Yeonsu-gu to inspect top-ranked bidders for construction projects, screening out ‘paper companies’ at bidding stage

Incheon’s Yeonsu-gu District (Mayor Lee Jae-ho) has set up a safeguard to stop so-called “ghost companies” from winning public construction contracts. These are firms that meet construction business registration requirements only on paper. The district said on the 23rd that starting in January next year it will run a “paper company inspection,” in which officials visit the offices of the top-ranked bidder in a construction tender and check its technical staff in person. Yeonsu-gu is the first of Incheon’s basic local governments to introduce a system that verifies on-site, during the bidding process, that a company actually exists.

[The Korean Today] Yeonsu-gu’s paper company inspection for construction projects © Reporter Kim Mi-hee

The system was introduced to close a gap in the existing screening process. According to the district, eligibility reviews for tenders have so far focused on how well a company could carry out the work, and there was no separate on-site check of whether it actually met construction business registration standards. Inspections carried out by the Ministry of Land, Infrastructure and Transport after registration were also limited to reviewing submitted documents, which made it difficult to confirm whether a company actually ran an office and employed technical staff.

The district believes this gap can lead to problems with construction quality. When a company with no office or technical staff wins a contract after meeting registration requirements only on paper, it does not do the work itself. Instead, it hands the project over through illegal subcontracting and simply takes a profit, which raises the risk of shoddy construction. Because the projects the district commissions, such as roads and public facilities, directly affect residents’ daily lives, the core aim of the new system is to weed out companies without construction capability before a contract is signed.

The inspection covers general and specialty construction companies that bid on projects commissioned by Yeonsu-gu with a base price of 500 million won or more. After bids are opened, the district will inspect the top-ranked company before starting the eligibility review. Officials will examine the company’s location, technical staff and capital to check, both on paper and on-site, whether it actually meets the construction business registration standards set out in the Framework Act on the Construction Industry: technical capability, capital, and facilities, equipment and office space.

To make the checks more objective and effective, the inspection will proceed in three stages: document review, on-site inspection and cross-verification with relevant agencies. In the first stage, officials will review the company’s capital, whether it has secured technical staff and whether it owns the required facilities, based on documents it submits, including financial statements, copies of technical certifications, workplace enrollment rosters for the four major social insurance programs and lease agreements.

In the second stage, officials will visit the company in person with a checklist. They will confirm whether the office is actually in use, including whether there is an independent office space and a sign posted, and will also check whether the registered technical staff actually work there and whether the company has the equipment it reported. In the third and final stage, officials will cross-check the findings against data held by the Construction Industry Information Center (KISCON), the four major social insurance agencies, and the general and specialty construction associations, among others, to confirm that technicians are not employed by another company at the same time and that they work there on a regular basis.

Companies found in violation will be excluded as ineligible when the winning bidder is selected and will face administrative measures such as corrective orders, business suspensions and fines. The district will suspend the contract process until the measures are finalized and will then inspect the second-ranked company in the same way. If a company based in another jurisdiction is caught, the district plans to ask the relevant metropolitan or basic local government to take administrative action.

The district will also give advance notice to help the system take hold smoothly. It will post a notice about the inspection in tender announcements, attach a list of required documents, and obtain a consent form for the inspection from the winning bidder. It also plans to promote the system in advance to related organizations, including the general and specialty construction associations, so the industry can become familiar with it beforehand. After the program begins, the district will analyze its effects and, if necessary, consider expanding the range of projects subject to inspection.

Mayor Lee Jae-ho said, “We will prevent shoddy construction by catching, at the bidding stage, paper companies with no construction capability that win contracts and then pursue only profit through illegal subcontracting.” He added, “We will create a construction market where excellent local companies that operate properly can win contracts fairly.”

The measure is significant because it does not leave the verification of companies solely to post-registration inspections and instead moves it up to the stage just before a contract is signed. Screening out companies that exist only on paper is expected to let local construction firms that actually run offices and employ staff compete fairly, and to improve the construction quality of public facilities used by residents. Because this is the first such system among Incheon’s basic local governments, it is also drawing attention as to whether it will spread to other local governments, depending on its results.

[ Reporter Kim Mi-hee: incheonsouth@thekoreantoday.com ]

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