In this blog post, we will examine the characteristics and pros and cons of the three main bidding systems used in public construction projects: the lowest-price bidding system, the qualification-based bidding system, and the turnkey bidding system.
Civil engineering is a field primarily applied to the construction of social infrastructure (SOC), such as roads, dams, and bridges. Since the construction of such social infrastructure requires enormous costs and, once built, serves as a public good used by many people, the government or public institutions are typically responsible for its provision. Because the production and supply of social infrastructure take place in a B2G (Business to Government) rather than a B2C (Business to Customer) format, many people are unaware of how these facilities are provided or consider it a matter of little relevance to their own lives.
However, the funds used for infrastructure construction are mostly raised through taxpayers’ money. Therefore, the methods used to award and contract public works projects are closely related to ordinary citizens, and it is important to closely monitor whether tax dollars are being used efficiently and transparently. In this article, we will examine the characteristics of the three main methods used in public works projects: the lowest-bid system, the qualification review system, and the turnkey bidding system. First, we will examine the lowest-bid system and the qualification review system, in which the contracting authority prepares the design, followed by an overview of the turnkey system, where the bidder is responsible for both design and construction.
Social overhead capital (SOC) refers to infrastructure that, while not directly used in production activities, is essential for facilitating economic activity. Representative examples include roads, ports, railways, airports, and water and sewage facilities.
The lowest-bid system and the qualification review system are methods in which a construction contractor is selected based on designs prepared by the contracting authority. A key feature of these two systems is that, if errors are found in the design, the contract amount can be adjusted through design changes. This is because, in principle, the contractor is not responsible for errors in the design, as the design is provided by the contracting authority. In reality, it is not easy to prepare every design perfectly, so there are quite a few cases where design changes occur during the construction process. Therefore, the actual construction cost may differ from the initial winning bid amount.
First, the lowest-price bidding system selects the winning bidder from among companies that submitted bids below the estimated price, after reviewing the appropriateness of the bid price. While this system was previously applied to projects above a certain scale, South Korea’s public construction bidding system has been continuously reformed—including the adoption of the Comprehensive Review Bidding System and the Comprehensive Evaluation Bidding System—and the traditional lowest-price bidding system has largely been replaced. However, evaluation methods centered on the lowest price are still used as the basic principle in some bidding systems.
While this system offers the advantage of reducing costs through price competition, excessive price competition can lead to unreasonably low bids. Concerns have been consistently raised that such low-cost contracts may result in reduced construction quality and negligence in safety management.
If the winning bid rate becomes excessively low, construction companies may reduce their workforce or adopt various cost-cutting measures to meet construction costs. In such situations, it may become difficult to secure skilled labor, which can negatively impact construction quality and safety management. In fact, the construction industry has consistently reported research findings indicating that excessively low winning bids can increase the risk of industrial accidents, and bidding systems are continually being improved to mitigate these issues.
The qualification review system was introduced to address the limitations of this lowest-price-based system. This system selects the winning bidder by evaluating not only the bid price but also the contractor’s ability to fulfill the contract. Companies that submit bids that are excessively low—below a certain threshold—are excluded, and a comprehensive evaluation is conducted based on various factors, including financial health, technical capabilities, and construction experience, in addition to price.
However, in actual practice, there are often cases where the difference in technical and performance scores between companies is not significant, resulting in price competition ultimately playing a major role. Accordingly, improvements to the evaluation criteria are continuously being made to enhance the system’s effectiveness.
In contrast, the turnkey bidding system is a method in which the bidder is responsible for both design and construction, and it is currently used primarily for large-scale and highly complex projects. Under this method, since the bidder also bears responsibility for the design, it is often difficult to request additional construction costs from the contracting authority due to design errors. Therefore, bidders must possess sufficient technical expertise and risk management capabilities from the design stage onward.
Furthermore, because this system places a high emphasis on the evaluation of design technology, it offers the advantage of actively utilizing new technologies and construction methods developed by the private sector. In fact, there are numerous examples of complex projects—such as large-scale railways, bridges, and plants—where competitiveness is enhanced through the use of patented construction methods or new construction technologies.
On the other hand, because the burden of design costs is significant and a high level of technical expertise is required, large construction firms tend to dominate participation in these projects. Consequently, concerns regarding restrictions on competition and the potential for collusion have been consistently raised, and the South Korean government is continuously strengthening bidding procedures and anti-collusion measures to ensure fair competition.
In the past, collusion among some construction companies during the “Four Major Rivers Project” sparked public controversy, leading to subsequent investigations and sanctions by the Fair Trade Commission. However, collusion does not necessarily result in high profits; since the contractor bears full responsibility for both design and construction, there have been cases where actual projects resulted in lower-than-expected profits or even losses.
We have examined the characteristics of the major bidding systems currently used in public construction projects in South Korea. Since each system prioritizes different factors—such as price competitiveness, technical capability, project scale, and risk exposure—it is difficult to conclusively state that any single system is absolutely superior.
This is similar to how one cannot definitively say whether a luxury car or a practical car is better. Just as the appropriate choice varies depending on the intended use and needs, it is important to select the appropriate bidding method for public construction projects by comprehensively considering the project’s purpose, scale, and technical characteristics. Ultimately, to ensure that taxpayers’ money is used efficiently and transparently, it is necessary to understand the characteristics of these systems and maintain a continuous interest in whether public construction projects are being awarded in an appropriate manner.
