John Holland, formerly part of Leighton Holdings, has reported a $55.5 million annual loss following major cost blowouts on two Melbourne infrastructure projects. In the last 14 years, the cost of building transport infrastructure projects is now 53% more expensive.
These increases have exposed contractors like John Holland to cost blowouts that are required to complete contracts for a fixed price.
The mining giant, now owned by a major China government-backed builder, attributes the loss - following a net profit of $94.8 million in 2023 - to “project delivery issues” on Melbourne’s Metro Tunnel rail project and West Gate Tunnel motorway.
Metro Tunnel
The company entered an initial $5.08 billion contract in 2017 for the Metro Tunnel, a rail line from the west to the south-east that’s due to open next year.
A revised $6.45 billion fixed-price contract was subsequently reached in late 2020 for main tunnelling work and the construction of five new train stations.
However, late last year the Victorian government announced that the covid pandemic and the war in Ukraine had resulted in a major blowout in the Metro Tunnel’s total costs (which include other contractors) to around $15.5 billion – that's $5 billion more than the initial forecast total.
While taxpayers bear the extra costs, so too do the myriad contractors building the tunnel.
However, cost blowouts aren’t contained to the Metro Tunnels project.
West Gate Tunnel
John Holland and joint venture partner CPB Contractors also entered fixed-price contracts to build the West Gate Tunnel motorway for toll road group Transurban (ASX: TCL).
However, the project started to unravel following arguments over who would cover unforeseen costs to dispose of contaminated soil.
While Transurban and the government finally agreed to share $3 billion in cost blowouts, the contractors also ended up bearing some of the cost.
Included in accounts filed with the Australian Securities and Investments Commission (ASIC) late last week, John Holland disclosed that provisions for onerous contracts increased to $189.5 million from $151.3 million a year earlier.
John Holland also wrote down the value of an undisclosed property development investment.
With a net asset deficiency of $45.8 million, John Holland had no choice but to go cap in hand with its parent, China Communications Construction for ongoing financial support.
3,200-plus contractors enter administration
According to recently released Australian Securities and Investments Commission (ASIC) figures, 3217 Australian construction firms entered into administration in 2024 including major builder, Roberts Co.
Having been forced to close its Victorian operations, Roberts Co has left eight projects in varying stages of completion, including Amazon’s biggest Australian automated warehouse.
Based on Infrastructure Australia’s figures, construction materials rose by around 12% in 2022-23, before reverting to a more modest 4.3% increase last year.
Construction costs aside, getting engineers, project managers and trade workers to fill jobs has not been easy.
Restructuring
With some bitter fixed prices lessons to swallow, John Holland has restructured its business since long-standing CEO Joe Barr resigned last October.
Recent restructuring initiatives have seen the group rejig a dedicated energy division established only two years ago into a broader infrastructure team.
Meanwhile, Glenn Palin, a non-executive director and former John Holland CEO who retired in 2016 has agreed to step in as acting CEO while the board finds a new replacement.
