Analysis of Domestic and International Policy Research for the Establishment of the Separate Contracting System in Fire Facility Constructions: Domestic Construction Performance and International Guarantee Systems

Jieun Choi; Wonchang Kim; Taegyu Lee

doi:10.7731/KIFSE.161d95ce

Int J Fire Sci Eng > Volume 38(2); 2024 > Article

Choi, Kim, and Lee: Analysis of Domestic and International Policy Research for the Establishment of the Separate Contracting System in Fire Facility Constructions: Domestic Construction Performance and International Guarantee Systems

Research Paper

International Journal of Fire Science and Engineering 2024;38(2):41-49.

Published online: June 30, 2024

DOI: https://doi.org/10.7731/KIFSE.161d95ce

Analysis of Domestic and International Policy Research for the Establishment of the Separate Contracting System in Fire Facility Constructions: Domestic Construction Performance and International Guarantee Systems

Jieun Choi, Wonchang Kim, Taegyu Lee^†

Department of Fire and Disaster Prevention, Semyung University, Choongbuk 27136, Republic of Korea

^†Corresponding Author, TEL: +82-43-649-1315, FAX: +82-43-649-1787, E-Mail: ltg777@semyung.ac.kr

Received February 15, 2024 Revised March 7, 2024 Accepted March 14, 2024

This is an Open Access article distributed under the terms of the Creative Commons Attribution Non-Commercial License (http://creativecommons.org/licenses/by-nc/4.0/) which permits unrestricted non-commercial use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

This study aims to help establish the separate contracting system in fire facility construction by analyzing the status of existing construction projects and empirical research cases implemented by other public institutions. Through this analysis, we seek to derive performance analysis areas for the separate contracting system in fire facility construction. In addition, we intend to analyze domestic and international guarantee systems and propose improvement directions to address issues related to construction performance guarantees for small to medium-sized fire facility construction companies. Using data from the National Statistical Portal, an analysis of public and private fire facility construction projects over the past five years shows an increasing trend in the gross amount of primary contracts, indicating the success of the separate contracting system. Empirical studies on the separate contracting system by public institutions in other construction projects primarily focused on analyzing construction cost, project scale, and construction duration. These studies generally demonstrated the benefit of reduced construction costs. However, it was also observed that if the project owner is not an expert, an additional cost of 4.4% might be incurred to hire a construction safety manager. An analysis of construction performance guarantee systems for fire facility construction companies, both domestically and internationally, revealed that pre-assessment measures, such as those under the Miller Act, should be implemented to evaluate capabilities appropriate to the construction scale. Furthermore, in cases of non-performance due to the fault of the existing contractor, administrative procedures should be streamlined and regulations relaxed to support the participation of capable fire facility construction companies.

Keywords: Fire facility construction; Separate contracting system; Empirical research; Construction performance guarantee; Improvement strategies

1. Introduction

Fire facility construction is crucial for protecting the lives and property of the public by preventing fires and ensuring their initial suppression in buildings. Therefore, thorough quality management in the construction sector is essential. Before the separate contracting system was implemented in June 2020, fire facility constructions were mostly conducted via a structure in which the project owner entered into a contract with a general construction company or a specialized construction company that included fire facility constructions, and then a subcontract was made with a fire facility construction company. However, issues such as substandard construction and low-cost subcontracting were raised as social problems associated with subcontracts. Although fire facility constructions are not legally included as construction works under Article 2 of the Framework Act on the Construction Industry, the practice of subcontracting persisted. Therefore, to address these fundamental issues and promote the development and quality construction of the fire industry, the separate contracting system was implemented to establish a direct contract between the project owner and the fire facility construction company as the primary contractor [1-3].

The Korea Fire Protection Facilities Association reported that the fire facility construction performance improved significantly owing to the separate contracting system. Specifically, the total construction amount increased by approximately 24.9%, from 6.4313 trillion KRW in 2019 before the implementation of the separate contracting system, to 8.0357 trillion KRW in 2022 [4]. However, the Korea Construction Association presented a case where a delay in the completion of fire facility construction by approximately 1.1 billion KRW in a new construction project with a total cost of 19.1 billion KRW delayed the completion of the entire building. Consequently, as the deadline for completion approached, the construction company had to bear the debt related to the project financing (PF) [5,6].

