Current Problems and Suggestions for Calculating Overhead Cost associated with the Extended Construction Period

Abstract

As the requirements of owners are becoming more complicated and diverse due to economical and cultural changes, the emphasis on pure construction work is diminishing, and majority of construction industry is shifting toward complex construction that includes various fields. The problems of delays in construction schedules due to the rapidly changing construction industry has always been a problem. In the case of construction work ordered by the government, contract prices may be adjusted in design changes in which the object of the construction changes, price fluctuations that alter the contract unit costs, and other reasons. Recently, the construction industry has been experiencing not only delays in construction schedules but also increase in indirect costs in maintaining the construction areas due to reasons attributed to the ordering organizations such as changes in design and other contents of the contract. After the enactment of the contract laws, estimation of adjusted prices caused by design changes and price fluctuations among the three cases where contract prices may be adjusted have been well implemented through amendments that specify the process of estimating the adjusted prices. However, unlike design changes and price fluctuations, the standards for estimating the actual expenses caused by the delays in construction is vague, which raises disputes between the contracting parties. The factors that prolong the construction period are multifactorial, including delays in compensations of the ordering parties, problems in budget allocations, and design changes due to unforeseen field circumstances. When construction prolongations occur in public works, enforcement decree and accounting regulations regarding contracts involving the government as an interested party states price adjustments shall be accounted as actual expense in the costs for delayed construction, but the such standard is not clearly established for indirect costs that occur due to the delays in the construction period. Often times, these costs are arbitrarily determined by the ordering party. Such costs are substantially lower that the actual costs caused by delays in construction, and the civil complaints and disputes regarding the payment of indirect costs, such as compensations for amount of loss and disputes over the documentations of actual costs, are being constantly made. In this study, I define the concept of indirect costs and explored the reasons for delays in construction period. Also, through literature search, I present the problems in estimation of indirect coasts by summarizing the legislatures and standards applied in case of delays in construction period in South Korea and overseas. Based on these problems, I also propose improvements in the adjustments of contract prices. Since Korean government recognizes the problems regarding indirect prices involved in the construction prolongations and plans to make improvements, I expect to see improvements in the contract price adjustment processes and less disputes between the contracting parties.