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Subcontract Price Payment Confirmation System (Subcontract System)

for the Support for Shared Growth and Fair Trade of Principal Contractors and Subcontractors

Seoul Metropolitan Infrastructure Headquarters

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Contents

I. Background and Impulsion

II. Introduction to the System

<Attachment > System Expansion Scheme

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②Claim construction price ①Claim subcontract price

Principal contractor Subcontractor③Pay the price ④Pay subcontract

price (within 15 days)

⑤Notify within 5 days of subcontract price (submit documents)

⑥Notify within 5 days ofreceipt of the price (submit the copy of bankbook)

Public Agency

Manual confirmation ofsubcontract price payment

Ⅰ. 도입배경 및 추진현황1. Background to System Introduction

□ All government agencies must manage the subcontract price payment regarding their public projects: Need-ing an efficient system

□ Emphasizing the need for shared growth and fair trade between large and small businesses : A social issue

□ Need a measure designed to enhance the convenience and fairness of confirming subcontract price payment

The government worked out measures designed to induce fair payment of subcontract prices → Payment confirmation sys-tem, direct payment system, prime contractor method

On December 13, the government established the Commission for Shared Growth → announced shared growth evaluation indicators for 56 large corporations.

Need an automation system to smoothly operate the system : manual work → computerization Need to secure the reliability of gathering all subcontract price payment details and confirming payment: in al-

liance with banks

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2. Goals of System Development Ⅰ. 도입배경 및 추진현황

Securing both the convenience and public interest of paying the subcontract price

Connect with e-settlement services including the function of paying subcontract prices Gather and confirm all subcontract price payment details (including prepayment) : In connec-

tion with banks’ system

Preparing a measure designed to fundamentally resolve problems related to subcontract price payment

Seoul Metropolitan Government provides a subcontract price settlement means for non-construction completion months: cashable settlement (replacement of bills)

Establish the system to guarantee the subcontract price payment: Manage the subcontract price sep-arately

Establishing a support system for both principal contractors and subcontractors

Delete the mandatory submission of evidential documents for confirming subcontract prices Offer a direct-payment system improvement solution: Retaining subcontractor control power (ex.:

reserving the price payment if the payment of worker wages is overdue)

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3. Impulsion Overview and Expansion Plan Ⅰ. 도입배경 및 추진현황

Apr‘11: Began system development

Oct‘11: Completed the system development

Feb’12 Educated users (principal contractors, supervisors)

Mar‘12: Completed the pilot and test operation of the system

2012: Expand the system across Seoul (including existing contracts)

Begin to build the system at government agencies including Korea Hydro & Nuclear Power Co.

Begin to introduce the system to private sector such as SK Telecom

Seoul Metropolitan Government plans to add the function of labor cost confirmation to the system

Applying to new projects worth over KRW 500M (including bid notification)

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1. Subcontract Price Payment Confirmation System

The Subcontract System is designed to automate the work of handling subcontract

price payment, gathering and confirming payment details, and confirming the subcon-

tract price between principal contractors and subcontractors.

⑤Claim construction price ③Claim subcontract price

⑥Pay price(to designated account)⑧Pay/settle subcontract price (cashable settlement and repayment)

①Original contract ②Subcontractor

④ Pay subcontract price (Cashable settlement)

⑧Pay the contract price

④Instruct cashable settlement ⑨Subcontract price payment details

ClientSeoul Metropol-

itan Govern-ment

Principal ContractorsTotal Constructors

SubcontractorsSpecialist Constructors

Financial Institution

Bank

Subcontract System

Ⅱ. 시스템 소개

⑦Instruct money transfer

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2. Major Functions Ⅱ. 시스템 소개

1Transfer money for subcontract price payment(Internet banking)

2 Financial support for subcontract price settlement (provi-sion of settlement means)

3 Streamline work procedure (deletion of submission of evi-dential documents, text message notice, etc.)

4Improve on problems associated with the direct subcontract price payment system (enhancement of arbitration power)

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2. Major Functions _ Price Transfer Ⅱ. 시스템 소개

Transfer the subcontractor price of Seoul Metropolitan Government’s paid contract price : Internet banking Subcontractor’s share is separately managed via the principal contractor’s designated account : The principal

contractor has the right to order payment.