While the overall performance of the separate contracting system for fire facility construction and the responsibilities and execution of the projects need to be specifically analyzed, studies investigating the outcomes of the separate contracting system since its implementation in September 2020 are limited. In particular, studies addressing the responsible completion of construction projects, conflicts with construction companies, and other issues that need improvement are lacking. Therefore, systematic research on these topics is necessary.

The information and communication construction industry and the electrical construction industry have implemented a separate contracting system since the 1970s [7]. They have been conducting research to investigate the status of construction projects after implementing the separate contracting system and to propose improvement strategies via system analysis. However, studies investigating the construction status and economic advantages of the separate contracting system for fire facility constructions compared to integrated contracting are limited. Based on previous research cases suggested in studies on the separate contracting system of other public institutions, determining and applying the items required to analyze the separate contracting system for fire facility construction is necessary.

This study thus aims to propose improvement directions for the separate contracting system by focusing on the construction performance guarantees of fire facility construction companies during the execution of fire facility constructions. Additionally, this study seeks to analyze the performance records of fire facility constructions and domestic and international cases of separate contracting to present alternatives to implement the performance guarantee system smoothly.

2. Research Process

2.1 Analysis plan

The analysis process of this study is as shown in Figure 1. In the first stage, the current status was analyzed by using public data related to fire facility constructions to compare the number of original contracts and subcontracts. In the second stage, we derived the analysis scope for the separate contracting system in fire facility constructions by analyzing empirical research cases supporting and opposing the separate contracting system in other public institution construction projects. In the third stage, we proposed improvement strategies by analyzing guarantee-related systems for the construction performance of contractors in domestic and international projects.

2.2 Analysis methods

In this study, we analyzed public data on "registered industry types/contract amounts by ordering party, progress payments, prime and subcontract progress payments, and outstanding payments" for the separate contracting performance in fire facility constructions over the past five years (2018-2022). We examined empirical research cases conducted by the Korea Information and Communication Industry Institute, the Construction & Economy Research Institute of Korea, and the Korea Institute of Civil Engineering and Building Technology on the separate contracting systems of other domestic public institutions to analyze the impact of separate contracting on contract amounts by contract types and to review the performance outcomes of the separate contracting system. Through this analysis, we aim to derive the advantages and disadvantages of the separate contracting system in fire facility construction by public institutions and identify areas for future empirical research. Additionally, we intend to analyze the limitations related to the responsibilities of small to medium-sized fire facility construction companies and the systems related to construction performance guarantees. This includes examining the application of the Civil Act, the Act on Contracts to Which the State is a Party, and contract execution standards in cases of non-performance by contractors. Furthermore, we will analyze international laws and systems related to contractor responsibilities and performance guarantees, such as the Miller Act (USA), the New Performance Guarantee System (Japan), and the Performance Bond for Public Works (Japan), to propose improvement strategies.

3. Analysis Results

3.1 Analysis results of the current status of the separate contracting system for fire facility constructions

Using data from Statistics Korea obtained via the National Statistics Portal (KOSIS), we analyzed the figures related to fire facility constructions. This included data on "contract amounts by registered business type/contractor, progress payment amounts, original contract and subcontract progress payment amounts, and unpaid amounts." We examined the progress payment amounts for original contracts and subcontracts in public and private construction projects before and after implementing the separate contracting system, covering the period from 2018 to 2022.

Figure 2 illustrates the analysis results based on the performance of different construction types and contract types. For public construction projects from 2018 to 2019 before the amendment, the progress payment amounts for original contracts were higher than those for subcontracts. Since the amendment, this upward trend has continued up to the present. The compound annual growth rate (CAGR) for original contracts was 13.12%, increasing by approximately 63% in 2022 compared to 2018. For private construction projects, the progress payment amounts for subcontracts were higher before the amendment; however, the progress payment amounts for original contracts became higher. The compound annual growth rate for original contracts was 14.81%, increasing by approximately 73% in 2022 compared to 2018.

