44.2% of construction firms can't pay interest; bankruptcies surge amid industry slump

A significant portion of South Korea's construction sector is facing a severe financial crisis, with 44.2% of companies unable to service their debts using operating profits. This widespread financial strain is contributing to a sharp increase in business closures.

Data from the Korea Construction Policy Institute reveals that 1,088 construction firms filed for bankruptcy in the first quarter of 2024, a 17.6% rise from the previous year. The report highlights that among 2,200 construction companies subject to external audits, 972 firms had an interest coverage ratio below 1, meaning their operating profit was insufficient to cover interest expenses.

Small and medium-sized enterprises (SMEs) are disproportionately affected, accounting for 86% of these struggling companies. Park Sun-gu, head of the economic and financial research division at the institute, explained that a decline in new construction projects has drastically reduced work volume. Smaller firms, in particular, lack the bargaining power to pass on increased material costs to clients, leading to a depletion of working capital and limited access to financing.

The situation is dire for many, pushing them toward survival's edge. Even mid-sized construction companies are not faring much better, with 27 firms in the top 20-100 by construction capacity facing similar financial pressures, according to Financial Supervisory Service data.

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As construction starts have decreased, the volume of work itself has significantly reduced, and small construction companies are vulnerable in their bargaining power to reflect the increase in material prices in their construction costs, facing a crisis of survival due to depletion of working capital and lack of financial access.