Hello, this is attorney Lee Young-kyung of Cheongchul Law Firm.

On July 30, 2026, the Korea Fair Trade Commission (KFTC) announced its decision against A Construction (hereinafter “A Construction”), a builder that had subcontracted the mechanical equipment works of a nursing home renovation and extension project. The KFTC identified five types of violations of the Fair Transactions in Subcontracting Act (하도급거래 공정화에 관한 법률, the “Subcontracting Act”): ① failure to pay subcontract payments, ② failure to issue the required written contract, ③ failure to pass on the advance payment, ④ failure to provide a payment guarantee, and ⑤ failure to adjust the subcontract price following a design change. For the unpaid subcontract payments, the KFTC imposed a penalty surcharge of KRW 103 million together with corrective orders (a payment order and an order to prevent recurrence), and issued orders to prevent recurrence for the remaining violations. This case is a comprehensive example covering, in a single decision, five core provisions of the Subcontracting Act that prime contractors routinely encounter in practice — essential reading for construction and manufacturing prime contractors and for in-house legal, contract, and site personnel. This column is based on the KFTC press release dated July 30, 2026, and the company name has been anonymized as “A Construction.”

The decision at a glance – comprehensive sanctions for five Subcontracting Act violations

In the mechanical equipment works subcontracted as part of the nursing home renovation and extension project, A Construction, with respect to one subcontractor, (i) failed to pay subcontract payments of KRW 103,330 thousand even after 60 days had passed from completion of the works, (ii) directed additional works not included in the original subcontract without issuing a written contract, (iii) received an advance payment from the ordering party but failed to pass on the corresponding advance payment of KRW 57,614 thousand to the subcontractor, (iv) failed to issue a payment guarantee within 30 days of the contract date, and (v) received an increase in the contract price from the ordering party due to a design change but failed to increase the subcontract price accordingly. These acts violate Article 13(1), Article 3(1), Article 6(1), Article 13-2(1), and Article 16(1) of the Subcontracting Act respectively.

● Violation period: March 8, 2024 – December 15, 2024

● Types of violation: five (unpaid subcontract payments / missing written contract / unpaid advance payment / no payment guarantee / no price adjustment after design change)

● Unpaid subcontract payments: KRW 103,330 thousand / unpaid advance payment: KRW 57,614 thousand

● Sanctions: corrective orders (payment order + order to prevent recurrence) + penalty surcharge of KRW 103 million (for the unpaid payments)

● Provisions applied: Subcontracting Act Articles 3(1), 6(1), 13(1), 13-2(1) and 16(1)

1. Overview of the case

From March 8, 2024 to December 15, 2024, A Construction subcontracted the mechanical equipment works of a nursing home renovation and extension project to one subcontractor. The subcontracted works formed part of the prime contract, and additional works arose during performance — a typical construction subcontracting arrangement. However, A Construction failed to perform each of the five principal duties that the Subcontracting Act imposes on prime contractors in relation to payment, written contracts, advance payments, payment guarantees, and design changes, and the KFTC deliberated on and decided these five violations together.

2. The five types of violation and the provisions applied

Type ① Failure to pay subcontract payments (Article 13(1)) – penalty surcharge of KRW 103 million

Although A Construction took over the mechanical equipment works from the subcontractor, it failed to pay subcontract payments of KRW 103,330 thousand within 60 days from the takeover date. Article 13(1) of the Subcontracting Act requires a prime contractor to set, as the payment due date, the shortest possible period within 60 days from the date it receives the goods (the takeover date in the case of construction subcontracting) and to pay the subcontract price by that date. Considering the significant ripple effect that non-payment has on the subcontracting order, the KFTC imposed a penalty surcharge of KRW 103 million together with an order to pay the outstanding amount and an order to prevent recurrence.

Type ② Failure to issue a written contract (Article 3(1)) – additional works without documentation

From October 1, 2024 to December 15, 2024, A Construction directed additional works that were not part of the original subcontract, yet issued no related written contract. Article 3(1) of the Subcontracting Act requires a prime contractor, when placing an order or making an additional or modified order not covered by the contract, to issue a written document stating the statutory mandatory items such as the subcontract price and the method of payment, before the subcontractor commences work. In other words, the duty to issue a written contract arises not only at the time of the initial contract but also at the time of any additional or modified order — a point frequently overlooked in practice.

Type ③ Failure to pass on the advance payment (Article 6(1)) – more than 15 days after receipt

Although A Construction received an advance payment from the ordering party, it did not pay the corresponding advance payment of KRW 57,614 thousand to the subcontractor in line with its terms and ratio. Article 6(1) of the Subcontracting Act requires a prime contractor that receives an advance payment from the ordering party to pass it on to the subcontractor within 15 days of receipt, in accordance with the terms and ratio received. For example, if the prime contractor receives 10% of the prime contract price as an advance payment, it must likewise pay the subcontractor 10% of the subcontract price as an advance payment.

Type ④ Failure to provide a payment guarantee (Article 13-2(1)) – more than 30 days after the contract

Although the subcontractor had submitted a performance guarantee, A Construction failed to issue a construction payment guarantee within 30 days of the contract date, and the works did not fall under any of the exceptions to the payment guarantee requirement set out in Article 8(1) of the Enforcement Decree of the Subcontracting Act (works of KRW 10 million or less per contract, an agreement for direct payment by the ordering party, and the like). Article 13-2(1) requires a prime contractor in construction subcontracting to provide a construction payment guarantee within 30 days of the contract date, while the subcontractor must provide a performance guarantee equal to 10% of the contract amount. The key point is that the performance guarantee and the payment guarantee are symmetrical duties that must be provided by “both parties.”

