Australian contractors want a bigger slice of defence's $8b pie

The surge in spending planned before the federal government hands down its Defence Strategic Review could be boosted by recommendations of the wide-ranging strategy document. Many expect the review to emphasise a greater role for northern Australia, the need for submarines and the adoption – and eventual local manufacture – of HIMARS high mobility artillery rocket systems.

“We’re eagerly awaiting the outcomes of the Defence Strategic Review and anticipate that the Australian government will continue to prioritise funding for defence, which could lead to further opportunities across the property and building sector,” said Damian Drain, defence sector lead at engineering and design consultancy GHD.

Contractors agree.

“We look forward to the release of the Australian government’s Defence Strategic Review and more opportunities for Built and the Australian construction industry to secure work for what we anticipate will be a strong pipeline of built environment projects,” contractor Built said.

But the review – the main findings of which will be made public before the May budget – may not mean more money. The expected push for a reshaping of Australia’s defence capabilities at a time of ballooning government debt could take expenditure away from some existing commitments and put it towards others.

“To say there’s further growth, we wouldn’t know until the DSR comes out and reprioritises,” a person at one building contractor said.

“Some projects might drop from the plan, others might come in.”

But more money or not, Australia’s changing defence and security environment will test the country’s ability to invest in infrastructure.

Contractors are hoping for a change of tack from a procurement past they say was hampered by lack of defence department capacity and delays – all of which advantages the entrenched position of larger companies.

“Defence will want to spend lots of money in a short period of time,” said an executive contractor, who did not want to be identified.

“We’re just expecting a lot to come out. They could be forced to change their procurement techniques to deliver the quantum of what’s going to come.”

Industry titans

Lendlease, CPB Contractors and Laing O’Rourke dominate Australia’s defence built environment procurement. ASX-listed Lendlease disclosed in its earnings announcement last month that defence projects made up 27 per cent of its $9.6 billion construction backlog – a measure of future revenue.

But there’s a tier of smaller, Australian-owned contractors – which includes Built, Hansen Yuncken, Adco, Roberts Co and FDC Construction & Fitout – who are keen to increase their defence work, but fear that any boost in expenditure will just go to the players already dominating the sector.

The problem is that a defence department already bumping up against its own capacity to manage and administer existing contracts will simply outsource ever-bigger packages of work to the big three contractors that have people and resources to take them on.

“There’s more opportunity coming to market,” said a senior person at one contractor.

“But … what we’ve found in the last couple of years is that projects are being smashed together to make programs of work.”

As an example, to reduce the demand on a stretched government department managing several regional projects – each worth a couple of hundred million dollars – it could combine those into one mega project worth more than $1 billion, which immediately makes it too big for most of those smaller contractors to take on.

“That’s way out of our wheelhouse,” the person said.

Another contracting firm executive was more blunt.

“There are some very good defence contractors outside CPB, Lendlease and Laings,” the executive said. “And if you put out a $1 billion project, not a lot of them can do it.”

The defence department was asked for a response a day in advance of this story running, but had not replied by the time of publication.

Defence built environment spending isn’t limited to direct investment by the department.

‘Prime’ contractors

Defence’s $3.3 billion enterprise estate and infrastructure budget this year is dwarfed by its $11.7 billion military equipment acquisition program, and much of this spending finds its way to facilities spending through the so-called “Prime” contractors.

These are companies such as armoured car maker Rheinmetall, Lockheed Martin, Northrop Grumman, Thales and BAE Systems which, as part of a contract to supply military hardware, also procure facilities relating to that contract.

Korean defence manufacturer Hanwha in 2021 secured a $1 billion contract to manufacture 30 self-propelled howitzers and 15 armoured ammunition resupply vehicles. Last year it appointed Built to construct a $170 million, 32,000-square-metre construction and testing facility to support this contract at Avalon Airport in greater Geelong.

The awarding of a planned $27 billion contract to supply 300 infantry fighting vehicles to replace the army’s fleet of light armoured vehicles will offer further opportunities for locally owned builders, as the Prime contractors have express requirements to use domestic contractors.

“What we’re seeing from the Primes is they’re starting to think about coming to the likes of what we’ll call the ‘Tier 2s’,” one contractor said.

“They want Australian-owned companies.”

Local ownership isn’t everything in defence procurement. While local contractor John Holland lost all of its defence contract work after being acquired by China Communications Construction Company in 2014, not all foreign ownership is seen as a risk.

Laing O’Rourke is the largest privately owned construction company in the UK. CPB parent Cimic is owned by Germany’s Hochtief, itself owned by Spain’s ACS Group.

Locally owned contractors argue that profit from defence work paid to them stays in the country rather than going overseas. They also argue that they offer a wider spread of subcontractors that increases the sector’s overall capacity to complete projects.

“While head contractors might have the capacity to do a lot of projects, they use the same subcontractors all the time,” one of the locally owned contractors said.

“The subcontractors don’t have the capacity to do a lot more. You need a different subcontractor market – Tier 2 builders have different subcontractors to Tier 1.”

This is particularly in regional areas, they said.