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

A long-term continuous contract is a contract system that allows flexible budget execution while planning, establishing, and implementing a project over multiple fiscal years, considering the budget situation of each fiscal year. It is primarily used in national infrastructure projects such as highways and railroads, considering that the completion of the project may take several years, requiring a separate budget to be secured each year.

Long-term continuous construction contracts are formed in such a way that contracts are entered into within the scope of the budget each year, recording the total contract amount, etc. According to national contract laws, advance payments and delay penalties are based on annual contract amounts, while contract guarantees are based on the total contract amount, and once the annual contracts are completed, the completed annual contract portions must be returned.

However, in long-term continuous construction, when the total construction period is extended, simply adjusting the annual construction payments in the annual contracts may not suffice to cover the increased indirect costs due to the extension of the total construction period. At this time, the question arises whether to protect the contracting party by compensating for the increased indirect costs through adjustments in the overall contract amount.

[Question]

Whether it is possible to adjust for increased indirect costs and contract amounts in the event of an extension of the total construction period in a long-term continuous construction contract (annual contract, overall contract)

[Answer]

「The Act on Contracts to which the State is a Party (hereinafter referred to as the 'State Contract Act') Article 21, Paragraph 2 states that regarding long-term continuous contracts, "Each head of a central ministry or the contracting officer may enter into long-term continuous contracts as prescribed by Presidential Decree in cases where it is necessary to continue for several years due to the nature of the contract or where performance requires several years, such as leasing, transportation, storage, and the supply of electricity, gas, and water. In such cases, the contract must be performed within the scope of the budget for each fiscal year."

Long-term continuous construction contracts are not concluded in the form of separate contracts concerning the total construction amount and total construction period, followed by contracts for each fiscal year; instead, they are formed by first entering into a contract regarding the first phase of construction in the first fiscal year while recording the total construction amount and total construction period.

Agreements recorded at the time of entering into the contract concerning the first phase of construction regarding the total construction amount and total construction period are commonly referred to as ‘overall contracts’, and the total construction amount and total construction period specified in these overall contracts are based on the scale of the project anticipated at the time of bidding by the government, and as fiscal years elapsed, if the total construction period is extended, additional annual contracts can be concluded wherein the recorded total construction amount and total construction period are modified accordingly; however, no separate contracts modifying the contents of the overall contract (total construction amount and total construction period) are concluded.

The aforementioned overall contracts do not reflect a definitive agreement regarding the total construction amount or total construction period but are linked to the conclusion of each annual contract. Generally, the parties to long-term continuous construction contracts are believed to have the intention to use the total construction amount and total construction period of the overall contract as a temporary criterion when entering into each annual contract, and it is difficult to consider that they intend to create binding rights and obligations regarding construction amounts and periods based solely on the total construction amount and total construction period recorded in each annual contract.

In other words, the so-called overall contracts in long-term continuous construction contracts are merely a temporary reference regarding the overall scale of the project, construction amounts, and periods, and specifically pertain to the agreement that the contracting party is in a position to enter into each annual contract and the entire scale of the contract is based on the overall contract.

Thus, the effectiveness of the overall contract affects only the decisions of the contracting party (there is no need to undergo the selection process for contracting partners for each annual contract through competitive bidding), the determination of will to perform the contract (annual contracts cannot be refused without justifiable reasons, and no separate orders can be placed for items included in the total construction details), contract unit prices (when determining the annual contract amount, it is decided according to the contract unit price of the total construction), etc., and it should be noted that the specific contents of the obligations to be performed by the contracting party, the scope of construction fees to be paid to the contracting party, and the period of contract performance are all specifically determined through annual contracts (see Supreme Court Decision 2018. 10. 30. Case No. 2014da235189, Full Court Ruling).

Even in the case where the total construction period is extended in long-term continuous construction, it is necessary to enter into additional annual contracts due to the extension of the period, and accordingly, the total construction period and total construction amount change, and the binding force of the total construction period of the overall contract is not acknowledged; thus, it is not possible to claim additional indirect costs solely because the total construction period has increased.

As such, we briefly examined whether it is possible to adjust for increased indirect costs and contract amounts due to extensions of the total construction period in long-term continuous construction contracts. In the case of disputes related to national contracts and public procurement, the applicable laws are complex and subject to frequent revisions, necessitating understanding and experience in this area, as well as familiarity with not only court rulings but also the administrative interpretations and case dispositions by regulatory authorities. Therefore, it is advisable to seek the assistance of attorneys who possess expertise in national contract laws and have experience in resolving various national contract and procurement disputes.

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