Reduction of Construction Contract Deposit Rate... Expected to Ease Corporate Burden by About 1.5 Trillion Won

Enforcement of Partial Amendment to the Local Contract Act Enforcement Decree

The Ministry of the Interior and Safety announced that the partial amendment to the Enforcement Decree of the Act on Contracts to which Local Governments are Parties was approved at the Cabinet meeting on the 28th and will take effect from the 7th of next month.

This amendment aims to support local businesses facing difficulties due to the economic downturn by easing the burden of contract deposits and improving and supplementing some deficiencies identified in contract operations.

First, when local governments enter into construction contracts, the contract deposit rate that the contracting party must pay has been lowered from at least 15% of the contract amount to at least 10%. Previously, the contract deposit was at least 15% of the contract amount (adjustable to at least 7.5% if necessary to overcome disasters or economic downturns), which was higher than the deposit rate for goods and service contracts (at least 10% of the contract amount). Based on last year’s number of construction contracts (approximately 470,000) subject to local contract laws by local governments and other institutions, it is expected that about 1.5 trillion won in construction contract deposits can be saved.

Along with this, the handling method of contract deposits in case of mid-contract abandonment has also been improved. Until now, if the contracting party failed to fulfill all contractual obligations, the entire contract deposit paid at the time of contract was forfeited to the local government, which was a significant burden for small and medium-sized enterprises (SMEs). To reduce the burden on businesses and strengthen their rights protection, the amendment allows for the return of contract deposits for the portions of construction or delivery that have been completed, with only the deposit corresponding to the unfulfilled portion forfeited to the local government.

Furthermore, the method of restricting bidding qualifications for Small and Medium Enterprise Cooperatives has been improved. Previously, if an individual member company represented by the chairman of the SME Cooperative was subject to disqualification sanctions, the cooperative itself was also restricted from participating in bids. Going forward, cooperatives unrelated to the reasons for bidding qualification restrictions will be excluded from the bidding restriction when participating in bids.

Choi Byung-kwan, Director of the Local Finance and Economy Office at the Ministry of the Interior and Safety, said, “We hope that the implementation of this amendment will help alleviate the burden on SMEs and contribute to the recovery of the local economy,” adding, “We will continue to discover reasonable regulatory improvements and develop the local contract system in a way that benefits local governments, residents, and businesses.”