New Regulation Brings Big Changes For Indonesia’s Construction Sector.

 

4 September 2020

 

 

A new regulation has introduced significant changes to the implementation of Indonesia’s Construction Services Law, which will affect business actors in the country’s construction sector.
 

The new regulation, Government Regulation Number 22 of 2020 (“GR 22”) regarding Implementing Regulations of Law Number 2 of 2017 regarding Construction Services (January 12, 2017) (the “Construction Services Law”), was promulgated on April 23, 2020. With the enactment of GR 22, the following regulations have been revoked and are no longer applicable:
 

1. Government Regulation No. 28 of 2000 regarding the Business and Role of the Construction Services Community (May 30, 2000), as lastly amended by Government Regulation No. 92 of 2010 (December 29, 2010) (“GR 28/2000, as amended”);
    

2. Government Regulation No. 29 of 2000 regarding the Implementation of Construction Services (May 30, 2000), as lastly amended by Government Regulation No. 54 of 2016 (November 22, 2016) (“GR 29/2000, as amended”); and
    

3. Government Regulation No. 30 of 2000 regarding the Implementation of Construction Services Supervision (May 30, 2000) (“GR 30/2000”).
    

We look at the regulatory updates under GR 22 and how the new regulation may affect business actors in the Indonesian construction sector.
 

A. New Construction Services Development Agency (Lembaga Pengembangan Jasa Konstruksi or “LPJK”)
 

As prescribed in the Construction Services Law, the Central Government and/or Regional Government (together, the “Government”), in implementing its authority, may involve the construction services community. Under GR 28/2000, as amended, the LPJK was established to carry out the role of the construction services community in matters related to construction services development (the “Current LPJK”). The Current LPJK, a nonprofit, carries out its role on a national scale, independently and autonomously. It is meant to act independently, without being influenced by any other party, either private business owners or state agencies or officials, pursuant to the principles of construction services regulations.
 

Now, under GR 22, the construction services community’s involvement in implementing the Government’s authorities will be done through an institution to be formed by the Minister of Public Works and Housing (“MPWH”). In that regard, the MPWH has issued MPWH Regulation No. 9 of 2020 regarding the Formation of Construction Services Development Agency (April 6, 2020) (“MPWH Reg. 9/2020”).
 

MPWH Reg. 9/2020 stipulates the formation of a new LPJK (the “New LPJK”), which will be under the auspices of the MPWH. The New LPJK will, among other things, implement the registration and accreditation process for construction service companies, issue licenses, appoint experts and form a Professional Certification Institution (Lembaga Sertifikasi Profesi or “LSP”). As part of its responsibilities, the New LPJK will have the authority to issue Business Entity Certificates, in Indonesian, Sertifikat Badan Usaha (“SBU”).
 

The Current LPJK will continue to carry out the certification and registration of construction companies and employees until the MPWH appoints the Board of the New LPJK. The Current LPJK will then hand over to the MPWH its assets including its informational system and important documents regarding construction services, in accordance with the prevailing laws and regulations. And upon the determination of the Board of the New LPJK, the Current LPJK will be dissolved. Consequently, while the LPJK will still perform registrations, it will no longer act as an independent institution, but rather as a non-structural body under the MPWH.
 

Based on an informal consultation with an LPJK official, the Board of the New LPJK is expected to be formed sometime in December 2020 and begin work around January 2021. It remains to be seen how the move from the Current LPJK to the New LPJK will impact the licensing and registration process, including the impact on the issuance of SBUs. We would expect that the licensing authority of the LPJK after this move will be more closely scrutinized by the MPWH.
 

B. Restriction on Construction Consultation Services
 

In line with the Construction Services Law, the types of construction service businesses under GR 22 are consultation services, construction services and integrated services. Integrated services include a combination of consultation and construction services.
 

Under GR 22, a construction services business that provides consultation services cannot engage in another category of construction service business. What this means is that a construction services company shall engage in only one type of construction service business and cannot carry out other work outside of the type of construction service business in which it engages, except for integrated service companies, which may also perform construction services. GR 22 does not address the implication of the above provision for already-established construction consultation companies that provide a combination of services.
 

C. Classifications and Subclassifications Related to Electrical Power
 

GR 22 provides that the provisions regarding business classifications and subclassifications, business qualifications, SBUs and manpower qualifications and certifications in the power sector shall be carried out pursuant to the prevailing laws and regulations in the power sector. The power sector is regulated by the Ministry of Energy and Mineral Resources (“MEMR”). After an informal consultation with an LPJK official, it remains to be seen how the interaction between MPWH and MEMR regulations will affect the licensing requirements for construction companies engaging in the power sector.

D. Construction Resources Supply Chain Business
 

For the purpose of implementing Articles 17 and 18 of the Construction Services Law, GR 22 has introduced provisions regarding the construction resources supply chain business under Articles 24 – Article 33. Construction services activities shall be supported by the construction resources supply chain. Essentially, construction resources supply chain businesses are divided into:
 

1. construction material suppliers;

2. equipment suppliers;

3. technology suppliers; and

4. human resources suppliers.
    

Construction “resources” include:
 

1. material resources;

2. equipment resources;

3. technological resources; and

4. human resources.
    

GR 22 emphasizes priority for local construction resources, insofar as these resources can be produced locally, meet the required technical specifications and/or satisfy the needs of local demand.
 