Based on these analysis results, it can be inferred that public construction projects pursued bids for fire facility constructions as original contracts even before the amendment of the separate contracting system. This is because 17 administrative districts had already revised their ordinances regarding the separate contracting system, and the construction performance guarantees were clearly defined. Examining the data from the "Bid Announcements and Progress Details" of the Public Procurement Service, we found that public construction projects were bid and conducted by public enterprises, educational institutions, national institutions, other public institutions, quasi-governmental institutions, local public enterprises, and local governments. The upward trend in the progress payment amounts for original contracts in both public and private construction projects can be seen as an effect of the separate contracting system for fire facility construction. Collecting and integrating specific construction-related data, such as the ordering institutions, project scale, bid amounts, and total construction costs for fire facility construction projects where the separate contracting system has been implemented, is necessary.

3.2 Analysis results of empirical research cases on domestic separate contracting

Table 1 presents the support or opposition opinions on the separate contracting system from empirical research conducted by the Korea Information and Communication Industry Institute, the Construction & Economy Research Institute of Korea, and the Korea Institute of Civil Engineering and Building Technology. It also shows the analysis results following the implementation of this system. We sought to analyze the applicability of analysis items through research cases from other public institutions that focus on the separate contracting system owing to the lack of studies focusing on the economic analysis of the separate contracting system in fire facility constructions. The research institutions conducted economic analyses to support each opinion and analyzed construction cases to demonstrate the validity of the separate contracting system.

The Korea Information & Communication Industry Institute (2012) conducted an analysis to demonstrate the economic feasibility of the separate contracting system in response to the controversy over its abolition in the information and communications construction industry. By analyzing cases of integrated and separate contracting for information and communications construction projects of similar scale, the following results were obtained. Among the 56 cases of integrated contracting analyzed, 40 cases showed that the final construction cost increased by 4.4% compared to the bid price. By contrast, among the 71 cases of separate contracting analyzed, 36 cases showed that the final construction cost decreased by 0.2% compared to the bid price.

Additionally, analyzing the rate of change in construction costs for projects over 10 billion KRW, the integrated contracting increased by 2.1%, while the separate contracting system decreased by 2.3%. A comparative analysis of the completion costs for a similarly scaled geriatric hospital in Gyeonggi Province showed that, for integrated contracting, the bid price was 11,550 million KRW; however, the completion price increased by 3.6% to 11,965 million KRW. Conversely, for separate contracting, the bids were made separately for architectural work, electrical work, and information and communications work, resulting in a bid price of approximately 9,296 million KRW and a completion price of 9,281 million KRW, reflecting a decrease of 0.1%. This analysis indicates that integrated contracting results in higher construction costs and costs per unit area. Therefore, using a separate contracting system with specialized contractors for each type of work is argued to be more economically advantageous than the integrated approach [9].

The Korea Construction Policy Institute (2013) promoted the legalization of the separate contracting system to address issues, such as low-cost subcontracting and the contracting structures of small and medium-sized enterprises that arose under integrated contracting. They also conducted an economic feasibility analysis for introducing the separate contracting system in public construction projects. The analysis revealed that for an apartment kindergarten construction project, the bid price for integrated contracting was 580 million KRW, whereas the bid price for separate contracting across 12 different types of work was 535 million KRW. This indicates that separate contracting could reduce the bid price by 8.4% compared to integrated contracting [10].

The Korea Construction Industry Institute (2017) took a critical stance on the introduction of the separate contracting system in construction projects and conducted an empirical analysis of the potential issues that could arise. The analysis indicated that under the separate contracting system, the project owner would need to organize a separate construction management team to oversee site management and supervision. Additionally, if the project owner lacks specialized capabilities, they would need to hire external consultants such as construction managers, which could cost 2.98-4.4% of the total construction cost. This could lead to unnecessary construction expenses. Moreover, owing to the unclear delineation of responsibilities for structures of the same scale among different contractors, friction such as the shifting of defect liabilities and delays in repair work could exist. This would add to the burdens on general contractors [11].

