Geonsanyeon "Cumulative Deficiency Penalty Points Combined with Pre-Sale Restrictions Cause Housing Supply Disruptions"

Deficiency Penalty Point Accumulation Method to be Applied from January Next Year
Number of Construction Companies Subject to Pre-sale Restrictions Expected to Increase by 107
"Application Should be Deferred for 1-2 Years or Penalty Criteria Raised"

[Asia Economy Reporter Noh Kyung-jo] An analysis revealed that if penalty points imposed on corporations or technicians involved in construction or services with potential risks of poor performance are calculated by cumulative summation, the number of companies restricted from pre-sale would increase by about 68%.

On the 10th, the Korea Construction Industry Research Institute stated in its report titled "Rationalization Plan for Pre-sale Restrictions Due to Penalty Points" that "If penalty points under the 'Construction Technology Promotion Act' are calculated by cumulative summation instead of the existing cumulative average method, it will negatively impact the housing market."

The penalty point system was introduced in January 1995. Its purpose is to raise awareness and prevent poor performance by imposing disadvantages such as restrictions on participation in public construction bids according to penalty points. The restrictions on pre-sale timing based on the imposed penalty points (divided into four categories) are included in the 'Regulations on Housing Supply' and the 'Amendment to the Enforcement Rules of the Housing Act.'

The contentious cumulative summation method for calculating penalty points is scheduled to be applied from January next year. The construction industry expressed concerns that large and medium-sized construction companies, which relatively have many sites, will suffer disadvantages, and medium and small construction companies without sufficient financial capacity will effectively be pushed out of the market.

It is also considered a violation of the principle of equity. This is because the same disadvantage is imposed for poor performance at one site of Company A, which operates a single site, and for poor performance at one site of Company B, which operates 100 sites. It was also pointed out that restricting pre-sale based on penalty points regardless of the severity of poor performance violates the constitutional principle of prohibition of excess (principle of proportionality).

Accordingly, the Korea Construction Industry Research Institute analyzed the results of the cumulative average and cumulative summation methods based on penalty points imposed during 2020-2021 using the Construction Industry Knowledge Information System (KISCON). This was to understand the impact of changing the penalty point calculation method on the construction industry.

As a result, under the cumulative summation method, the number of companies restricted from pre-sale increased by 107 to 265 companies compared to the current cumulative average method. This accounts for 45% of the total 587 companies. When limited to the top 100 in construction capability evaluation, the number of companies subject to sanctions was 2 under the current method but surged to 40 under the cumulative summation method.

Senior Researcher Kim Young-duk of the Korea Construction Industry Research Institute said, "The number of companies restricted from pre-sale due to the change in penalty point calculation method has significantly increased," adding, "The changed method is not only inappropriate for the operation purpose of the penalty point system but will also lead to a decline in the growth of the construction industry, difficulties in achieving government policy goals, and deterioration of the national economy."

He suggested either postponing the application of the cumulative summation method by 1 to 2 years or raising the penalty point criteria, considering the purpose of operating the penalty point system. He also proposed supplementary measures such as expanding or establishing reduction criteria to encourage construction companies' efforts to reduce penalty points, maintaining the existing cumulative average method, and restricting pre-sale only based on penalty points imposed during the housing construction project process.

Senior Researcher Kim said, "Considering the excessive negative impact on the housing market and the purpose of operating the penalty point system, fundamental improvements are needed for pre-sale restrictions based on penalty points," and added, "Rational improvements should be made in terms of excessive sanctions restricting private companies' business and production activities and the unclear purpose of imposing disadvantages."

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