30/11/2004 - 21:00

Tim Treadgold: Briefcase - Cheap shoe warning rings hollow

30/11/2004 - 21:00

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REMEMBER when your mother warned you about buying cheap shoes? “They’ll fall apart, dear,” are the words that ring in your ears. Well, mother’s words are ringing loudly in the ears of Planning Minister, Alannah MacTiernan, as she contemplates what to do w

REMEMBER when your mother warned you about buying cheap shoes? “They’ll fall apart, dear,” are the words that ring in your ears. Well, mother’s words are ringing loudly in the ears of Planning Minister, Alannah MacTiernan, as she contemplates what to do with her much-touted, “fixed price”, railway tunnel that was supposed to be heading under Perth, but appears jammed up by industrial delays and site problems.

In time Alannah’s tunnel will be dug but, as the people of Perth watch its slow progress and lament the chaos being caused to city traffic, there is a silver lining. You’re not alone.

Fixed-price, turnkey contracts, like that awarded to Leighton and partners on the Perth rail tunnel, are proving to be a disaster everywhere, and far from saving anyone money it seems that a number of them actually burn both the contractor and the customer.

Over the past few weeks, Briefcase has seen three of these so-called “fixed-price, turnkey, drive-away, pay-no-more contracts” turn sour. It has also become known that at least one of the world’s biggest engineering contractors, the much-maligned Halliburton group of the US, will no longer bid on a fixed-price basis for offshore oil and gas work.

The reason? Too much risk transfer to the contractor, too many hassles, a collapse in the relationship with customers when something goes wrong and the inevitable march into a legal settlement process where everyone loses, except the lawyers.

First case study is in Bass Strait, but involves one of the “lucky” failed bidders for the Perth rail tunnel. Clough Ltd, the Perth engineer fast developing a South African twang to its accent, has been scorched to a crisp on its $400 million BassGas project which is developing the Yolla gasfield for gas deliveries to Victoria.

Hailed in 2002 when secured, BassGas was said to be the best thing Clough had ever landed. It is now shaping as the worst with Bassgas destined for months, if not years, in legal disputes with the contractor and the customer, Origin Energy, blaming the other for delays in equipment installation, and/or poor design, including a decision to not spend $30 million on a mercury separation plant – with mercury in a gas stream an absolute no-no.

The second case study is a small goldmine in northern Sweden being built for the Perth-based Dragon Mining on a fixed-price, turnkey contract. Well, that’s not quite right. The Svartliden mine was being built by the South African contractor, MDM, until a few weeks ago when Dragon stepped in and took control of the final construction and commissioning itself.

The problem, from Dragon’s perspective, is that completion of the mine was running late, some items of equipment taken to the ultra-cold construction site did not meet Swedish Government specifications and MDM was claiming additional payments to meet the higher-than-expected costs caused by design variations. So much for fixed price.

No-one is yet saying that Alannah will be forced to step in and take personal control of the Perth rail tunnel, but Dragon’s experience shows just how bad a fixed price contract can turn.

In the case of the tunnel, there is also a growing band of outside critics who are looking at the job and asking what’s gone wrong, why the delays, why isn’t Leighton just getting on with its fixed-price contract.

The answer is that Leighton is hitting all the classic problems of every construction contract where risk, at the start, is not absolutely clear, unions decide to play up, and the customer thinks it smart to refuse any help because it believes it is protected by the fixed-price nature of the contract – and the politics of the situation are red hot with a State election on the way.

How wrong a refusal to help will prove to be. Leighton may have been overly ambitious with its bidding on the rail tunnel but some of the issues that have come up are not its fault. It might even be argued, and probably will in a future court case, that the government itself is to blame. For starters, why hasn’t Alannah called off her mates in the union movement who seem intent on screwing Leighton to the wall with their ridiculous wage claims – claims made after they had signed a deal to not strike.

The point, which Halliburton obviously got years ago, is that there is no such thing as a fixed price construction contract. There are just too many damned variables.

The only way to handle a contract successfully is for the contractor and the customer to work hand-in-hand to resolve problems as soon as they arise (it saves time and money), for both sides to absorb costs (because risks can appear from nowhere), and for both sides to share those unexpected risks and costs.

For Alannah to think she has transferred all the risk of the Perth rail tunnel to Leighton is not only foolish, it will ultimately prove to be expensive as easy-to-fix issues drag on with ever-mounting cost, and a future appointment before a judge who is just as likely to say to both sides, “share the cost overruns, don’t be silly boys (and girls), never buy cheap shoes, ? or imagine for one second that fixed price means no risk”.

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EVER seen a dog with mange. Not pretty. But mange is the new name flitting around global financial circles to describe what the falling value of the US dollar is doing to companies that sell their products in that currency.

“Dollar-mange” is the name, and there is more than one Australian company likely to catch a dose of the disease.

Just take iron ore producers as an example. Their product is sold in US dollars. Most of their costs are in Australian dollars. New contracts may accommodate the decline taking place as the US dollar sinks slowly in the west, but in the meantime there is a little pain to bear – pain that might not yet be fully reflected on the stock market.

Nickel miners too are facing an attack of dollar mange, which gets its name because of the insidious way it eats away at profits, leaving a very unsightly set of accounts.

February should be the first time we get a closer look at the dollar-mange effect. That’s when December balance date profits are released. Stand by for some interesting results.

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 “He know nothing and thinks he know everything. That points clearly to a political career.” George Bernard Shaw.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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