Hello, this is Attorney Bae Gi-hyung from Cheongchul Law Firm.

In general public construction contracts, issues often arise regarding 'additional construction costs due to design changes' when the contents of the actual design documents change, which results in variations in the construction quantities.

However, even when there are no changes in the design documents themselves or in the construction quantities, if work efficiency decreases during the construction process, fluctuations in total construction costs may inevitably occur, raising the question of whether such cases can also be treated as 'design changes' and whether additional construction costs can be recognized.

[Question]

If the instruction to shorten construction time leads to a decrease in work efficiency, can it be treated as a design change and recognize additional construction costs?

[Answer]

The Seoul High Court ruled that when the originally scheduled night construction time was reduced from 8 hours to 4 hours due to the circumstances of the ordering agency, and the contractor needed to input additional personnel and equipment, this constituted a reason for contract amount adjustment due to design changes, thus allowing recognition of additional construction costs (Seoul High Court 2015. 10. 13. Decision 2014Na2046561).

Construction Company A entered into a construction contract with Local Government B, which initially scheduled night work to be carried out from 10 PM to 6 AM for 8 hours. However, as a superior local government decided to limit the working hours to 1 AM to 5 AM, the night working hours were reduced to 4 hours, prompting Construction Company A to inevitably input additional personnel and equipment to complete the work within the established construction period.

In response, Construction Company A claimed that this change in working hours and the resulting decrease in work efficiency constituted a 'design change' altering the contents of the construction contract, and thus sought to bill for the additional construction costs. However, Local Government B rejected this claim, arguing that these circumstances did not constitute a design change. Subsequently, Construction Company A filed a lawsuit against Local Government B seeking payment of the additional construction costs incurred.

The issue was how to assess the 'specific additional construction costs', as the standard unit price for construction merely establishes a premium rate for downtime but does not specify a definitive assessment method for increases in rates due to reduced work efficiency, only stating that it may apply.

In this case, the appraiser divided the work before and after the reduction in construction time, aggregated the construction quantities, input personnel, equipment, and resources, and then calculated the ratio of input resources to the construction quantity. Subsequently, they quantified the productivity before and after the reduction of construction time, and applied the resultant figure as a premium rate based on the loss rate due to productivity decline after the change in construction time. The court deemed this premium accurate. For reference, the premium rate in this case was 209.66%, significantly different from the 25% downtime premium rate, leading to substantial disputes between Construction Company A and Local Government B regarding the premium rate, but ultimately, the premium of 209.66% was recognized.

Until this ruling, it was unclear whether the decrease in work efficiency could be classified as a 'design change', and since the standard unit price for construction did not clearly specify a premium rate for this drop in work efficiency, contractors often found themselves unable to claim these costs even when work efficiency decreased.

However, the ruling confirmed that a decrease in work efficiency could be considered a design change, and that specific construction costs could be assessed by computing premium rates through the aggregation of actual input resources.

In construction sites, changes in specific construction conditions that alter work efficiency can occur frequently, so it is essential for construction companies to keep accurate records of the actual work inputs to prepare for future recognition of additional construction costs. Conversely, it is also crucial for the ordering agency to discuss and finalize the method for calculating additional construction costs due to changes in work efficiency early on, to prevent unnecessary increases in construction costs.

Attorney Bae Gi-hyung has worked with the National Defense Facilities Agency and a large law firm's construction/real estate team, specializing in matters related to state property, including bidding and usage permits, lease contracts, and compensation penalty imposition. With ample experience and skill in resolving many disputes, including administrative appeals and lawsuits, please feel free to contact us anytime if you need assistance regarding state property, local property, or public property.

Cheongchul Law Firm is composed solely of attorneys from four major law firms in Korea: Kim & Chang, Bae, Kim & Lee, Pacific, and Sejong. Rather than relying on a single attorney, a team of specialized attorneys in related fields takes on each case. Cheongchul Law Firm provides comprehensive solutions not only to resolve specific issues but also focuses on achieving the overarching goals of our clients. If you need help reaching your objectives, do not hesitate to contact Cheongchul.