The head of engineering and construction company, Clough, says contractors navigating new energy transition projects will face significant challenges that only collaboration can solve, as he provided Energy Club members with an overview of Clough’s struggle through administration.

Ahead of a panel discussion on how EPC contractors are adapting to thrive in the new energy future, Clough CEO and Managing Director Peter Bennett said they “firstly needed to figure out how to survive in the industry and then we can start thinking about how we may thrive in the future”.

“As we move through this energy transition our industry is going to be required to step up and we are going to have to solve some significant challenges,” Mr Bennett said.

“There are going to be a number of first-of-a-kind developments. We all talk about hydrogen and the expectation of the role it will play in the energy future that we have.

“There are an awful lot of technical challenges to be overcome and we are going to have to work as an industry in a collaborative fashion to ensure that we can manage through those significant challenges with all parties still playing their role.”

He sounded a warning on the sector’s fixed-price contract model that transferred all the risk to contractors.

“You can’t fix price innovation in this environment and certainly not on this scale,” he said.

“No contract can account for all the unexpected impacts that complicate our lives. Contracts are problems, we all know that. It’s how we manage and overcome those problems collectively that determines how successful we are going to be.

“We can incorporate mechanisms that encourage the client and the contractor to resolve these problems fairly and equitably and it’s an important topic to keep in mind as EPC contractors seek firstly to survive and then thrive.”

Mr Bennett had been at the helm of Clough for about six years, joining in February 2016, when, on December 4, 2022, he entered the business into voluntary administration.

“What felt like nine very long weeks passed before we were able to announce that the Webuild group had acquired the Clough business in Australia and we emerged
from the administration under a deed of company arrangement,” he said.

The Clough business and Webuild branch activities in Australia were combined and Clough is a wholly owned subsidiary of Webuild.

It was a traumatic time for the engineering and construction company founded in Perth in 1919 by two brothers and which became synonymous with major infrastructure projects in WA as it expanded nationally and globally.

“When I joined Clough seven years ago it was owned by Murray and Roberts, a relatively small South African firm and the business was really at the tail end of the
investment in LNG in the Asia Pacific,” Mr Bennett said.

“Clough had had almost 10 years of income derived almost exclusively from the LNG sector. We were present on and represented on just about every project in
Australia and PNG.

“It was a unique period and one of the most successful periods in Clough’s long and proud history.

“My timing was not quite as auspicious. When I joined the business the LNG investment cycle had well and truly ended. There was a global oil price crash, and the
market for LNG EPC contractors evaporated overnight.

“On arrival, I was told the business this year is going to be break even at best, and that was after a number of years of very good financial outcomes.

“For Clough our choice was clear, we either needed to become relevant in the markets that were continuing to invest and develop, or we were going to fail.”

The company reinvented itself, diversifying “both our end markets and our geographic footprint” and targeted the energy resources and infrastructure sector in Australia.

“We had a strong focus on energy and our strategy centred on generation, transmission, and storage of power,” he said.

“Our first major milestone in the energy arena came in 2019 when we teamed up with Webuild, a JV at that time, and were awarded the Snowy 2.0 project in NSW.

“Snowy 2.0 is the largest committed renewable energy project in Australia’s history. It involves linking two existing dams that are separated in elevation by about 900m
with 27km of a 10m diameter waterway.

“We are constructing an underground powerhouse: 750m below the ground in solid granite we are going to excavate a cavern you can fit two Optus stadiums in
and build a 2GW power plant deep inside the Snowy mountains.

“The concept is that when the renewable energy projects are producing excess power at periods of low demand, Snowy hydro will use that power to pump water from the Talbingo reservoir back up that 900m elevation change into the Tantangara reservoir then at periods of high demand when the sun is not shining and the wind is not blowing reverse that flow and generate hydroelectric power to supply the grid.”

Other projects included Australia’s first high voltage transmission project in about 30 years and shortly after Australia’s first hydrogen-capable, gas-fired peaking plant
in the power sector, in NSW.

The project portfolio was diversified in sectors that were making large investments and the Clough workforce was growing – but in background, the company was
operating without the support of external credit facilities largely due to the ownership structure under Murray and Roberts.

“We were operating strictly off our own balance sheet. The largest asset was a $350m loan that was extended to our parent company at the acquisition of the
business in 2014,” Mr Bennett said.

“In the last few years all of us, professionally and personally, have experienced the impacts of the pandemic. Significant impacts that resulted from lockdowns,border
closures, major supply chain disruptions, we have all felt the impacts of the resourcing shortages that are very much a major issue for all of us and remains the case today.

“(We were) managing all these issues and continuing to make progress on sites (while) overcoming the many challenges that the pandemic had thrown our way.

“(But) the commercial models we were contracted under weren’t designed for this level of change. Our portfolio was predominantly lump sum and as we all
know getting change in that environment is very difficult and time-consuming.

“The impact on our working capital was significant.

“With a fairly aggressive commercial environment that our market is known for, commercial changes come at an incredibly slow pace. Not surprisingly our liquidity
wasn’t going to be able to sustain these impacts indefinitely.

“Our parent company at the time was unable to make good on their loan repayments to the business and so we were left with no choice other than to enter into
a controlled administration process.

“It was the burning platform of the administration that really enabled the business to convert our contracts into a much more collaborative model and I am pleased to
say that through that period our clients stuck with business, we went through the commercial restructuring pretty seamlessly, none of our employees were made redundant
and all of our projects continued.

“It was a successful outcome in terms of the re-emergence of the business.”

Reflecting on the current state of the sector, Mr Bennett said construction companies were entering into administration at roughly twice the frequency of any other sector.

“The basic reason is simple: fixed-price contracts work well when the buyer knows exactly what they want and the seller knows exactly how much it costs – and that ain't construction,” he said.

“If you look at the housing sector you will see many parallels. With Australia having a national shortage of housing, the house-building market has been booming and
yet we see builders going into liquidation a couple of times a week; two more in Perth this week.

“So why is that: rampant escalation, supply chain shortages, resource constraints that have impacted that building market, that risk has all been borne by the
builders because the banks demand fixed price contracts.

“It’s not survivable.

“In the lump sum environment, all the uncertainty and risks are the responsibility of the contractors and when those risks are realised, they are funded out of the
contractors’ already razor-thin margins.

“The practice of transferring all of the risk to the contractors under the fixed price model has led to a deeply unstable industry.

“The very aggressive commercial management that ensues in that environment just needs to be reviewed and revised.”

 

Thank you to our event sponsors OMSB and Yokogawa Australia.

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