A construction cost verification system will be introduced for apartment remodeling projects. It will apply when a majority of remodeling cooperative members demand it or when construction costs increase by a certain percentage or more. Remodeling project sites are frequently seeing disputes over cost increases between contractors and cooperatives (developers) due to higher construction costs. Until now, there has been no legal basis to verify the appropriateness of cost increases, but the introduction of this verification system will establish such a standard.
According to the National Assembly and the maintenance industry on the 8th, an alternative amendment to the Housing Act proposed by the chair of the National Assembly's Land, Infrastructure and Transport Committee in May includes the establishment of a construction cost verification system. The amendment consolidates 15 pending Housing Act amendments submitted by the committee chair, was approved by The National Assembly's Legislation and Judiciary Committee on May 6, and is awaiting a plenary vote.
The construction cost verification system requires a project implementer to commission a verification agency to review appropriateness when raising costs by more than a certain percentage. It is included in the Act on the Maintenance and Improvement of Urban Areas and Dwelling Conditions for Residents, which underpins reconstruction and redevelopment projects, but there has been no such provision in the Housing Act. Remodeling projects, which carry out major repairs or partial extensions to multifamily dwellings while retaining the existing frame, are governed by the Housing Act.
The amendment allows requests for construction cost verification to the Korea Real Estate Board (REB) and the Korea Land & Housing Corporation (LH) if at least one-fifth of cooperative members or multifamily dwelling owners demand verification. Verification can also be requested if, before project approval, the construction cost has been increased by more than 5% compared to the original contract amount (10% after approval). In addition, if costs rise by 3% or more after verification is completed, an additional verification may be requested. The cooperative must disclose the verification results to its members and decide whether to execute a contract for the increased construction costs by holding a resident vote or a general meeting of the cooperative.
If the amendment passes the plenary session, cost increases for remodeling projects are expected to become more stringent. Contractors must specifically present reasons for the increase, such as higher raw material prices, design changes, or changes in site conditions. The cooperative must also broadly incorporate members' opinions when deciding whether to raise construction costs.
However, there are concerns that if the verification process drags on, it could lead to project delays. In its Construction Law Trends report in May, the Korea Research Institute for Construction Policy noted regarding the Housing Act amendment, "If construction cost verification is delayed or if standards differ by verification agency, it would be hard to rule out the possibility of increased financing expense due to project delays." An official at a major construction company said, "Remodeling projects have the advantage of being faster than reconstruction projects, but if the verification process takes a long time, the project's profitability could deteriorate."
Meanwhile, conflicts between remodeling cooperatives and contractors over construction costs are occurring frequently. One representative complex is Ichon Hyundai Apartment in Ichon-dong, Yongsan-gu, Seoul. A dispute arose when the contractor asked to raise the construction cost from 5.42 million won to 9.26 million won per 3.3 square meters (pyeong), leading to severe conflict between the cooperative and the contractor. In the end, early last year, with mediation by the Seoul city government and the dispatch of a coordinator, the parties agreed on 8.53 million won per pyeong, settling the dispute.