The case analysis results indicate that while the separate contracting system reduces cost compared to the integrated contracting system, most construction responsibilities are placed on construction works, which are considered more critical than fire facility constructions. According to the analysis results, a detailed economic analysis of the separate contracting system should include a comparison of bid amounts, including an assessment of cost savings, a comparison of construction delays, an analysis of construction performance guarantee and execution speed, and an evaluation of the impact on job creation.

3.3 Analysis results of domestic and international construction performance guarantee systems

Table 2 presents the guarantee laws and contract guarantee provisions in South Korea, the United States, and Japan. Most fire facility construction companies are small to medium-sized enterprises, often lacking reliable construction guarantees. While the scope of guarantees is limited domestically and internationally, guarantee institutions and project owners have greater autonomy. Therefore, various methods of guarantee execution can be discussed [12]. According to Article 667 of the Civil Act in South Korea, the project owner can request the contractor to repair defects observed in the construction before completion within a reasonable period. Alternatively, the project owner can demand compensation along with defect liability [13]. In cases of construction delays attributable to the contractor, a penalty rate of typically 0.1% is agreed upon in the construction contract, requiring the contractor to pay delay damages [14]. Consequently, guarantee systems are implemented to mitigate the risk of non-performance. Construction performance guarantees are regulated under Article 52 of the Act on Contracts to Which the State is a Party. If the contractor fails to fulfill their contractual obligations, the guarantee institution assumes the obligation or pays a specified amount. Currently, for public construction contracts exceeding 30 billion KRW, a performance bond covering 40% of the contract amount must be submitted as a mandatory requirement [13,15].

The current government contracting system requires qualifications equivalent to those at the time of the initial bid, as per Article 45, Paragraphs 3 and 4 of the Contract Execution Standards, without considering the scale of the remaining work, technical difficulty, or inclusion of special processes. This presents challenges in selecting a suitable performance guarantee contractor. For fire facility constructions, the Fire Industry Mutual Aid Association implements performance guarantees, setting the guarantee amount between 40% and 60% of the contract amount as specified in the contract documents, from the date of the contract until the completion of the work [16].

The Jeju '00 Mixed-Use Building Construction Project,' with a total construction cost of 19.1 billion KRW, is an example of the PF responsibility for completion. While the main building construction, costing 18 billion KRW, was completed, the completion of the fire facility constructions, costing 1.1 billion KRW, was delayed, delaying the overall building completion [5]. Consequently, as per the PF agreement, the construction company assumed the debt of the PF owing to the approaching completion deadline. Although no legal regulation exists for the responsibility of completion by the contractor for the smooth progress of construction and the recovery of loans by financial institutions, it is stipulated through a Letter of Commitment to Completion under the principle of freedom of contract in civil law. The Letter of Commitment to Completion includes obligations for completion, liability for damages in lieu of completion obligations, and completion guarantees. Following the implementation of the separate contracting system, the responsibility for completion falls on the construction company. This has been identified as a cause of PF crises, as the construction companies are burdened with the responsibility for fire facility constructions, despite the separate contracting system [17].

The analysis of construction performance guarantee systems in other countries revealed that the Miller Act in the United States requires contractors on all federal construction projects exceeding $100,000 to post performance and payment bonds. This mandate aims to protect the interests of the US government and ensure that construction projects are completed according to contract terms. Each state also enforces mandatory performance bond regulations through the Little Miller Act. Surety companies conduct preliminary evaluations focusing on character (reputation), capacity (construction capability), and capital (financial strength) to minimize risk. After issuing the bond, surety companies regularly monitor project progress. Following a performance bond claim, decisions are made through consultations among the surety company, the project owner, and the contractor. If the contractor cannot fulfill the contract, the project owner can claim the performance bond. The surety company then conducts an investigation to determine the necessary actions, such as hiring a replacement contractor, providing financial compensation, reducing the scope of work, or supplementing labor. These measures ensure that the rights of the project owner are not infringed upon [12,18].