Seoul Metropolitan Government Principal contractor Subcontractors

Projects Contract price (unit: KRW 1,000)

Agreement date (commencement of construction work)

Major progress

Ooo Service Center Construction Project 2,639,560 Dec 27, ‘11(Jan 26, ’12)

Handled KRW 66,000,000 in cashable settlement (Mar 19, ‘12)

Ooo Center Renovation Project 1,076,317 Dec 28, ’11(Dec 30, ;11)

Paid KRW 64,250,000 for com-pleted portion (Feb 29 ’12)

* After education and pilot operation, the system operation proved to be normal.

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2. Major Functions _ Financial Support Ⅱ. 시스템 소개

Seoul Metropolitan Government supports the fund for subcontract price settlement before paying the price: Provision of settlement means (cashable settlement)

Issuing cashable settlement certificates (with good conditions) : Enable principal contractors even with low credit rating to use the means (settlement means replacing bills)

Principal contractor Subcontractors

Category Before the system development After the system development

Target users Principal contractors with superior credit ratings (BBB+ or

higher)All firms that signed agreements with Seoul Metropolitan

Government

Repayment of price

Principal contractors repaid the price with their own fund. (risk of chain bankruptcy exists)

Repaying the price with the construction price paid by Seoul Metropolitan Government (preventing the risk of chain

bankruptcy)

00 constructor that signed an agreement with Seoul Metropolitan Government (credit rating /BB-, principal contractor) : Price payment based on cashable settlement: 5.56% (Mar 19, 2012)

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2. Major Functions _ Streamlining of Work Procedure Ⅱ. 시스템 소개

Automating the price payment confirmation work via banks : Deleting the submission of copies of bank-

books, securing the reliability of documents

Can manage whether the subcontract price is timely paid: HQ can monitor whether the price was timely

paid by field.

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2. Major Functions _ Improvement of Direct Payment SystemⅡ. 시스템 소개

Recognizing the system use results as direct payment results

Retaining subcontractor price payment control power : Can promptly take corrective action on problems

created (overdue wages, etc.)

Category

Total Principal contractors Subcontractors

No. of cases Amount No. cases Amount No. of

cases Amount

2010 111 1,536,558 19 230,375 92 1,306,183

2011 75 768,966 6 221,380 69 547,586

Total 186 2,305,524 25(13%) 451,755 161

(87%) 1,853,769

<Overdue Wages in Principal Contractors and Subcontractors >

(Feb 2010 – Dec 2011, Unit: KRW 1,000)

Principal contractors protract price claim cycles => Subcontractors experience a lack of liquidity => The possibility of creating overdue wages

(Under agreements with banks, Seoul Metropolitan Government provides cashable settlement means to bolster the settlement capa -bilities of principal contractors)

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Ⅱ. 시스템 소개3. Expected Effects

Prevent overdue wages and enhance construction work quality Secure the transparency of price payment to guarantee subcontractor price payment Support principal contractors and subcontractors, thus helping establish

a fair trade culture

Bolster subcontract price settlement (securing of settlement means) Improve the direct payment system (hold subcontract price payment rights to enhance con-

trol power) Delete the submission of evidential documents (official letters, copies of bankbooks) and

automatically send a text message on payment details Respond to the government’s policy (Can provide financial support for secondary / tertiary

partner firms : Reflect results in the shared growth evaluation)

Guarantee the receipt of subcontract price to enhance financial health Delete the submission of evidential document (copies of bankbooks, tax payment certificate

for direct payment, etc.)

Enhance the stability of recovering labor cost / equipment rents / material price (After ex-panding the development of system)

Can confirm the information on subcontractor price receipt in real time (Send a text mes-sage on payment details in real time)

Seoul Metropolitan Government

Seoul Metropolitan Government

Principal Contrac-tors

Principal Contrac-tors

SubcontractorsSubcontractors

WorkersEquipment

& Material Suppliers

WorkersEquipment

& Material Suppliers

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Pushing to further develop the system into a truly shared growth system for the public sector, as well as for large, medium and small businesses (May 2012 -)

☞ Add the labor cost payment confirmation function to prevent overdue wages for workers

☞ Add the price payment confirmation and payment support function for equipment and material suppliers

<Attachment > System Expansion Scheme

☞ Add the mutual-aid linked advance-payment guarantee management function for lowering advance pay-ment guarantee fees for subcontractors

☞ Add the advance payment use details management function for principal contractors

Equipment / MaterialSuppliers

Workers

Confirm subcontract / equip-

ment, material priceSupport subcontract price

settlement

Support subcontract price & support

equipment, material price settlement Support labor, equipment and mate-

rial price Subcontract System

Support financial service

Bank

Guarantee Institutions

ClientSeoul Metropolitan

Government

Principal ContractorsTotal Constructors

SubcontractorsSpecialist Constructors