Negotiations to increase construction costs that account for price fluctuations in the Korea Land & Housing Corporation (LH) private-participation public housing projects are gaining speed after a stalled start. Following the government's 2023 announcement by the Public-Private Joint Construction Project Financing (PF) Adjustment Committee, it has taken about two years just to go through prior consulting by the Board of Audit and Inspection and arbitration by the Korea Commercial Arbitration Board. With builders turning their attention to private-participation projects, which offer stable order intake amid an industry downturn, the arbitration outcome is expected to serve as a barometer for adjusting construction cost disputes.
According to the construction industry on the 31st, the Korea Commercial Arbitration Board has been arbitrating six completed presale project sites since late last year, including ▲ Seongnam Wirye A2-6 block in Gyeonggi ▲ Yeoju station area block 3 in Gyeonggi ▲ Incheon Michuhol-gu Yongmaru district block 1 ▲ Sejong 6-3 living area UR1 and UR2 blocks. GS Engineering & Construction led a consortium for the Wirye, Yeoju, and Yongmaru districts. For the Sejong 6-3 living area UR1 and UR2 blocks, Gyeryong Construction is the main contractor.
A construction company official said, "As the prior consulting results from the Board of Audit and Inspection have come out, we are proceeding with negotiations to increase construction costs due to price rises under the arbitration of the Korea Commercial Arbitration Board as a follow-up." The Korea Commercial Arbitration Board is the country's only permanent statutory arbitration body. Arbitration is a system that resolves disputes through a decision by an arbitrator selected by agreement between the parties, and it carries an effect similar to a final court ruling.
After construction costs surged from 2020, builders participating in private-participation projects clashed with public agencies such as LH and local public corporations, the project operators, over increasing project costs. In private-participation projects, public institutions provide land and private operators build and sell dwellings, but the Special Act on Public Housing does not allow application of price indexation clauses. As a result, builders were left to shoulder all losses from additional construction costs. The estimated loss at the time was about 1.2 trillion won.
The Ministry of Land, Infrastructure and Transport convened the public-private joint PF Adjustment Committee in Sep. 2023 and accepted first-round applications for project adjustments. There were 24 private-participation projects in total, and the committee issued an adjustment plan directing public agencies to negotiate with private operators so that they shoulder at least 50% of the price increase exceeding the 10-year average inflation (3.15% annually). Concerned about potential breach-of-duty controversy, LH sequentially requested prior consulting from the Board of Audit and Inspection for each district, and arbitration by the Korea Commercial Arbitration Board has been underway since last year.
The reason attention is focused on the arbitration plan is that it could serve as a reference case for adjusting construction cost disputes in private-participation projects. It is also related to LH's plan to expand the share of private-participation projects to around 30% by 2027 in line with the expansion of LH's directly run dwelling projects. The number of private-participation public housing groundbreakings scheduled for this year alone is 26,000 units. Another construction company official said, "LH has put in place safeguards, such as deciding to reflect a 6.9% rise in construction costs, but given the current pace of increases, we cannot rule out additional costs exceeding the rise," adding, "Construction cost disputes in private-participation projects are likely to increase going forward."