Hello, this is Attorney Park Jong-han at Cheongchul Law Firm.

When the construction period extends beyond what was originally set in the construction contract, an increase in indirect construction costs (expenses for site operation, management, and supervision auxiliary work) may follow. We will examine the legal basis for recognizing these indirect costs from extended construction periods, the scope within which they can be recognized, and the special considerations for long-term continuing contracts in public works.

[Question] Recognition of Indirect Costs from Extended Construction Period

[Answer]

A. Background of Indirect Construction Cost Claims

When the construction period extends beyond what was set in the original construction contract, an increase in indirect construction costs (expenses for site operation and management/supervision auxiliary work) follows. Recently, cases claiming indirect costs due to extended construction periods have been increasing. In such cases, proving who is responsible for the extension of the construction period is the most important issue, and when it is recognized that the construction period was extended due to causes not attributable to the contractor, the amount of indirect construction costs for the extended period is proven through appraisal.

B. Legal Basis — Standard Contract and General Conditions of Construction Contracts

Based on contractual provisions such as Article 17 of the Standard Construction Contract used in private works and Article 26 of the General Conditions of Construction Contracts (contract precedent) applied to public works, when the construction period is extended for reasons not attributable to the contractor (mainly meaning 'causes attributable to the orderer' or 'force majeure'), the orderer has the obligation to pay the contractor additional indirect construction costs incurred during the extended period.

However, depending on the construction contract, some contracts recognize indirect construction costs only when there are 'causes attributable to the orderer', while only acknowledging extension of construction period and waiver of liquidated damages (but not indirect costs) for 'force majeure' cases.

C. Court's Reduction — Appropriate Adjustment Within Actual Cost Limits

Even when indirect construction costs from extended construction periods are recognized, courts may determine an appropriate adjustment amount within the actual cost limit by considering all circumstances based on the principles of good faith and fairness (reduction possible).

This is because contract amount adjustment due to changes in contract content such as construction period extension follows the principle of adjustment through agreement between the parties, with the adjustment amount limit set at "within the scope not exceeding actual costs", and unlike contract amount adjustments due to design changes or price fluctuations, the adjustment amount is not directly calculated by a specific formula based on contract unit prices, bid ratios, or adjustment rates (Supreme Court Decision 2011Da109012 dated November 28, 2013). In actual lower court practice, there has been a case where indirect construction costs calculated under this legal principle were limited to approximately 90% (10% reduction) (Seoul High Court Decision 2018Na2015763 dated January 31, 2019).

D. Special Considerations for Long-Term Continuing Contracts in Public Works — Denial of Binding Force of Master Contract

For long-term continuing contracts in public works, a recent en banc Supreme Court ruling denied the binding force of the master contract, overturning a lower court ruling that had recognized indirect construction costs when the construction period in the master contract was extended (without extension of the construction period of annual contracts).

Extensions of construction periods in long-term continuing contracts can occur in cases where: (i) the construction period of each annual contract is extended, thereby extending the total construction period together; (ii) the construction period of each annual contract is not extended, but only the total construction period increases; or (iii) the construction period of annual contracts is also extended, but the total construction period is extended even more. Due to the en banc ruling, when only the total construction period is increased (extended) without extension of the construction period of annual contracts, indirect construction costs for that extended period have become difficult to recognize, and indirect costs cannot be recognized even for portions where the total construction period is extended beyond the annual contract extensions (Supreme Court en banc Decision 2014Da235189 dated October 30, 2018).

Ultimately, since only the construction period specified in the annual contract has legal binding force, contract amount adjustment grounds due to construction period extension can be recognized only when the 'annual construction period' is extended, and in this case, the application for contract amount adjustment must be made before receiving the completion payment for each annual contract (Supreme Court Decision 2019Da267679 dated October 29, 2020).

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