Starting Tuesday, prime contractors in the construction industry must enroll in payment guarantee schemes even when a project owner has agreed to pay subcontractors directly, bypassing the prime contractor. New contract language will also explicitly hold prime contractors ultimately liable for any unpaid subcontracting fees if a project owner fails to honor that direct-payment commitment.

The measures are designed to strengthen subcontractors' ability to recover payments, but the construction industry has raised concerns that prime contractors could face significantly higher costs and broader legal exposure.

A housing reconstruction site in Seoul. [Yun Chang-bin]
A housing reconstruction site in Seoul. [Yun Chang-bin]

The Korea Fair Trade Commission announced Wednesday that it has revised the standard direct-payment agreement form embedded in the construction industry's standard subcontracting contract, ahead of the amended Subcontracting Act taking effect Tuesday.

The revision follows a change in the Subcontracting Act that makes payment guarantees mandatory for prime contractors even when a direct-payment agreement is in place. A payment guarantee is a safeguard under which a guarantee institution — such as the Korea Construction Mutual Aid Association or Seoul Guarantee Insurance — steps in to pay subcontractors if the prime contractor becomes insolvent or goes bankrupt.

Under the previous rules, a prime contractor was exempt from the payment guarantee requirement simply by agreeing to have the project owner pay subcontractors directly. Critics had long argued, however, that if the project owner also became insolvent or went bankrupt, subcontractors could end up receiving nothing from either the project owner or the guarantee institution.

The amended law addresses this by removing direct-payment agreements from the list of grounds for exempting prime contractors from the guarantee requirement, making payment guarantees mandatory for all construction subcontracting transactions except small-scale work valued at 10 million won ($7,000) or less.

The revised standard agreement form reflects these legal changes. It now explicitly states that if a project owner fails to fulfill its direct-payment obligation, the prime contractor bears ultimate liability for any unpaid subcontracting fees.

The Fair Trade Commission said the revision is intended to embed the amended law's goal of stronger subcontractor payment protection into actual construction-site practice. Clearly establishing the prime contractor's ultimate payment liability at the contract stage should help prevent disputes over unpaid guarantee amounts and raise the overall level of subcontractor payment protection, the commission said.

The construction industry said it understands the intent to improve subcontractors' payment security, but expressed concern that prime contractors' guarantee costs and liability could expand significantly. Industry voices called for complementary measures, including stronger accountability for project owners and the incorporation of guarantee costs into overall construction budgets.

An official at a major construction company said that while subcontractors' payment security may improve, an excessive increase in prime contractors' guarantee costs and liability could make transaction terms more demanding, reducing contract opportunities for smaller subcontractors. "Complementary steps must accompany this — such as strengthening project owners' accountability and factoring guarantee costs into construction budgets," the official said.

Some in the construction industry described the measures as part of the same trend as the so-called "yellow envelope law," which expanded prime contractors' liability in the area of employment, noting that this revision similarly broadens prime contractors' responsibility — this time over payment.

An official at another major construction company said prime contractors are already under growing financial pressure from rising raw materials prices and labor costs, and continuously expanding their liability risks compounding the industry's burden. "On top of employment liability under the yellow envelope law and safety liability under the Serious Accidents Punishment Act, adding payment guarantee costs could affect not only housing supply but also participation in large-scale infrastructure projects," the official said.

The head of a mid-sized construction company said the direction is in effect the same as the yellow envelope law. "Requiring prime contractors to bear ultimate payment liability even when they have agreed to direct payment broadens the scope of their responsibility," the official said. "We see this as part of a process in which the liability expansion the industry feared when the yellow envelope law took effect is being realized one step at a time."


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