SMEs to suffer as engineering and construction projects dry up: Report

Smaller businesses in the civil and construction engineering sectors are expected to struggle during 2010-11 as overall industry activity slides 6%, a new BIS Shrapnel report reveals.

But the news isn’t all bad, with major transport, water and resources projects set to commence during the next year, with strong growth expected in South Australia and Victoria boosted by infrastructure and mining projects.

The latest BIS Engineering Construction in Australia report shows activity grew by a solid $10 billion during the 2008-09 year through the financial crisis, although this growth was largely driven by a pipeline of projects contracted during the previous few years.

However, the crisis saw fewer companies contract for new work, and the impact of the smaller pipeline of projects is now expected to be felt during 2010-11 and the following years.

Adrian Hart, senior manager for BIS Shrapnel’s infrastructure and mining unit, says this lagged downturn is being felt across the industry, and not just in one or two particular sectors.

“The lag is fairly broadly based. There are a lot of projects which started in a range of sectors, such as transport, utilities and mining, prior to the GFC and what’s happened is that they’ve seen a pause in commencements. There is a 15-20% drag in commencements expected in most sectors including road construction, harbour work, electricity, mining and heavy construction.”

“It’s a little surprising because we thought we’d see the effect of the GFC in 2009-10, but in fact the pipeline of work has sustained us through them and we expect 9-10% growth this year. But the pause is going to see a lag next year.”

While Hart says a number of larger projects will take the headlines, such as the Gorgon LNG project, smaller companies in the sector may struggle.

“It’s hard to compete when projects are packaged up for larger businesses to bid on. It’s going to be tough for smaller businesses because of this pause in a number of sectors, transport, electricity, etc.”

But Hart also says following 2010-11 there will be an upswing in activity as the industry catches up to the economic recovery. While he warns the growth rate won’t be at the levels the industry experienced during the past five years, the sector will still perform “quite strongly”.

“I think commodity prices are going to start picking up, and we’re going to see take-ups in construction costs and more scope for small companies which want to claw back their margins.”

“Everybody has been cutting prices and trying to get that to work for them, but if they make it through the next year there will be less pressure to just bid on any work available and they can afford to be a little bit picky and bid for work that will give them a better return.”

The breakdown for engineering activity state-by-state:

New South Wales. Activity will grow by 10% during the current year, but stay at that level during the next few years. Water projects such as the Kurnell Desalination Plant and harbour projects including Port Botany and Newcastle coal ports will keep work high. Roads and rail work will continue.

Victoria. The state will see 28% growth in activity during the current year, but fall back over the next few. Rail activity, roads, water, electricity and oil and gas projects will keep sector activity high.

Queensland. Flat growth is expected following five years of consecutive growth of more than 20%. Roads and bridges work, such as the Gateway Duplication, along with water, electricity and heavy construction will see projects completed. Mining, oil and gas will drive an upswing in 2012-13.

South Australia. After massive growth in activity of 39% in 2008-09, 28% growth is expected for the current year. Roads, water, electricity and mining will keep activity high in 2010-11.

Western Australia. The state will see 12% growth during 2009-10, driven by mining projects, but a pause in expected over the next few years as new projects in the industry transfer over. An increase is expected from 2012-13.

Tasmania. Activity will grow by 9% during the current year led by the NBN, roads and heavy industry. However, a decline will occur in 2010-11 as these projects are completed. Electricity construction and projects will help activity in 2012-13.

Northern Territory. Activity fell during the current year with major oil and gas projects having completed. While declines are also expected in the next two years, the state will see higher activity in the minerals and energy sectors post 2012.

Australian Capital Territory. Work during the current year has been led by the Cotter Dam and other major water projects, along with road works. A peak is expected in 2010-11 before a setback in activity.