November 30, 2024

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Cho Joo-hyun, vice minister of SMEs and Startups

Latest issues such as the COVID-19 outbreak and the Russia-Ukraine war have prompted active discussions about the introduction of an interlocking system for cost of goods delivered. The small and medium-sized enterprises have long been calling for the introduction of this system, and the legislation of delivery unit price indexation system is one of the agenda items for the Special Committee on People’s Livelihood and Economic Stability, which was launched in July 2022. Alongside this, the Ministry of SMEs and Startups is trying to respond to this need that has gone unaddressed for the last 14 years.

First and foremost, it is necessary to define the indexation system. An interlocking contract for the cost of goods delivered is an agreement that is made in the final stage after having a prior consultation, which pertains to how the cost of goods delivered is adjusted. This adjustment would occur in case of a change to the cost of raw materials in a bid to dodge any risk entailed in a long-term and continuous contract relationship. Therefore, this type of agreement is not intended for or applicable to contracts of small contract price or one-off short-term contracts.

Delivery unit price indexation system was already in placed. For example, the Department of Transportation of about 40 state governments in the United States has in place a provision that allows price adjustments in case the prices of raw materials for key materials such as fuel, tarmac, and cement change. There is also a private contract case that can be found in a 1929 judicial precedent wherein an interlocking system was adopted. Moreover, the Bureau of Labor Statistics of the United States provides a guideline that encourages the use of a price adjustment provision in a private contract. The Australian Bureau of Statistics also has a similar guideline. Germany amended the Provision of Procurement and Contract in Construction in March 2022 in a bid to enable increased contract prices or contract cancellations when a supply shortage or construction material price changes occur in a contract with the federal government.

Locally, the National Contract Act and the Local Government Contract Act have established a system that allows an adjustment of contract prices when prices increase or decrease in excess of 3 percent. Also, some conglomerates already operated an interlocking system for major items.

The partners who have made interlocking contracts with these companies have expressed their satisfaction with this system because it can lessen the burden caused by price changes of raw materials. In contrast, companies that have not introduced an interlocking system can be at risk because as entrusted businesses, they will have to cover the price increments. This will, in turn, have a detrimental impact on the conglomerates due to supply problems from those businesses they entrusted.

The system is one of the methods that can help avoid uncertainty in price changes of raw materials. Therefore, it can benefit both conglomerates and SMEs. With many people putting their effort to develop a feasible strategy that can work on site, it is hoped that conglomerates and SMEs have more forward-looking perspectives towards the interlocking system for the cost of goods delivered.

Views expressed in this article are his own. -- Ed.

By Cho Joo-hyun, vice minister of SMEs and Startups