Hello, this is Attorney Bae Gi-hyung from Cheongchul Law Firm.
Construction contracts can be categorized into ‘lump-sum contracts’ and ‘unit price contracts’ based on the payment method for the construction cost. A lump-sum contract means a contract where the ‘total amount’ of the construction cost is predetermined, and a unit price contract means a contract where the construction cost is determined based on unit prices of individual items without setting a total amount.
Generally, even when a construction contract is concluded in the form of a ‘lump-sum contract’, a detailed bill of quantities is prepared based on the schedule of the work to be performed, and a breakdown of the costs is also created, making it often difficult in practice to distinguish between whether it is a unit price contract or a lump-sum contract.
So what criteria does the Supreme Court provide to determine whether it is a ‘lump-sum contract’ or a ‘unit price contract’?
[Question]
What is the criterion for determining whether a construction contract is a ‘lump-sum contract’ or a ‘unit price contract’?
[Answer]
Supreme Court Decision 2017Da3024, Delivered on April 14, 2022 states, “Construction contracts can broadly be divided into lump-sum contracts and unit price contracts based on the payment method. A lump-sum contract is a contract where the total construction cost for the entire object of the contract is determined, while a unit price contract is one that is concluded based on unit prices and rates for individual processes or items. Whether a construction contract is a lump-sum contract or a unit price contract is a matter of contract interpretation and should be judged based on the contents defined in the construction contract. If it is difficult to determine this from the content provided in the construction contract, then it should be judged comprehensively considering the motivation or purpose of the contract, the attitude of the parties during contract performance, business practices, etc., according to the general principles of contract interpretation.”
The Supreme Court found that the relevant construction contract corresponds to a ‘lump-sum contract’ and based this on the following reasons:
(i) The construction contract only set the total construction cost without specifying in the contract the basis for calculating the construction cost based on unit prices and rates for individual processes or items.
(ii) The breakdown attached to the contract contains quantities and unit prices for individual processes or items, but it is unclear whether this content is a reference for determining the total construction cost or if it was predetermined for calculating individual process or item prices.
(iii) The contract states, 'In cases where there are specific circumstances, changes to the design can be made, and if there is an increase or decrease in the quantity of construction work due to the changes, the construction cost can be adjusted based on the unit prices in the construction price breakdown,' but this merely sets the standard for adjusting the construction cost in cases requiring adjustments due to design changes and cannot be used as a basis to assert that the relevant construction contract is a unit price contract.
(iv) When claiming progress payments, no data regarding individual quantities or items was presented, and the corporation did not demand or conduct inspection of the data regarding progress quantities until there was a measurement of remaining quantities.
Typically, commonly used construction contracts stipulate the total construction cost. It is also standard practice to prepare and attach a bill of quantities and breakdown, and include provisions that adjust construction costs based on the unit price in the breakdown in case of design changes.
Thus, the typical construction contracts in use within the country generally exhibit the characteristics of a ‘lump-sum contract’ as mentioned in the Supreme Court's 2022 Decision.
Therefore, if one wishes to conclude a ‘unit price contract’, it is necessary to explicitly state that it is a ‘unit price contract’ in the respective contract and include provisions such as ‘final settlement after verifying the actual construction quantities.’ Additionally, when claiming progress payments, actual quantities related to the construction process must be presented, and a process of settlement based on this should be undertaken.
Attorney Bae Gi-hyung has worked with the Defense Acquisition Program Administration and has experience at large law firms specializing in construction/real estate, providing legal advice on large-scale construction projects including government contracts, defense construction projects, and SOC construction projects, as well as possessing extensive experience and skills in resolving related litigation. If you need help regarding government contracts, private construction projects, public procurement contracts, state property, local property, or public property, please feel free to contact us at any time.
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