Research Reports

Subcontractor Payment Bond System has been implemented since 1997 to protect subcontractors’ payment from insolvency due to bankruptcy of contractors. After the introduction of Subcontractor Payment Bond System, the system has been revised to strengthen the regulations by deleting causes for exemption from the subcontractor payment guarantee. Besides, various systems or regulations for protecting the subcontractor payment has been also operated via the Korean statute. As a result, the average bankruptcy ratio of a bill receivable for subcontractor payment in 2014-2018 is only 1.2%, and a back pay or overdue pay for subcontractors in construction site operated by public institutions under Ministry of Land, Infrastructure and Transport has not appeared at all since Chuseok in 2018. In addition, it is expected that the amount of back pay or overdue pay for subcontractors will more decrease, given that the application of an electronic system for management of subcontracts is mandatory for public construction. In specific, the electronic system for management of subcontracts could protect the subcontractors’ payment by applying withdrawal restriction function and monitoring from parties to a contract for construction for registered accounts of the system. On the other hand, the electronic system for management of subcontracts does not completely eliminate the risk of back pay or overdue pay for subcontractor caused by the bankruptcy of contractors because of its operation for payment, which pays various construction costs(e.g., the subcontractor’s payment) through an account of the contractors. Considering these comprehensively, the Subcontractor Payment Bond System is considered as a redundant and excessive regulation and as a result, causes problems as follows: ①unnecessary social costs(e.g. tax), ②contractor’s additional costs incurred in issuing a payment guarantee, ③contractor’s additional deposit amount for guarantee institutions, ④excessive administrative work of owner and contractor. For instance, as a result of estimating the owner’s cost for the operation of the Subcontractor Payment Bond System, this research found that the owner costs about 30 billion won per year for public constructions and even 120 billion won per year in case of including private constructions. As an effort to address these challenging issues, this research proposes an improvement of the Subcontractor Payment Bond System considering the mandatory application of the electronic system for management of Subcontracts in public construction. In specific, when the contractor applies the electronic system in their construction project, the improvement of Subcontractor Payment Bond System can be divided into two alternatives: (Alternative 1) ‘a reduction of the cost incurred in issuing a payment guarantee’ and (Alternative 2) ‘an exemption of the subcontractor payment guarantee’. In case of Alternative 2, the electronic system still has the risk of back pay or overdue pay for subcontractors from contractors, this research also proposes two measure for overcoming the limitation: (Alternative 2-1) ‘improvement of the electronic system’s functions and operation’ and (Alternative 2-2) ‘application of the Owner’s Direct Payment of Subcontract Prices’. As a result of this research, it is potentially expected that the proposed alternatives could decrease the unnecessary social costs and contractor’s additional cost from the Subcontractor Payment Bond System.