As construction costs rise, the cost-to-revenue ratio of major large construction companies has been found to exceed an average of 90%. The surge in construction costs has also intensified conflicts between construction companies and clients regarding cost increases.
According to the construction industry on the 16th, among the top construction companies in construction capability evaluation last year, Hyundai E&C and Kumho Engineering & Construction recorded cost-to-revenue ratios of 100.6% and 104.9%, respectively. The cost-to-revenue ratio is the proportion of the cost of sales to total revenue. A ratio exceeding 100% means that the company's expenditures exceed its revenue.
Hyundai E&C reported a large operating loss of 1.22 trillion won on a consolidated basis last year. Kumho Engineering & Construction also recorded an operating loss of 181.8 billion won.
Most construction companies recorded cost-to-revenue ratios of around 90%. Daewoo E&C had a cost-to-revenue ratio of 91.2%, with its operating profit of 403.1 billion won decreasing by 39.2% compared to the previous year. GS Engineering and Construction and HDC Hyundai Development Company had cost-to-revenue ratios of 91.3% and 90.9%, respectively. Samsung C&T's construction division recorded a cost-to-revenue ratio of 89.4%, while DL E&C recorded 89.8%.
Excluding Kumho Engineering & Construction, the other six corporations are all among the top 10 in construction capability evaluation. The average cost-to-revenue ratio for these six corporations was recorded at 92.2%.
The main reason for the rise in cost-to-revenue ratios for construction companies is the increase in construction costs. In addition to the COVID-19 pandemic, the outbreak of the Russia-Ukraine war has caused prices of raw materials and labor costs to rise significantly. The construction cost index rose 27.6% from 102.04 in December 2020 to 130.18 in December last year.
Construction companies that cannot make profits due to rising construction costs are increasing project costs. Consequently, disputes and lawsuits related to cost increases are occurring at some sites.
Doosan and KOLON GLOBAL increased the construction cost for the Gimhae DeSkyCity apartment project, jointly awarded in 2019, by 84.5 billion won earlier this month. Although they reached an agreement on the increase with the association, some members are reportedly strongly opposing the association's decision.
GS Engineering and Construction recently demanded an additional construction cost of 485.9 billion won for the reconstruction project in Seoul's Sinbanpo 4 district (Maple J1). A lawsuit has been filed against the association for 257.1 billion won of this amount.
Construction costs are expected to remain high for the time being. The Korea Construction Industry Research Institute noted, "The construction costs that have been continuously rising over the past three years are expected to persist for a while, indicating that the management conditions of construction companies are unlikely to improve rapidly."