Construction Companies Inflate Reconstruction and Other Construction Costs by 1.2 Trillion Won Using Inflation as an Excuse

Kim Jeong-jae, People Power Party Lawmaker: "Grant Conflict Mediation Authority to Korea Real Estate Board"

Photo by Asia Economy

Over the past three years, the total amount of construction cost increases requested by contractors at reconstruction and redevelopment project sites nationwide, citing reasons such as rising prices, has reached 4.7 trillion KRW. The Korea Real Estate Board reviewed the appropriateness of these requests and determined that 3.5 trillion KRW of the increased amount was reasonable. There are concerns that construction companies may have inflated construction costs by as much as 1.2 trillion KRW.

According to data submitted by the Ministry of Land, Infrastructure and Transport and the Korea Real Estate Board to Kim Jeong-jae, a member of the National Assembly’s Land, Infrastructure and Transport Committee from the People Power Party, from 2019 to July of this year, contractors in major maintenance projects requested a total construction cost increase of 4.681474 trillion KRW (54 cases in total) from the associations, citing reasons such as design and construction finishing material changes and price increases. This amount includes the increased construction costs requested by contractors based on the initially contracted construction costs at maintenance project sites nationwide.

From the perspective of association members who lack expertise in the construction field, it is difficult to judge whether the requested cost increases by contractors are reasonable. Accordingly, the "Urban and Residential Environment Maintenance Act (Urban Maintenance Act)" enacted in October 2019 mandates that if more than 20% of association members request or if the construction cost increase exceeds the legal standard, the project implementer must request a mandatory construction cost verification from the Korea Real Estate Board. The Real Estate Board, on behalf of the association, reviews the data and conducts on-site inspections with external experts to determine the appropriateness of the contractor’s requested amount.

Analyzing 54 cases (totaling 4.681474 trillion KRW) for which verification was requested from 2019 to July of this year, the Korea Real Estate Board found that the appropriate increased construction cost was 3.488729 trillion KRW, which is about 75% of the amount requested by contractors.

This practice of contractors inflating their increase requests has become a source of conflict between contractors and associations in the real estate market’s maintenance projects. The number of verification requests to the Real Estate Board has increased from 3 cases in 2019 to 22 cases last year. This year, 16 cases have been verified as of July.

A representative case of conflict leading to construction suspension due to a 600 billion KRW construction cost increase dispute between the contractor and the association is the Dunchon Jugong Apartment complex in Seoul. The Dunchon Jugong association and the contractor underwent construction cost verification through the Real Estate Board in March 2020.

Even if the Real Estate Board’s verification reveals that the contractor’s requested construction cost increase is excessive, there is no obligation to reduce the construction cost. If construction companies hold their ground, resolving conflicts becomes difficult.

Assemblyman Kim Jeong-jae stated, "Since construction cost contracts for reconstruction and redevelopment projects are private transactions, it is difficult for the government to intervene with mandatory regulations," but added, "It is necessary to grant the Korea Real Estate Board 'conflict mediation authority' to establish a foundation for contractors and associations to reach amicable agreements."