"New Orders?..."... Construction Companies Compete to Raise Construction Costs

Private Construction Orders Show Negative Growth for 1 Year and 2 Months
Focused on Negotiating Increased Construction Costs at Existing Sites
If Construction Costs Are Not Settled, Post-Sale Projects Will Increase... More Burden on Construction Companies

Image sketch related to Jamsil 5 Complex Apartment. Photo by Yongjun Cho jun21@

Recently, construction companies have been desperately trying to increase the construction costs of their existing contracted projects. This is a struggle to secure profitability amid rising prices. Experts predict that the volume of post-sale units may increase in future housing maintenance projects within Seoul.

According to Statistics Korea on the 29th, private construction orders in February decreased by 34.2% compared to the same period last year. Except for one month during the past 1 year and 2 months (October 2022 to February this year), the year-on-year growth rate of private orders has been declining continuously. This indicates that construction companies are postponing new project orders.

As labor and raw material costs surged significantly, construction companies gave up on new orders and focused on securing profitability by increasing construction costs at existing project sites.

Daewoo Construction is currently negotiating construction costs with the redevelopment association at Haengdang 7 District in Seongdong-gu, Seoul. In January this year, Daewoo Construction requested a 23% increase in construction costs from the existing 5.46 million KRW to 6.72 million KRW per 3.3㎡. This price reflected the rise in raw material prices and changes in construction conditions since the start of construction in January 2021. However, the redevelopment association ignored this, escalating the conflict, and at one point, Daewoo Construction considered halting construction. A Daewoo Construction official said, "When the construction progress reached 40%, and the possibility of halting construction was mentioned, the association also came to the negotiation table," adding, "A conclusion must be reached soon."

In some places, construction costs soared to 13 million KRW per 3.3㎡. For example, Shinbanpo 22nd, built by Hyundai Engineering, initially set construction costs at 5.69 million KRW per 3.3㎡ when the contractor was selected in 2017. Since then, due to rising raw material prices and increased finishing costs from applying a high-end brand, the reconstruction construction costs reached an all-time high on the 16th.

While some projects are adjusting or negotiating construction costs, others have failed to narrow the gap, resulting in project cancellations. On the 13th of this month, the reconstruction association of Jugong Apartments in Eunhaeng-dong, Jungwon-gu, Seongnam City, and GS Construction and HDC Hyundai Development Company terminated their construction contract amid construction cost conflicts.

According to the Korea Institute of Civil Engineering and Building Technology, the residential building construction cost index in February reached 154.81 (2015 construction cost = 100), marking an all-time high. As construction costs rise, construction companies’ cost ratios have exceeded 90%. The cost ratio is the proportion of costs to sales revenue; the higher it is, the lower the profit.

The first-quarter results have cast a shadow over construction companies. Hyundai Construction recorded favorable results thanks to overseas orders, and Samsung C&T saw good performance due to semiconductor factories. However, housing sluggishness has become a problem affecting all construction companies. In particular, companies with a large housing business share, such as GS Construction, Daewoo Construction, and DL E&C, showed poor performance. Kang Min-chang, a researcher at KB Securities, said, "Whether construction companies succeed in smoothly increasing contract amounts will significantly impact their annual performance trends."

An official from Company A said, "The government is preventing price increases through the price ceiling system, but construction companies must defend their profits amid rising prices, so they have no choice but to push for construction cost increases," adding, "There was a surge in urban maintenance project orders in 2021 and 2022, and the construction cost increases for those projects are becoming an issue."

An official from Company B said, "If construction costs are not fixed, sales cannot proceed, so future reconstruction projects within Seoul will inevitably have to adopt post-sale," adding, "Post-sale means financing happens later, so from the construction companies’ perspective, financial costs will increase significantly, and the burden will be heavier."