Lee Jae-myung Misunderstands the Construction Industry

Lee Jae-myung misunderstands the construction industry.

The heart of the debate between standard quantity estimation and standard market pricing.

"We'll make costs realistic."

As policy language, it sounds plausible.

The promise to calculate construction costs based on actual data sounds, at first, scientific and transparent.

But anyone who knows even a little about the construction industry knows better.

They know how dangerous a misjudgment this phrase can lead to.

If the government now moves toward weighting standard market pricing and the old actual-cost method over standard quantity estimation when calculating the cost of public works, that is not merely a change in calculation method.

It is a change to the pricing standard for the entire construction industry.

And if that standard is set wrong, the field pays the price.

Standard quantity estimation calculates construction costs by standardizing the inputs of labor, materials, and equipment a project requires.

It has drawbacks, of course. Sometimes it fails to reflect market conditions immediately, and a gap can open up between it and the actual site.

But standard quantity estimation has one crucial advantage.

Predictability.

Stability.

A company taking on a project can at least produce an estimate on top of some baseline.

Standard market pricing, by contrast, sets unit prices by reflecting prices formed in the market — actual contract prices, construction prices, bid prices, and the like.

Just hearing it, it sounds more rational.

The problem is which market that "market price" came from.

A price from a bleeding bid placed just to survive a downturn.

A winning bid slashed through gritted teeth in a market where liquidity had dried up under the PF crisis.

A unit price where margin was surrendered just to keep the work coming.

All of that, too, counts as "actual performance."

And once that record piles up, it becomes the standard for the next project.

In this structure, reality is not what gets reflected.

The bottom of the slump becomes the standard.

There are areas where performance-based pricing works well.

In industries with short cycles, limited unit-price volatility, and relatively standardized output, using actual contract data makes a certain amount of sense.

But construction is different.

A construction project's cost sits on top of time.

From winning the order to breaking ground takes months at the shortest, and completion takes two years, three years — sometimes more than five.

In between, the price of rebar jumps.

The price of ready-mix concrete rises.

Labor costs shift.

A single move in the exchange rate sends imported-material prices swinging.

And financing costs at the site change with interest rates and conditions in the PF market.

A construction project's cost is not a fixed number.

It is a compound variable, moving as time, prices, finance, labor, and the subcontracting structure overlap.

So what happens when you lock construction costs to past winning-bid data?

The ordered unit price falls.

The prime contractor passes that pressure down to the subcontractors.

Specialty contractors and small and mid-sized builders take on the work with no margin.

To hit the cost target, the site cuts people, compresses the schedule, and starts agonizing over which materials to use.

At the end of that road lie two things.

Defective construction.

Or the bankruptcy of marginal firms.

Both can happen at once.

Policy is always wrapped in good words.

"Data-driven."

"Reflecting market prices."

"Making costs realistic."

"Saving the public budget."

But good words do not guarantee good policy.

In construction, making costs realistic is not simply a matter of averaging past contract data.

It has to reflect the risks on the ground.

It has to reflect price changes over the course of the project.

It has to look at how price pressure is passed along inside the subcontracting structure.

It has to look, too, at how fragile builders' liquidity has become since the PF crisis.

Lead with the phrase "actual market price" without seeing any of this, and the policy does not reflect reality — it distorts it.

Construction right now is not in a normal boom.

The aftereffects of the PF crisis are not yet over.

Provincial sites sit idle, the burden of unsold units remains, and the finances of small and mid-sized builders are stretched thin.

To lower the cost of the next project against the low winning bids of the past, at a moment like this, is not efficiency.

It is tightening the windpipe of firms that were barely holding on.

The first place to collapse is the field

Policymakers look at the numbers.

The field takes those numbers with its body.

When construction costs drop, the budget is saved — on paper.

But on the ground, the cost shows up in a different form.

Subcontracting prices get squeezed.

Skilled workers become harder to hire.

The schedule gets tight.

Safety costs get pushed down the priority list.

Quality control becomes a formality.

If the result is shoddy work, the harm comes back to the public.

If the result is bankruptcy, the harm comes back to the workers and the partner firms.

Cost estimation for public works is not simply a technique for saving government money.

It is the minimum price order that keeps the field running properly.

Tear down that order, and on the surface it may look like you cut construction costs.

But in reality, all you have done is push the risk downward.

Good policy comes from understanding the structure of an industry.

You have to know the liquidity of construction.

You have to know the cycle of an order-driven industry.

You have to know the structure by which price is passed from prime contractor to subcontractor.

You have to know how costs swing over the life of a project.

Without knowing this, it is a misjudgment no matter how many times you attach the words "data-driven."

Expanding standard market pricing looks rational on the surface.

But in a slump like the present, it is dangerous.

It can become a policy that does not reflect reality but instead locks the low prices of a downturn in as the next standard.

Lee Jae-myung does not understand the construction industry.

And without understanding it, he is shaking the very standard by which construction costs are set.

The field will pay the price.

And that price, if we are not careful, comes back larger.

Beneath the Lee Jae-myung government's view of construction lies an old frame. The construction cartel, contracts handed out through connections, collusion among the big firms — the stigma the progressive camp has pinned on construction for decades. The sentiment is understandable. It is not as if corrupt structures never existed.

The problem is that smashing the cartel and killing the field are two entirely different things. The ones hit by the switch to performance-based estimation are not the big construction firms that endure on lobbying power and deep pockets. It is the small and mid-sized builders, the specialty contractors, and, at the very end of the subcontracting chain beneath them, the day laborers. The cartel survives; the field falls.

You may understand the sentiment, but policy has to be built on structure. This decision is a case of sentiment beating structure.