties in that sector has led to a contraction in the number of contractors willing to undertake renewables projects.
The causes of these losses has been bruising competition between contractors, particularly pricing lump sum contracts with very lean margins, and inadequate contingencies, underestimates of the completion time (and the factors that can delay completion), contractual terms which impose uneconomic risk transfers and supply chain failures. Rules relating to Covid, which differed between states, also caused disruptions to the industry.
Last year saw the additional factor of the conflict in Ukraine significantly raising prices for oil, gas, steel and timber, comprising a major contributor to a global inflation blowout. Meanwhile, Covid is continuing to cause supply chain bottlenecks both with international shipping and aviation, particularly in relation to imports from China.
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On the positive side, there has been some movement towards greater risk sharing in contracting models on mega-projects in the past few years, driven by the major contractors and certain State governments and utilities, and some of the price increases, particularly in transport costs, have begun to moderate. However, outside the mega-projects, particularly projects developed by private operators, lump sum contracting with significant risk transfer to building contractors is still the norm.
Lump sum contracts continue to predominate at all levels of the construction market, under which contractors often have no right to increase prices to cover increased costs due to high inflation. Accordingly, we anticipate that there will be future casualties across all levels of the construction and infrastructure sectors arising from legacy contracts. We also expect to see a continuation of the trend towards contractors incorporating price escalation clauses in new contracts, to enable pass through of cost increases in supply chains.
