Construction industry in 'historic recession'... What is the agency’s risk response strategy?

Recently, the domestic construction industry is literally in a dilemma. According to the '2025 Revised Economic Outlook' announced by the Bank of Korea in June, the growth rate of construction investment this year was predicted to be -6.1%. This is the lowest figure since -13.2% during the 1998 foreign exchange crisis. This is also revealed in the scale of wage arrears. The amount of wage arrears in the construction industry, which had been decreasing until 2021, turned to an increase in 2022 when the construction economy slowed down, and increased by about 49% to 436.3 billion won in 2023 compared to the previous year.

In this reality, the current Labor Standards Act imposes heavier responsibilities on the main contractor considering the subcontracting structure of construction sites. A representative example is Article 44-2 of the Labor Standards Act. This provision stipulates that even if a subcontractor other than the construction business fails to pay wages, the immediate subcontractor is also jointly and severally liable. This is a ‘no-fault liability’ structure that holds the original contractor responsible even if there is no direct fault. For this reason, the primary contractor takes on unpredictable legal risks in areas that are difficult to directly manage and supervise.

For example, let's assume that construction company A, the main contractor, entrusted the construction to company B, and then subcontracted it to company C, a human resources company that was not registered as a construction business. If Company C, which actually recruits and manages construction workers, fails to pay wages due to management difficulties, responsibility extends beyond Company B, which signed a contract with Company C, to Company A, the highest-ranking contractor. Company A is now shackled to be responsible for the wages of workers with whom it does not have a direct contractual relationship.

Ultimately, in order for the primary contractor to survive in such a tight legal liability network, much more specific and realistic defense measures are needed beyond simply writing a contract well. The following three options must be considered: First, actively utilize the direct payment system for subcontracting payments. Second, clearly establishing a unit price adjustment process according to price fluctuations. Lastly, the financial soundness of the subcontractor should be carefully reviewed before signing the contract.

First of all, the subcontract payment direct payment system is an effective device that allows the main contractor to prevent legal disputes due to delayed wages or non-payment in advance by paying subcontract payments directly to workers or material and equipment suppliers rather than intermediate beneficiaries. In addition, in private construction, even if it is not a contractual obligation, the chain of joint liability that may arise in the future can be broken through the direct payment system. In addition, by checking the actual number of days worked and wage payment details of workers in real time through an electronic commuting system or mobile wage management platform, missed or delayed payments can be prevented at the source.

Second, if the burden on subcontractors increases due to design changes or sharp increases in raw material prices during construction, it is important to prepare a unit price adjustment process in advance to reflect this. By regularizing cost review meetings every quarter and specifying in the contract that unit price negotiations will automatically begin when material prices rise above a certain standard, the possibility of disputes over increased construction costs can be greatly reduced. In addition, by introducing a unit price adjustment model based on risk and scoring the above items comprehensively, a more reasonable and predictable contract is possible.

Lastly, it is fundamental to thoroughly review whether the supplier is registered as a construction business and its financial soundness. This can be prevented by mandating the submission of a construction business registration certificate and setting up wage payment guarantee insurance as a mandatory contract requirement.

This goes beyond simply avoiding legal responsibility. This is because joint liability for non-payment of wages is not a one-time cost that damages one line of the main agency's financial statements, but a serious management risk that directly leads to long-term loss of trust and decline in brand value. In the construction industry, as the construction period is long and stakeholders are complexly intertwined, a single non-payment incident will affect the competitiveness of receiving orders and financial creditworthiness for years to come. Therefore, in order to prevent unpredictable financial losses and protect the trust of the field, organization, and market, 'prevention' is the best defense strategy and the only survival strategy.
 

Small Business Team

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