Starting next year, a direct payment system will allow construction payments to be made directly to subcontractors and workers, bypassing the main contractor. This initiative aims to reduce wage and payment arrears that can occur in multi-tiered contracting processes.
According to government sources, Minister of Land, Infrastructure and Transport Kim Yoon-deok attended a public briefing on the direct payment system in Yeouido, Seoul, on September 10. The revised law expanding the direct payment system is set to take effect on January 1, 2027, without delay.
The direct payment system utilizes an electronic payment platform, enabling clients to pay construction workers directly without routing funds through contractors or subcontractors. This includes payments for subcontracting, materials, equipment, and wages. The system emphasizes managing payment routes to ensure that funds are not misused by intermediary contractors.
Previously, the mandatory use of the electronic payment system applied mainly to construction projects initiated by the government, local authorities, and public institutions above a certain scale. However, the revised law will extend this requirement to private construction projects of a similar scale.
The criteria for private projects will be determined based on the contract amount. If a single contract amount exceeds a threshold set by the Ministry of Land, Infrastructure and Transport, the electronic payment system must be utilized. Specific monetary thresholds will be defined in future subordinate legislation.
Protections for construction equipment rental payments have also been strengthened. The revised law mandates the use of the electronic payment system for claims related to construction equipment rental fees. Local governments will support some of the payment guarantee costs for subcontracting or equipment rental fees if private construction projects utilize the electronic payment system.
Concerns about payment delays in multi-tiered contracting structures have been raised for some time. Typically, payments in construction projects flow from the client to the main contractor and then to subcontractors, and finally to workers or equipment providers. If a contractor's account is seized or funds are used for other purposes, the final recipients may not receive their payments on time.
The Korean Confederation of Trade Unions' National Construction Workers Union highlighted these issues in a statement when the legislation was proposed in March. They noted that during the multi-tiered subcontracting process, construction payments have been misappropriated or delayed, leading to workers going unpaid for weeks or even months.
Minister Kim Yoon-deok attended the public briefing on the direct payment system but did not announce any additional policy reports or new detailed implementation standards related to the event.
Challenges remain to be addressed before the system is implemented. It has not yet been determined at what scale the direct payment system will apply to private construction projects. While expanding the scope of application may help prevent payment arrears, it could also increase the burden on clients and construction companies to adapt to the new payment system.
There are also discrepancies regarding the timing of implementation and the imposition of fines for violations. According to the revised Construction Industry Basic Act, which was promulgated on September 8, the regulations related to the direct payment system will take effect on January 1, 2027. However, the penalties for failing to use the electronic payment system when making construction payments will not be enforced until January 1, 2028.
Ham Young-jin, head of the Real Estate Research Lab at Woori Bank, stated, "The introduction of the direct payment system fundamentally eliminates the risk of funds being tied up due to misappropriation in the subcontracting process or the seizure of financial accounts of main and subcontractors. This is expected to reduce wage and material payment arrears."
However, he cautioned that unlike public projects, in the private sector, clients may not deposit funds into the payment system on time or may face 'fundamental credit risks' such as bankruptcy. He suggested that due to the nature of multi-tiered subcontracting, it may not be possible to guarantee complete safety against unofficial subcontracting that does not appear in formal contracts, emphasizing the need for enhanced detection and monitoring of illegal subcontracting.
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.