"Damage to SMEs Due to Unfair Subcontract Payments"… Ministry of SMEs Requests Prosecution of Two Construction Companies

Dongho Construction Requests to File Charges Against Lead Construction

[Asia Economy Reporter Kim Cheol-hyun] The Ministry of SMEs and Startups (Minister Park Young-sun, hereinafter referred to as the Ministry) has decided to request the Fair Trade Commission (hereinafter referred to as the FTC) to file charges against two companies that violated the Subcontracting Act. On the 28th, the Ministry announced that based on the results of the '13th Mandatory Prosecution Request Deliberation Committee' held on the 27th, it decided to request the FTC to file charges against two companies, Dongho Construction and Lead Construction, for violating the Subcontracting Act. This is in accordance with the 'Mandatory Prosecution Request System' implemented since 2014, which allows the Ministry to request prosecution for cases where the FTC has not prosecuted violations of the Subcontracting Act or Fair Trade Act, considering the damage caused to small and medium enterprises or social ripple effects. Once requested, the FTC is obligated to prosecute the case to the prosecution.

The two companies subject to the prosecution request this time commonly caused significant damage to small and medium enterprises by awarding contracts to subcontractors through lowest-price competitive bidding but then illegally concluding subcontract contracts at prices lower than the lowest bid through additional price negotiations without justifiable reasons.

First, Dongho Construction caused damage by concluding a subcontract contract at 3.2 billion KRW, which is 690 million KRW lower than the initial winning bid of 3.809 billion KRW, through five rounds of price negotiations without justifiable reasons with subcontractors who bid lowest for painting and external insulation work from November 2015 to January 2016. As a result, it received an order to prevent recurrence and a fine of 256 million KRW from the FTC. The Ministry explained that the 600 million KRW reduction in contract amount by Dongho Construction was about 15% of the subcontractor’s sales, causing significant damage to the subcontractor, and that the illegal act aggravated the management difficulties of the affected company, which eventually led to its closure, thus deciding to request prosecution.

Also, Lead Construction concluded a subcontract contract at 2.4 billion KRW, which is 529 million KRW lower than the initial winning bid of 2.929 billion KRW, through additional price negotiations without justifiable reasons with subcontractors who bid lowest for construction work from October to November 2016. It also imposed unfair special terms by demanding items not included in the bid and shifting the resulting costs. Furthermore, it failed to fulfill the obligation to guarantee payment of construction fees, receiving an order to prevent recurrence and a fine of 464 million KRW from the FTC.

The Ministry stated that despite Lead Construction’s past violations of the Subcontracting Act for similar acts, the violations were repeated, and considering that the unfair determination of subcontract payments and failure to guarantee construction payment are serious legal violations that must be strictly eradicated, it decided to request prosecution. No Hyung-seok, head of the Transaction Environment Improvement Division at the Ministry, said, "The two companies requested for prosecution this time both engaged in unfair subcontract payment determination in construction subcontract transactions, which must be dealt with strictly, and it is meaningful to demand punishment for this." He added, "We expect that this prosecution request will prevent recurrence of similar legal violations and raise awareness in the subcontracting industry."