As construction cost burdens increase due to rising raw material prices and labor costs, business sites are emerging that aim to lower construction costs as much as possible from the contract signing stage with construction companies. Redevelopment and reconstruction associations are actively demanding construction cost reductions from construction firms since the early stages of the project to prepare for the potential burden of contribution payments due to future increases in construction costs.
According to the repair industry on the 18th, the Namgwang Royal Apartments redevelopment association in Incheon is in negotiations with SK Eco Plant regarding construction cost negotiations for establishing a management and disposal plan. To obtain approval for the management and disposal plan in the redevelopment project, the association must announce contribution payments, which requires finalizing the construction costs.
The Namgwang Royal Apartments, located in the area of 1458 Juandong, Michuhol District, Incheon, is a multi-family housing complex consisting of 474 units across 13 buildings, constructed in 1980. The construction company for the redevelopment of the Namgwang Royal Apartments is SK Eco Plant. Through the redevelopment, this apartment complex is expected to transform into a 774-unit structure with 12 buildings, with three basement levels and 20 above-ground floors. The association is currently in the stage of finalizing member allocations and preparing for approval of the management and disposal plan.
SK Eco Plant proposed a construction cost of 7.06 million won per 3.3 square meters during the bidding cost negotiation process in June last year. However, due to differences with the association, it lowered the proposed cost to 6.72 million won per pyeong. It is reported that the association requested again at the end of last year to reach an agreement on the cost being below 6 million won per pyeong.
In response, SK Eco Plant has stated that it cannot lower the construction cost further from the level of 6.72 million won per pyeong. SK Eco Plant recently expressed a negative stance on cost reduction in a letter, stating, "The existing internal and external situations remain unresolved. In fact, due to recent deteriorating economic conditions, additional reductions in contracted construction costs are likely to be even more challenging."
A representative from the association said, "We are currently negotiating construction costs with SK Eco Plant," adding, "The construction costs each side wants differ by about 1 million won per pyeong." An SK Eco Plant representative noted, "The appropriate construction cost has yet to be confirmed with the association," and mentioned, "The discussions are becoming prolonged."
Currently, the association is reportedly considering utilizing the expert dispatch system for construction cost disputes operated by Incheon Michuhol District. However, due to significant concerns about unsold properties in the Incheon area and the deepening construction industry recession, it remains uncertain whether a reasonable construction cost that both sides can agree upon can be derived even if the experts are dispatched.
The difficulty in deriving appropriate construction costs from the early stages of the reconstruction project is primarily due to the recent substantial increase in construction costs. Even if the initial construction costs are set low at the time of signing the main contract between the reconstruction association and the construction firm, the costs often surge later, reflecting inflation over the project's duration. After discussions with the association, the consortium of Samsung C&T and HDC Hyundai Development Company raised the construction cost from the previously projected 745.8 billion won to 1.3818 trillion won in three increments.
GS Engineering and Construction has requested an additional 103.2 billion won for the housing reconstruction maintenance project association of the Cheolsan Jugong Complex 8 and 9 in Gyeonggi Province. DL E&C is in discussions with the association regarding the increase of contracted construction costs from the existing 233.289 billion won by about 77%.
An industry official noted, "It is natural for the association to negotiate construction costs with the construction firm in the redevelopment project, but as recent construction costs are increasingly rising significantly compared to the amount proposed in the main contract, the association is likely to try to formulate a solid plan from the first stage of the construction cost negotiations to alleviate concerns about contribution payment burdens."