Research Reports

Korean construction industry has been recognized as one of the leading industries that has carried on Korean dramatic economic growth. Despite of the past glory, Korean construction industry has been going through a difficult stagnation tunnel mainly caused by the recent dramatic decreases on public construction investment. In addition to the public investment issue, fairness on public construction cost has been emerged as one of the most problematic areas as many public contractors has seriously expressed their complaints on public construction cost. Therefore, this research focused on analyzing the fairness of Korean public construction cost by focusing on public cost estimation standards and processes as well as on their negative industrial and social impacts. The Standard Historical Unit Cost Database which accounts for approximately 20% of public construction cost has been dropped by 36.5% last ten years, and the Standard of Construction Estimate which consists of 35% of public construction cost has been deducted by 9～25% last five years. Even with the assumptions of other references are reasonable, the actual public construction cost for the same work has been downsized by 10～15% in average, which is 4.2～6.4 trillions won, by just considering changes of these two major public cost references. The situation could get much worse when considering the public cost estimation/management process defined by Total Project Cost Management Guideline in the Ministry of Strategy and Finance. By just following this public cost management process, the actual amount to be paid to field contractors shrinked to 65～90% of the original construction budget, which mostly recognized as ‘not-enough budget’. Lack of proper compensation and/or fairness in public construction cost, the industry has been experiencing some serious problems. It is turned out that about 78.6% of public contractors are actually losing their money on public works by an average of 10.05%. Consequently, about 30% of all registered construction firms are losing their money, and the more they depend on public works, the bigger deficits they suffer from. The average profit margin among Korean construction firms has constantly dropped from 6.1%(2005) to 0.6%(2015), which many believed that lack of fairness in public construction cost played a significant role. Other noticeable side-effects are identified such as increases of public bidding failures, construction delays, and safety/quality problems. Even more serious is that job opportunities has been significantly reduced in the construction industry which is one of the biggest job providers of Korean economy. Finally, this research provides public policy recommendations to ensure fairness on the public construction cost. Three area of policy improvements are presented, including ‘Innovations on public cost estimation and management processes’, ‘Innovations on Public bidding and procurement processes’, and ‘Eliminations of public unfair practices’. Public entities should change their view from cutting the budget and cost to preparing the reasonable budget which should serve as the basis for final account. In terms of public bidding/procurement processes, more focuses are required on technology innovations and quality rather than cheap prices while employing the concept of ‘Target Costing’ defined by the availability of public budget. At last, public owner-oriented industry culture must be improved to reduce the public unfair practices not only with major public owners but with smaller regional public owners. It is envisioned that proper policy improvements on these three areas would help to solve the issues related to public construction cost and eventually enhance the global competitiveness of Korean construction industry.