Local Governments Reduce 'Construction Contract Deposit' from 15% to 10%...Easing Burden on Small and Medium Enterprises

Ministry of the Interior and Safety Announces Legislative Notice for Amendment of 'Local Contract Act Enforcement Decree' Including Improvement of Contract Deposit System

[Asia Economy Reporter Lim Cheol-young] The local government contract system will be improved to reduce the burden on local small and medium-sized enterprises (SMEs), such as lowering the construction contract deposit paid to local governments and ensuring that only the contract deposit corresponding to unfulfilled parts of the contract is forfeited to the local government.

On the 7th, the Ministry of the Interior and Safety announced that it will hold a 40-day legislative notice period from the 8th to December 19 for the amendment to the "Enforcement Decree of the Act on Contracts to Which Local Governments Are Parties," which includes these changes.

This amendment improves the method of handling contract deposits as local government revenue. SMEs and others pay a contract deposit to the local government when signing a contract, but if they do not fulfill 100% of their contractual obligations, the entire contract deposit is forfeited to the local government, which has been a significant burden for the SMEs.

Going forward, even if a company is unable to fulfill part of the contract due to unavoidable reasons, for divisible construction, goods, or service contracts where partial construction or delivery has been completed, the contract deposit for the completed portion will be refunded, and only the deposit corresponding to the unfulfilled part will be forfeited to the local government.

There is also a plan to lower the contract deposit rate for construction contracts from the current minimum of 15% to 10%. Currently, the contract deposit paid by the contracting party when signing a construction contract with a local government is at least 15% of the contract amount (or 7.5% or more when adjusted for disaster or economic downturn recovery), which is higher than the deposit rate for goods and service contracts (at least 10% of the contract amount). Considering fairness with other contracts and the possibility of imposing sanctions for contract breaches, the deposit rate for construction contracts will be lowered to at least 10% to reduce the burden on small construction companies.

Additionally, the method of restricting bidding qualifications for small business cooperatives will be improved. Currently, if an individual member company represented by the chairman of a small business cooperative receives a sanction for unfair practices, the cooperative itself is also restricted from participating in bids. The Ministry of the Interior and Safety judged that extending bidding restrictions to cooperatives unrelated to the cause of the sanction is excessive in light of the principle of individual responsibility, and decided to exclude cooperatives unrelated to the cause of the bidding restriction from the restriction when participating in bids.

Choi Byung-kwan, Director of the Local Finance and Economy Office, said, “This improvement of the local contract system is part of the new government’s economic regulatory innovation, aiming to alleviate the burden on SMEs and revitalize the local economy through reasonable regulatory improvements. We hope it will help SMEs, who are currently struggling due to rising raw material prices and other difficulties, to overcome this crisis to some extent.”