Hello. I am attorney Shin Jun-seon from Cheongchul Law Firm.

Since the beginning of 2023, the Ministry of Land, Infrastructure and Transport has requested each local government to establish and implement self-inspection measures regarding the eligibility criteria for registration of construction companies participating in public bidding. Consequently, major local governments have begun to actively introduce pre-inspection systems (or expressed as “actual investigations,” etc.). The Construction Industry Basic Act has provisions regarding actual investigations in Article 49, but its detailed operational guidelines are inadequate and there have been criticisms regarding differing enforcement criteria by each contracting agency or the application of excessive enforcement criteria, and in 2022, the Legislation Office interpreted some local governments' ordinances as unlawful, highlighting the need for improvements.

However, the very intention to secure the soundness of the construction industry is justified, and it is expected that the pre-inspection system at the bidding stage will continue to expand. As construction companies participating in bidding, it is essential to prepare for potential risks, including administrative disadvantages arising from pre-inspections, rather than merely accepting that they may fail to secure projects.

[Question]

Expansion of pre-inspection systems at the bidding stage in public tenders, what are the risks?

[Answer]

1. Background of the introduction of the pre-inspection system at the bidding stage

In October 2018, Gyeonggi Province was the first to introduce this system, establishing a 'Comprehensive Plan to Eradicate Construction Industry Paper Companies' and forming a dedicated task force to verify the compliance of construction company registration criteria of bidding participants beforehand. This was initiated from the recognition that post-facto inspections had difficulty in solving issues like poor construction and subcontracting problems. In October 2019, Gyeonggi Province amended its ordinance to promote local construction industry activation, providing a legal basis, and other local governments, including Seoul, are modeling this system to implement similar schemes.

2. Current status of system operation by each local government

After the implementation of the system in Gyeonggi Province, it has shown results by exposing over a hundred disqualified companies, so-called ‘paper companies’, prompting other local governments to eagerly expand its implementation.

Since 2021, Seoul has expanded the scope of investigation to public works projects of over 200 million KRW and subcontracting contracts of over 100 million KRW. Chungcheong Province has taken the lead by implementing this from July 2023 in Nonsan City, setting the stage for its spread across the Chungcheongnam-do region, while Asan City plans to expand projects from January 2025 that are between 1 billion and 7 billion KRW, and Anseong City intends to expand to specialized construction projects over 50 million KRW from November 2024. Notably, in the case of Seoul City, the contents of the actual inspection are specified in the bidding notice, suggesting the possibility of restrictions on participation as well as the application of the crime of interfering with bidding in case of violations, indicating that the severity of sanctions is increasing.

3. Possibility of administrative sanctions and countermeasures

If deemed ineligible during an actual investigation, individuals may face up to 6 months of business suspension or restrictions on bidding qualifications, and if the borrowing of national technical qualifications is detected, extreme measures such as cancellation of construction business registration may result. In fact, the Suwon District Court recently acknowledged the legality of sanctions in a case where a company was found to be a paper company, determining that the operation of a real office and violations of relevant laws such as the Building Act corresponded to failing to meet construction business registration criteria (Suwon District Court, January 14, 2022, ruling 2021guandan8324).

Therefore, construction companies need to thoroughly check the compliance with registration criteria before bidding and must systematically manage evidence regarding the actual employment of technical personnel, capital status, and operational status of offices. Especially for specialized construction companies participating in subcontracting, equal levels of diligence are expected in the future.

In addition, if there are anticipated disadvantages due to excessive application of enforcement criteria, it is necessary to conduct a detailed review of the basis for such dispositions and take active measures for rights recovery, such as disputing their illegality through lawsuits.

4. Legal limitations of the system and future prospects

As mentioned in the introduction, there are criticisms that this pre-inspection system has legal limitations. In May 2022, the Legislation Office determined that Gyeonggi Province's public bidding pre-inspection system, which defines delegated matters without legal authorization, poses a risk of violating the Local Government Act. It was also pointed out that the concepts of unfair trading companies and paper companies are ambiguous and conflict with local contracting law.

However, despite these legal controversies, the very intention of the system to secure the soundness of the construction industry is likely to be judged as justified and remains valid. Issues regarding the illegality of ordinances can potentially be remedied through future ordinance revisions.

In reality, the implementation of the pre-inspection system at the bidding stage is expanding nationwide. Therefore, construction companies should thoroughly check compliance with registration criteria from the pre-bidding stage, and while this system is mainly applied to the construction industry currently, there is also a possibility that it could be considered for implementation in other public procurement areas, potentially expanding the scope of application further in the future.

Cheongchul Law Firm consists of top lawyers and corporate attorneys in South Korea, possessing extensive legal consulting and litigation experience in various public procurement sectors, including the construction industry. If you need legal advice regarding the pre-inspection at the bidding stage and related administrative sanctions, please feel free to contact us.