Type ⑤ Failure to adjust the subcontract price after a design change (Article 16(1))

Although A Construction obtained approval of a design change from the ordering party, resulting in an increase in the prime contract price and additional costs to complete the works, it did not increase the contract price for the subcontracted works. Article 16(1) of the Subcontracting Act requires a prime contractor that receives an increase in the contract price from the ordering party — due to a design change, a change in the delivery schedule, or a change in economic conditions — and that incurs additional costs to complete the works, to increase the subcontract price in accordance with the terms and ratio of the increase received. Furthermore, under paragraphs (2) and (3) of the same Article, the prime contractor must notify the subcontractor of the grounds and details of the increase within 15 days and complete the price adjustment within 30 days.

3. Summary of the applicable provisions – prime contractor duties under five Subcontracting Act articles

The prime contractor duties under the five Subcontracting Act provisions applied in this case are summarized in the table below.

4. Self-audit checklist for prime contractors’ subcontracting compliance

Below are the items that in-house legal, site, and contract personnel of prime contractors engaged in construction or manufacturing subcontracting should review immediately; it is worth checking whether any of these issues exist at your current company.

5. FAQ from prime contractor personnel facing subcontracting investigations

Q1. Must the subcontract price always be paid within 60 days? Is paying default interest enough?

Article 13(1) of the Subcontracting Act is a mandatory provision setting 60 days from the takeover date as the rule, so exceeding that period itself constitutes a violation. The duty to pay default interest (15.5% per annum, etc.) is a separate obligation arising from non-payment and does not substitute for the 60-day requirement. In this case as well, a penalty surcharge of KRW 103 million was imposed in relation to the unpaid subcontract payments of KRW 103,330 thousand.

Q2. Isn’t issuing the initial subcontract enough? Do additional works also require a written contract?

No. Article 3(1) of the Subcontracting Act requires a separate written document to be issued before the subcontractor commences work not only for the initial order but also for “additional or modified orders” not covered by the contract. The practice of ordering additional works verbally on site and omitting the written contract constitutes a violation of the duty to issue a written contract, and in this case A Construction’s failure to issue a written contract for the additional works was recognized as a ground of violation.

Q3. Once an advance payment is received from the ordering party, by when must it be passed on to the subcontractor?

Within 15 days from the date the advance payment is received from the ordering party (the order date if received before the order), and in accordance with the terms and ratio of the advance payment received (Article 6(1) of the Subcontracting Act). For example, if 10% of the prime contract price is received as an advance payment, 10% of the subcontract price must likewise be paid to the subcontractor as an advance payment.

Q4. What are the exceptions to issuing a payment guarantee?

The duty to issue a payment guarantee is waived only where one of the exceptions set out in Article 8(1) of the Enforcement Decree of the Subcontracting Act applies (works of KRW 10 million or less per contract, an agreement with the ordering party for direct payment, and the like). Unless such an exception applies, a prime contractor in construction subcontracting must issue a payment guarantee within 30 days of the contract date.

Q5. If the contract price is increased by the ordering party due to a design change, must this be reflected for the subcontractor?

Yes. Article 16(1) of the Subcontracting Act requires a prime contractor that receives an increase in the contract price from the ordering party — due to a design change, a change in the delivery schedule of the goods, or a change in economic conditions — and that incurs additional costs to complete the works, to increase the subcontract price in accordance with the terms and ratio of the increase received. The grounds and details of the increase must be notified to the subcontractor within 15 days, and the price adjustment must be completed within 30 days.

Q6. How should a company respond to notice of a KFTC subcontracting investigation?

The essentials are: ① immediately notify the in-house legal, contract, and site teams upon receiving notice that an investigation has commenced, and absolutely never delete related materials without authorization; ② systematically organize the evidence of performance for each of the five types of duty — subcontracts, additional-order documents, payment records, advance payment transfer records, guarantee issuance records, and design change adjustment records; ③ organize the facts and prepare a written response with the assistance of counsel; and ④ consider securing mitigating grounds through voluntary correction (paying the outstanding amounts, retroactively issuing written contracts, and the like).

6. Cheongchul Law Firm’s Subcontracting Act advisory and investigation/litigation services

Cheongchul Law Firm has extensive advisory, investigation, hearing, and litigation experience representing construction, manufacturing, and service prime contractors across the multi-layered regulatory areas relevant to prime contractor and subcontractor practice, including the Subcontracting Act, the Fair Trade Act, and the Framework Act on the Construction Industry. Through the services described below, we directly support prime contractors in responding to Subcontracting Act violation risks of the kind seen in this case.

This case is a comprehensive example in which five types of Subcontracting Act violations arising from a single subcontracted project were sanctioned together, reminding construction and manufacturing prime contractors of the importance of managing the timing of performance under each provision and of proper documentation. If you need a review of your in-house subcontracting compliance system, a response to a KFTC or regional fair trade office investigation notice, or a response to corrective orders and penalty surcharges, prime contractor and subcontractor personnel are welcome to contact Cheongchul Law Firm.