A Rational Improvement Plan for Public Works Advance Payment Execution and Management
Publication Date 2025-10-30
Researchers Minju Kim, YoungJoon Jun
The public works advance payment system in Korea was introduced to ease the initial financial burden on contracting partners and induce rapid financial execution.
- The limit of advance payment has been maintained at the same level in the National Treasury Management Act for a while since it was specified as 70% of the contract amount in the "舊 (Accounting Budget) Advance Payment Guidelines" enacted in 1997.
- Since then, the limit has been raised to 80% through the revision of the Enforcement Decree and temporary contract guidelines to ease corporate financial difficulties caused by the impact of COVID-19 in April 2020. Since the announcement of the special case to expand to 100% in response to the prolonged economic recession in February 24, the application period of the relevant guidelines has been extended every half year.
However, the expansion of the upfront payment limit goes beyond the original purpose of the "timely support of necessary funds" system, resulting in various side effects, undermining the soundness of construction work and the stability of the overall construction market.
- If the advance limit is extended to 100%, general administrative expenses that are not directly related to the construction will be paid in advance, directly contradicting the purpose of the system and reducing policy effectiveness.
- In particular, in a situation where business conditions across the industry have deteriorated, excessive execution of advance payments beyond necessary acts as an incentive for construction companies to divert the amount for non-construction purposes such as debt repayment.
- In addition, the person placing an order maintains the practice of forcing the execution of advance payments regardless of the operator's ability to manage funds due to economic stimulus and securing early financial execution performance compared to institutional evaluation, increasing the burden on the principal and subcontractors.
In addition, excessive advance payments negatively affect each entity, such as construction business operators, guarantee institutions, and orderers who are stakeholders of construction contracts and accompanying guarantees and insurance contracts.
- As the number of cases of corporate bankruptcy and financial transaction suspension due to the economic downturn has increased, short-term cash outflows have surged during the process of returning advance payments and settling basic payments during construction, forming a vicious cycle of worsening corporate liquidity.
- (Financial and guarantee institutions) The number of guaranteed accidents and subrogation cases increases in a situation where construction businesses' dependence on guarantees and insurance increases, and as a result, the overall loss ratio of the guarantee institution rises, reaching its limit with its own risk management efforts alone.
- As the amount of advance payment increases, the difficulty of settlement and collection of advance payment due to the destruction of the construction contract also increases, and the loss increases due to additional costs and time input for the resumption of the contracted construction.
Therefore, this paper realizes the original purpose of the system based on the execution and management of public construction advance payments and proposes reasonable improvement measures to secure a balance between financial efficiency and industrial stability.
- First, by adjusting the current payment limit (100%), which has a limited effect on revitalizing the domestic economy, to 70%, the previous level, it is necessary to curb the advance execution of funds and secure fiscal soundness.
- Second, it was proposed to introduce an 'intermediate advance system' to increase the flow of funds and execution efficiency of the site. After the first advance payment is paid as much as the mandatory ratio at the start of public construction, a certain percentage of the second advance payment is made when the process rate is reached 50%, and a procedure is prepared to verify the use of the existing advance payment when additional payment is made.
Future policies should not only support short-term liquidity through quantitative expansion of fund execution, but should shift to strengthening the construction industry ecosystem in the mid- to long-term by creating orders and boosting demand from the public and private sectors.