The government has published measures to realize public construction costs and revitalize private investment projects, and the construction industry responded that this approach could greatly help alleviate difficulties caused by the domestic economic downturn, rising construction materials, and labor costs.

May 22, 2023, at a construction site in downtown Seoul. /Courtesy of News1

The Ministry of Land, Infrastructure and Transport announced on the 23rd the plan to enhance the vitality of the construction industry. The essence of this plan is to reflect the recently skyrocketing material and labor costs when issuing public construction contracts starting next year. In addition, the general management cost rate will be increased by 1 to 2 percentage points for small and medium-sized projects, and in order to improve the practice of low-bidding, the minimum price limit for bids will be raised by 1.3 to 3.3 percentage points from the mid-80% range.

The Construction Association of Korea noted in a statement that the "measures to enhance construction industry vitality" announced by the government will greatly help resolve issues related to insufficient construction costs, but added that there are still some underachievements, such as the need to raise the bid rate for small-scale projects. The association stated, "We will continue to improve these issues through close consultations with the government to alleviate industry difficulties."

The Korea Housing Association also issued a statement the same day stating that "realizing public construction costs will tackle the cost increases that were not adequately reflected during the recent surge in construction costs, and it will help normalize delays and failures in public projects." They also assessed that "relaxing restrictions on pre-sales due to business suspensions and expanding the scale of housing project financing (PF) guarantees will reduce the funding burdens on construction companies."

The construction industry explained that this reform plan includes many items that the industry has long requested.

A construction industry representative said, "To prevent low bidding on public construction projects worth more than 10 billion won, the criteria for unit price evaluation have been strengthened to increase the bid rate, and the general management cost rate that has been fixed for 35 years is being raised by 2 percentage points. This has been a consistent request from construction companies for a long time. Improving institutional mechanisms to set appropriate construction costs in technical bidding, such as turnkey contracts, could also positively impact the revitalization of public projects."

The Korea Housing Construction Association also stated on the same day that "the measures to enhance construction industry vitality announced by the government, including the realization of construction costs and the expansion of public investment, will help revitalize the construction industry, which has been subdued, and will have a beneficial effect on housing supply and demand recovery by promoting private investment such as support for financing in PF establishments." They added that "by expanding the scale of PF guarantees and increasing the size of syndicate loans, we will also contribute to ensuring an orderly soft landing of the PF market."

An official from a major construction company said, "Currently, in public construction projects, institutions such as the Korea Land and Housing Corporation (LH) are showing a cooperative attitude towards increasing construction costs, so delays are expected to decrease compared to the past." They added, "Not only the government's plan to reflect the increased costs in construction but also raising unit prices to match inflation during the initial contracting or design process will lead to more active public construction in the future."

However, there are criticisms that in the current impeachment climate, it will be difficult to visualize measures that require amendments through legislative procedures in the short term.

The representative of a construction company stated, "While it is good that efforts are being made to resolve issues that construction companies are facing, the contentious political environment makes it likely that such matters will be relegated to a lower priority, listed among those that must pass through legislative approval." They explained that "due to rising construction costs, the selling price is bound to increase, but since the PF market is frozen, small and medium-sized construction companies are in a very tough situation."

Opinions emerged that it is realistically difficult to catch two hares at once by managing household loans and strengthening supervision of PF while trying to invigorate private investment.

Lee Eun-hyung, a researcher at the Korea Construction Policy Research Institute, stated, "Recently, the government is enforcing measures to manage household loans and strengthen supervision of PF, and I believe it is difficult to pursue conflicting plans for promoting and invigorating private investment at the same time." He analyzed that "in the private sector, business feasibility is more critical than benefits, so instead of the government taking the lead in controlling and guiding the private market, it is advisable to present maximum support measures without crossing that line."