Riding a rough road to riches

OPPORTUNITIES may abound for many in the resources services sector as the state’s economy returns to full speed, but they are not yet always flowing through to the bottom line.

That’s seen in the number of resources sector contractors to deliver profit warnings during the past month, as even sector heavyweights such as Leighton Holdings find the road to riches is not always smooth.

According to executives from the sector at a recent WA Business News forum, contractors are being hit by a combination of factors that’s keeping a lid on their enthusiasm.

In particular, they are being hit hard by margin squeeze, as escalating costs eat into their profits on existing contracts, and a slower-than-expected rollout of new work as major resources projects are revived and sanctioned.

According to acting chief executive of mining and civil contractor Brierty, Tony Bevan, escalating labour and materials costs were major issues for contractors that won work during the global financial crisis.

“One of the issues is that the customer has done their feasibility and budgeting during the GFC at low margins. Now all of a sudden the costs are starting to escalate,” Mr Bevan told the forum. “So they’ve got much less tolerance for price increases ... and it’s a much more adversarial environment with your customer.”

The end result was that many contractors who had bid ‘low’ during the downturn just to keep work on the books and retain staff were now facing potentially significant losses on some contracts unless they could negotiate major variations with the client.

And until those contracts were completed and replaced with new contracts priced according to the changed conditions, many firms would continue to struggle, according to Mr Bevan.

“It’s going to be very challenging in the next six to 12 months in terms of contractors being squeezed,” he said, adding that while many major projects had been announced or sanctioned in recent months, it would still be some time before major work actually started.