In 1996, Japan introduced a new performance guarantee system, which can be categorized into cases where the payment of contract guarantees is exempted and where collateral measures replace the payment of contract guarantees. The collateral measures that replace payment include guarantees from financial institutions, such as banks, and special contract guarantees undertaken by prepaid guarantee companies. Performance bonds for public construction projects provide both monetary and construction performance guarantees. Contractors and surety companies enter into surety agreements, and the issuance of performance bonds is determined by evaluating the business management status, contract and construction history, financial situation, technical capabilities, and construction capacity of the construction company. If the contractor fails to fulfill the contractual obligations and the project owner opts for a construction performance guarantee according to the surety contract, the surety company will either complete the work by hiring another contractor or fulfill the defect liability obligations; however, this may lead to construction delays. According to the standard terms of public construction contracts, the guarantee rate is set at 30% for performance guarantees. For monetary guarantees, the guarantee rate is typically approximately 10%; however, the project owner can set it at their discretion. A contract termination procedure is required to claim the guarantee, which is complex and burdensome for the project owner. However, this approach avoids delays in construction progress similar to those seen with new construction projects [12,19].

Table 3 comprehensively summarizes the guarantee institutions and the scope of guarantees in domestic and international systems. In South Korea, priority is given to guarantees that ensure construction completion by replacement, whereas in the United States and Japan, the guarantee institutions and project owners are granted autonomy in selecting the guarantee implementation method. In the case of separate contracting systems for fire facility construction, introducing rigorous pre-screening by the guarantee institution is necessary to minimize business risks based on the capabilities of the company. Additionally, expanding the autonomy of domestic project owners and guarantee institutions can reduce the time and additional construction costs associated with selecting a performance guarantee contractor. Furthermore, although current government bid contract execution standards (Article 45) require the designation of contractors who meet specific qualification criteria for construction performance guarantees, guarantee implementation presents some challenges. In some cases, the scale of the uncompleted work is small, making it difficult to designate a performance guarantee contractor. Particularly when core or specialized processes have already been completed, resulting in lower construction difficulty for the remaining work, relaxing the criteria for selecting a performance guarantee contractor is necessary. Moreover, fire facility construction companies could undertake the remaining work.

4. Conclusion

This study aimed to propose empirical research that should be conducted by public institutions for the smooth implementation of the separate contracting system for fire facility constructions and improvement strategies for the guarantee system of small and medium-sized fire facility construction companies. The following conclusions were drawn:

1) The analysis of fire facility construction performance indicates an upward trend in the interim payment amounts of the prime contractor, which can be attributed to the effect of the separate contracting system for fire facility constructions. However, for a clear statistical approach to the performance outcomes of fire facility constructions, collecting and integrating specific construction-related data, such as the project owner, project scale, bid amount, and total construction cost from cases where the separate contracting system has been implemented, is necessary.

2) By analyzing research cases on other construction projects by public institutions, we found that we can compare separate contracting and integrated contracting by focusing on cost savings analysis, construction amount, construction period, construction delays, and job creation, and that these aspects can be presented as evidence. However, when adopting this approach, collecting construction data related to fire facility constructions that focus on public institutions related to firefighting is necessary. This is expected to present economic advantages and identify areas for improvement in the system.

3) Domestically, the scope of guarantees applies primarily to construction performance guarantees, such as the selection of a guarantee executor. In contrast to the scope of guarantees in other countries, discussing guarantee execution scope diversification, including the financial support, acquisition, and selection of guarantee executors, is necessary to enable guarantee execution through consultations between the project owner, guarantee institutions, and construction companies.

4) The analysis of construction performance guarantees for small to medium-sized fire facility construction companies revealed that, under domestic government bidding contract execution standards, the contractor selection process can lead to construction delays. Relaxed standards for selecting guarantee executors are considered necessary for projects where key or specialized construction types are completed and the remaining construction has a lower degree of difficulty, to enable fire facility construction companies to complete the work.

