Reason for the Proposal and Main Contents

Under the current Act, a prime contractor that entrusts a part or the whole of a construction work to a subcontractor is required to submit a payment guarantee for the subcontracted work consisting of up to four installment payments, depending on the interim payment cycles for the completed parts. However, prime contractors are exempted from the obligations to submit the payment guarantee if the project owner agrees with the prime contractor and the subcontractor for payment of the subcontracted amount to the subcontractor, thereby directly skipping the prime contractor via a subcontract payment management system when the subcontract amount is 10 million won or less per project.

This mechanism is designed to protect the project owner, the end-user, by ensuring that the subcontractors carry out the entrusted construction work properly while protecting the materials or equipment suppliers, as well as the construction workers, in the event of the bankruptcy or insolvency of a prime contractor.

However, some subcontractors are still not paid even when they perform the entrusted work successfully, as some prime contractors maliciously abuse the system enabling direct payment by the owner to the subcontractors as a means of evading the payment guarantee obligations. Even when the subcontract amount is to be paid directly to the subcontractors using the subcontract payment management system, some subcontractors are not paid their due as their claim cannot be secured when a third-party creditor imposes attachment or provisional attachment on the prime contractor's account or on the prime contractor's construction payment claim against the client.

In response, the proposed revision aims to establish a fair subcontracting culture while securing stable payments to subcontractors by directly stipulating in the Act certain categories of improved causes or reasons for exemption from the payment guarantee for subcontract payments, which are currently provided under a Presidential Decree of the Act (Article 13-2 of the draft).