"When Using Deficiency Point Aggregation Method, 8 out of Top 10 Si-Pyeong Areas Face Pre-Sale Restrictions"

Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Kim Yuri] Concerns have been raised that the government's proposed amendment to enhance the effectiveness of the construction industry’s defect penalty system could effectively halt apartment pre-sales. If the bill is implemented as originally planned, it is understood that more than 70% of the top 20 companies in construction capability evaluation will be unable to conduct pre-sales, sparking backlash from the industry.

According to the industry on the 18th, the Ministry of Land, Infrastructure and Transport announced last month on the 20th a draft partial amendment to the Enforcement Decree of the Construction Technology Promotion Act, which includes a revision of the defect penalty calculation method. The amendment changes the penalty calculation method to a cumulative system. Currently, an average method is used, where penalties are summed by site and then divided by the number of sites. Penalties for joint contracts (consortiums) are imposed collectively on the representative company. Previously, penalties were imposed individually according to the investment ratio. The industry argues that this disadvantages large companies that have many projects and are more likely to be the representative company of joint contracts.

Defect penalties are imposed when defective construction occurs or is likely to occur. Under the current Housing Supply Regulations, a high number of defect penalties results in point deductions during the pre-qualification (PQ) for large public construction projects ordered by the government, and depending on the scale of penalties, participation in bids can be restricted for up to two years. The construction capability evaluation amount under the Construction Technology Promotion Act is also reduced.

Above all, the biggest issue pointed out by the industry is that apartment pre-sales will be restricted. In September 2018, the government amended the Housing Supply Regulations to limit the timing of pre-sales based on defect penalties. If the penalty is between 1 point and less than 3 points, pre-sales can only occur after one-third of the above-ground floors of the entire building’s frame work is completed. For 3 to 5 points, pre-sales are allowed after two-thirds of the floors’ frame work is completed; for 5 to 10 points, after the entire building’s frame work is completed; and for 10 points or more, pre-sales are only allowed after the usage inspection (completion). If the amendment is applied, a significant number of large construction companies will face problems with pre-sales.

According to the industry, currently, pre-sales are restricted for 15 companies, accounting for 75% of the top 20 construction companies by construction capability evaluation. Among the top 10 companies, 8 are restricted. Even within the top 20, 7 construction companies cannot conduct pre-sales. The Korea Construction Association predicted that if this amendment is implemented, the average defect penalties imposed on medium to large construction companies will increase by 7.2 times, and up to 30 times in some cases.

The construction industry is opposing the amendment. They argue that the amendment is unfair and that the responsibility of joint contractors will be reduced, which is expected to lead to a decline in construction quality. As of the morning of the same day, 2,614 opinions had been posted on the Ministry of Land, Infrastructure and Transport’s legislative notice board, with most opposing the amendment. Meanwhile, the Ministry is reportedly planning to collect penalty status data for two years starting July and implement the original plan in July 2022, while considering additional supplementary measures at that time.

This content was produced with the assistance of AI translation services.