By Greg Peel

Construction company Leighton Holdings ((LEI)) has been stuck with two disastrous legacy projects in the form of the Victorian desal plant and the Brisbane airport link, not to mention Middle East projects that remain a constant risk. Having made several write-downs on the value of the two contracts, the market was justified in assuming that Leighton's recent half-year earnings report and update should be the end of it. The projects are nearing completion and management made no suggestion of further cost overruns to come.

So when Leighton announced another big net write-down on the two projects last week, the market was quite simply angry. How can two more months make such a difference? Had management been cagey, or just incapable of controlling costs?

Either way, and with Middle East write-down risks still lingering in the face of a highly-geared balance sheet, the market has largely chosen to dismiss the company's current project pipeline and just get out on lack of confidence in management.

Construction company Transfield Services ((TSE)) had made two profit guidance downgrades over the past twelve months up until yesterday, when it delivered another one. Management reduced guidance to $105m from the earlier range of $130-135m to account for wet weather impacting on the Easternwell resource sector project (-$7.4m) and the ANZ services project (-$1.6m) in Queensland and cost overruns at the legacy Brown Hill underground cabling project in New Zealand (-$16m).

Analysts are not so much worried about weather-related write-downs ? they are a part of life and weather will always normalise ? albeit Macquarie notes that while the big wet was concentrated in the month of March it was no more severe than any typical Queensland March. Why then does Transfield not include a weather buffer in its guidance? What analysts are really surprised about is the Brown Hill write-down of A$16m on a NZ$50m contract, for various reasons.

First is the size of the write-down. The amount seems awfully large for a project that is not that risky ? laying cable. Secondly is the surprise nature of the write-down. The contract was signed by the former management but it's been going for 18 months. In all that time, new management has never mentioned that the project might be having some problems. Was it just a poor contract to begin with, and/or is management showing itself to be incapable of controlling costs and internal systems?

Transfield's systems appear to lack visibility, suggests RBS Australia, and its contract pricing lacks transparency. RBS has had multiple contractors informing the analysts over the past six months that they have been underbid on contracts by Transfield. Now comes this out-of-the-blue big write-down. RBS admits that there are still good margins to be made for companies with the lowest cost base, but was the Brown Hill pricing simply too tight and management unable to foresee what was coming?

Brokers are now concerned about what else might befall. The Brown Hill problems are likely now accounted for and weather is weather, but Credit Suisse suggests "execution on the Easternwell operations is now more critical than ever". Macquarie notes the upfront coal, iron ore and oil & gas exposure provided by Easternwell makes the project one of higher reward potential but higher risk, and thus should be ascribed a lower multiple. RBS is particularly now worried about the ANZ contract, assuming margins will be lower ahead. Deutsche Bank notes Transfield has a positive outlook on CSM and mining opportunities but RBS believes the focus should now be on "the implications for other contracts" of the shock Brown Hill write-down.

Credit Suisse throws another potential spanner into the works, noting that management hinted it might exercise its pre-emptive rights to buy out the rest of the FT Services JV. With Easternwell a risk another acquisition would not be well-timed, particularly if it risks the balance sheet position. Credit Suisse nevertheless maintains an Outperform rating on Transfield, based on opportunities in resources maintenance.