[비즈한국] It has been confirmed that the number of construction companies caught subcontracting to 'unregistered businesses' that have not registered for construction operations has increased by more than 30% this year compared to the previous year. Analysts suggest that this 'recession-driven deviation' has risen as construction costs have surged due to higher raw material prices and labor costs, prompting calls for stricter oversight and penalties to prevent industrial accidents and poor-quality construction.
According to the construction industry, the Seoul Metropolitan Government imposed a penalty of 20,575,000 won on Dongbu Corporation005960 on the 20th for subcontracting work at a secondary battery production facility construction site in Gijang-gun, Busan, to an unregistered entity. It is reported that Dongbu Corporation hired the unregistered company to install temporary fencing this past February, shortly after commencing the project, which it had been awarded in September of last year. The scale of the illegal subcontracted work is approximately 260 million won.
An official from the Seoul Metropolitan Government's Construction Business Management Team explained, "Following a request for disciplinary action from the Busan Regional Office of Construction Management, we imposed a penalty after conducting a hearing. The company hired to install the temporary fencing at the site was an unregistered business. We calculated the penalty by considering the statutory penalty rates and mitigating factors, such as the fact that the company had not received any sanctions within the past three years."
In principle, construction work can only be performed by entities registered for construction business. Under the Framework Act on the Construction Industry, anyone intending to engage in the construction business must meet specific requirements regarding capital, technical personnel, facilities, and equipment, and register with the competent local government. Construction firms intending to subcontract work they have been awarded are only permitted to subcontract to contractors who are qualified to perform such work.
However, cases of subcontracting to unregistered entities have increased significantly this year. BizHankook's analysis of data from the Ministry of Land, Infrastructure and Transport's Construction Industry Knowledge Information System shows that a total of 206 construction companies were caught and received administrative dispositions (including changes, corrections, and withdrawals) for subcontracting to unregistered entities this year (as of the 30th), an increase of 50 firms (32%) from the previous year. While the number of general construction companies caught rose by only 5 (6%) to 95, the number of smaller specialized construction companies surged by 45 (68%) to 111.
The rise in illegal subcontracting is driven by the increase in construction costs. According to the Korea Institute of Civil Engineering and Building Technology, the construction cost index in October this year stood at 130.32 points, an increase of about 12% compared to October 2021, three years ago. Cumulative construction prices up to October this year were up about 1.85% compared to the same period last year. The construction cost index, which tracks changes in direct costs such as materials, labor, and equipment, is surveyed and released monthly by the institute.
Administrative sanctions for illegal subcontracting to unregistered entities include business suspension. Under the Framework Act on the Construction Industry, companies caught subcontracting to unregistered entities can face up to one year of business suspension or a penalty of up to 30% of the subcontracted project cost. Unregistered entities performing non-minor construction work are subject to up to three years in prison or a fine of up to 30 million won. However, these penalties may be aggravated or mitigated depending on the severity, motive, and outcome of the violation. This year, 69 construction firms that subcontracted to unregistered entities received business suspensions, while 137 were fined.
Efforts are also underway to strengthen punishment for such practices. The government initially proposed an amendment to the Framework Act on the Construction Industry in June 2021 that would revoke the construction registration of firms found to have subcontracted to unregistered entities three or more times within five years. However, the bill was automatically scrapped when the 21st National Assembly's term expired. A similar amendment has since been re-proposed by Representative Eom Tae-young of the People Power Party and others on the Land, Infrastructure and Transport Committee, and is currently pending in the National Assembly.
A construction industry source pointed out, "The primary reason construction firms seek out unregistered entities is to cut costs. Firms that secure projects with low bids feel the burden of construction costs more acutely during periods of inflation. Because subcontracting to unregistered entities is directly linked to safety and quality issues—not only during the construction process but also after completion—there is a clear need to strengthen oversight and punishment."