The top 10 construction companies are showing an upward trend for the third consecutive year, with the cost of sales (cost-to-sales ratio) exceeding an average of 93% due to rising construction material and labor costs last year. This means they spent more than 930 million won to complete a 1 billion won project.
According to the Financial Supervisory Service's electronic disclosure system on the 17th, the average cost-to-sales ratio based on consolidated standards for the top nine domestic construction companies, excluding Samsung C&T, recorded approximately 93.2% last year. This is an increase of 0.4 percentage points compared to 92.8% the previous year.
The cost-to-sales ratio, which can gauge the profitability of construction companies, indicates that as it rises above 100%, the money spent on projects exceeds revenue, signaling a decrease in revenue.
The cost of sales includes expenses such as the cost of purchasing materials necessary for construction, salaries of employees, as well as project expenses for design or supervision, land expenses if purchasing land is required, maintenance costs, and construction loss reserves.
Among the top 10 construction companies last year, Hyundai Engineering and Hyundai E&C both exceeded a cost-to-sales ratio of 100%, ranking first and second, respectively. Hyundai Engineering recorded a ratio of 105.4%, up 10.3 percentage points from the previous year, while Hyundai E&C rose to 100.7%, an increase of 6.4 percentage points, resulting in a loss.
This reflects the large expenses incurred at overseas construction sites that Hyundai Engineering is undertaking. Notably, the construction costs at the Balikpapan site in Indonesia surged, impacting negotiations with clients and preventing agreements on cost-sharing with local partners. Hyundai E&C also saw its cost ratio rise consequently due to the performance of its subsidiary, Hyundai Engineering.
The third place goes to POSCO E&C, and the fourth to Lotte Construction, both showing mid-90% cost-to-sales ratios. POSCO E&C recorded a ratio of 94.2%, down 0.3 percentage points compared to 2023, while Lotte Construction rose by 1.9 percentage points to 93.5%. Next, GS Engineering and Construction reported a 91.3% cost-to-sales ratio, an improvement of 6.7 percentage points. Daewoo E&C (91.2%), HDC Hyundai Development Company (90.6%), and SK Eco Planet (90.0%) followed.
DL E&C, ranked ninth, recorded the only cost-to-sales ratio in the 80% range among the top 10 construction companies. DL E&C lowered its ratio to 89.8% compared to the previous year. This is analyzed as the result of reducing the proportion of low-profit projects in the housing sector while increasing revenue from relatively profitable plant projects.
The construction industry reports that the appropriate level of cost-to-sales ratio for stable management is in the 80% range.
However, the average cost-to-sales ratio for the top 10 construction companies has risen for three consecutive years. The cost-to-sales ratio, which held steady in the 80% range from 2019 to 2021, began rising to the 90% range from 2022 and has continued to climb. By year, it is ▲89.0% in 2019 ▲88.3% in 2020 ▲87.2% in 2021 ▲90.4% in 2022 ▲92.8% in 2023.
The rise in the construction cost ratio is primarily due to a rapid increase in construction material and labor costs since 2020-2021, stemming from the COVID-19 pandemic and the Russia-Ukraine war. According to the Korea Institute of Civil Engineering and Building Technology, the construction cost index rose over 30%, from 100 in 2020 to 131.04 in February this year.
There are forecasts that construction companies, which have been facing difficulties since last year, may catch a breather this year.
Overall in the construction industry, although sales are expected to decrease due to a reduction in the supply of properties in recent years, the improvement in the cost-to-sales ratio is anticipated as construction material procurement costs decrease.
Kim Se-ryeon, an analyst at LS Securities, noted, "The decrease in demand for construction materials due to reduced new works will ultimately drive down construction material prices and outsourcing costs, contributing to improvements in profitability at construction sites."
The government's various support measures to stabilize construction costs are also expected to aid in improving construction companies' cost ratios.
In February, the government introduced a "construction cost normalization plan" that reflects inflation rates in the costs of private projects or public-private joint construction projects. In March, a revision of the "standard construction contract for private construction projects" was also administratively announced, which included a provision to adjust contract amounts due to price changes for materials from exceeding 1% of the construction cost to 0.5%.
Shin Dae-hyun, an analyst at Kiwoom Securities, explained, "The rising costs of construction materials and labor, which had been factors driving up construction costs in the housing sector, have stabilized, and the government's measures for stabilizing construction costs are expected to positively influence future improvements in housing sector cost ratios for construction companies."