Notes

Author Contributions

Conceptualization, J.C. and T.L.; methodology, J.C. and T.L.; software, J.C.; validation, J.C. and T.L.; formal analysis, J.C.; investigation, J.C. and W.K.; resources, W.K.; data curation, J.C.; writing—original draft preparation, J.C.; writing—review and editing, T.L.; visualization, J.C.; supervision, T.L.; project administration, T.L.; funding acquisition, T.L. All authors have read and agreed to the published version of the manuscript.

Conflicts of Interest

The authors declare no conflict of interest.

Acknowledgments

This work was supported by the National Research Foundation of Korea (NRF) grant funded by the Korea government (MSIT) (No. 2022R1F1A1073333).

Figure 1.

Flow chart.

Figure 2.

Public and private construction data from Statistics Korea[8].

Table 1.

Public Data by Construction Type on Separate Order Construction

Research Institution	Support/Opposition	Analysis Results
Korea Information and Communication Research Institute (2012)	Support	1. Cost Effectiveness: Separate order construction generally leads to lower final construction costs compared to integrated contracting methods.
	Support	2. Scale Efficiency: For larger projects, separate order construction tends to offer greater cost reductions than smaller projects.
Korea Research Institute for Construction Policy (2013)	Support	1. Cost Savings: Separate order construction in public construction projects results in an 8.4% cost reduction compared to integrated contracting.
		2. Cost Efficiency: In the construction of an apartment kindergarten, the bid for separate order construction was 535 million won, while the bid for integrated contracting was 580 million won, demonstrating the cost efficiency of separate order construction.
		3. Legislative Push: Separate order construction is being promoted to address issues, such as low-cost subcontracting and problems affecting small and medium enterprises (SMEs).
Korea Institute of Construction Industry (2017)	Opposition	1. Increased Costs: Separate order construction leads to higher costs due to the need for additional management and supervision, increasing total project costs by 2.98-4.4%.
Korea Institute of Construction Industry (2017)	Opposition	2. Coordination Problems: The lack of clear responsibility boundaries among separate order construction can result in poor coordination, quality issues, and delays.

Table 2.

Guarantee Systems of South Korea, the United States, and Japan

Country	Legislation	Contract Guarantee Provisions
Korea	Civil Act 667 Article	• Claim for Defect Repair
		• Defect Liability
		• 0.1% Liquidated Damages for Delay
	Act on Contracts to Which the State is a Party 52 Article	• Performance Guarantee: Obligation to Fulfill Contract Duties on Behalf of the Contractor
	Procurement and Contracting Standards 45 Article	• Require the Same Qualifications for Selecting Guarantee Companies for Bid Participants
America	Miller Act, Little Miller Act	• Require Contractors on all Federal Construction Projects to Post Performance and Payment Bonds upon Contract Award
		• Guarantee Agencies Must Conduct Preliminary Reviews of Character, Capacity, and Capital
		• The Guarantee Agency, in Consultation with the Client, May Hire Another Contractor or Provide Financial Compensation
Japan	New Performance Guarantee System	• Exemption from Payment of Contract Bond
	New Performance Guarantee System	• Collateral Measures After Payment of Contract Bondġ
	Performance Bond	• Preliminary Review of Company Management Status, Contracts, and Experience
		• Reverse Warranty: Contract substitution with another contractor, obligation to fix defects
		• Financial Guarantee: Payment of bond

Table 3.

Analysis of Guarantee Obligations Scope

	Korea	USA	Japan
Guarantee Institution	- Fire Protection Association	- Insurance company	- Advance payment guarantee corporation
			- Banks
			- Insurance companies
Scope of Guarantee Obligations	- Construction guarantee	- Construction guarantee	- Counter-guarantee : 30% of guarantee amount, defect warranty, etc.
		- Compensation for contract performance loss
		- Additional costs for construction delay, wages and equipment costs, etc.
		- Construction delay damages
	- 40% of contract amount	- Legal expenses	- Monetary guarantee: Bond rate 10% (Owner may set it to 20%)
		- Liquidated damages
		- Costs related to corrective work
		- Cost of defect rectification

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