Further, construction equipment will need to be registered with the MPWH.
 

GR 22 provides that the optimization of locally produced resources and the registration of construction equipment will be further regulated in a regulation to be issued by the MPWH.
 

For construction human resources, construction services companies must employ manpower (read: engineers) that meet the prevailing work competence standards, evidenced by a work competence certificate that has been registered with the MPWH (“Work Competence Certificate”).

Construction human resources consist of (a) operators, (b) technicians/analysts (c) and experts.
 

Where expatriate workers are employed, the employed expatriates may only occupy certain positions and provide construction services after obtaining a registration letter from the MPWH through a “standardization process”, which comprises education, experience and expertise. GR 22 stipulates that a regulation to be issued by the MPWH will further regulate this process. Additionally, as with Indonesian construction manpower, expatriate workers are also required to have a Work Competence Certificate.
 

A Work Competence Certificate is issued through a competency test administered by the LSP subject to the prevailing work competence standards. A Work Competence Certificate is valid for five years and is extendable.
 

The definition of LSP as provided under MPWH Regulation No. 10 of 2020 regarding the Accreditation of Construction Services Business Entity Associations, Construction Services Professional and Construction Supply Chain-Related Associations (April 6, 2020) (“MPWH Reg. 10/2020”) is an institution that implements professional certification activities, established by an accredited professional association or a construction educational and work training institution, and licensed pursuant to the prevailing laws and regulations, after obtaining a recommendation from the MPWH. An accredited professional association is a construction services professional association that has been accredited by the MPWH through the LPJK.
 

Further to the above, the implementation of the work competency certification conducted by the LSP must comply with certification requirements governed under the laws and regulations regarding manpower. Law No. 13 of 2003 regarding Manpower (March 25, 2003) (the “Manpower Law”) governs that manpower shall be entitled to receive work competency recognition after participating in work training provided by a government work training institution or private work training institution, or after participating in workplace training.
 

E. Business Entity Certificate (“SBU”)
 

In providing construction services, construction service companies must obtain an SBU issued through a certification and registration process overseen by the MPWH. It appears that the certification and registration process will be performed by two separate institutions.
 

GR 22 provides that the certification process will be carried out by a Business Entity Certification Institution (Lembaga Sertfikat Badan Usaha Jasa Konstruksi or “LSBU”) that is established by an accredited business entity association. MPWH Reg. 10/2020 provides that an LSBU is an institution that implements business entity certification activities and is formed by an accredited construction services business entity association and licensed by the LPJK. MPWH Reg. 10/2020 provides that an accredited construction services business entity association refers to an association of construction services companies that has been accredited by the LPJK pursuant to MPWH Reg. 10/2020.
 

GR 22 stipulates that the registration process will be carried out by an institution established by the MPWH. At present, the registration process is still being carried out by the Current LPJK. We expect that the New LPJK will take over this role once it is formed.

Based on an informal consultation with an LPJK official, pre-existing SBUs shall remain valid until their expiry date.
 

F. Determination of Service Providers for State-Financed Construction Projects
 

Pursuant to the Construction Services Law, the appointment of construction service providers is subject to certain rules, which are now elaborated by GR 22. GR 22 stipulates that the appointment of construction service providers that are financed by the state shall be done through one of the following methods:
 

1. tender or selection;

2. direct appointment;

3. direct procurement; and

4. procurement through electronic catalog.
    

The procurement of construction services is further governed by MPWH Regulation No. 14 of 2020 regarding Standards and Guidelines for Construction Procurement Through Service Providers (May 18, 2020) (“MPWH Reg. 14/2020”). Please note that MPWH Reg. 14/2020 only applies to construction services procured through direct procurement, limited tender, tender/selection in ministerial or state bodies, or regional bodies that are financed by the state.
 

GR 22 does not address the selection of construction service providers for private construction projects.

G. Construction Work Contract
 

GR 22 provides that a construction contract must comply with the laws of Indonesia and that the form of a construction contract shall be based on the construction delivery system, payment system and work measurement system. It further provides the minimum provisions and documents of a construction contract, including (this list is not complete.):
 

1. identity of the parties;

2. consideration;

3. scope of work;

4. contract value and duration; 

5. list of binding documents and their hierarchy; 

6. general terms relating to the construction work implementation system, scope of work, method of payment and work measurement system;

7. owner documents that underlie selection documents that serve as a basis for the construction service provider to issue an offer, containing the scope of work and its requirements including work specification requirements, drawings, output/quantity list, and price;

8. recommendation or offer from the construction service provider based on selection documents containing the method, offer price, schedule and resources;

9. summary of agreement between the owner and provider during the evaluation process;

10. statement letter from the owner; and

11. statement letter from the construction service provider. 
     

GR 22 also provides that the form of the construction contract may generally be determined based on:
 

a. Construction implementation system (delivery system):
 

1. design-bid-build;

2. design-build;

3. EPC;

4. construction management (CM) at-risk;

5. agency construction management (CM); and

6. partnership/cooperation;
    

b. Payment system:
 

1. advance payment;

2. progress;

3. milestone; or 

4. turnkey;
    

c. Work measurement system:
 

1. lump sum;

2. unit price;

3. combination of lump sum and unit price;

4. value percentage;

5. cost reimbursable; and

6. target cost.
    

GR 22 also requires that the opinion of a “construction contract expert” be obtained specifically for integrated construction contracts prior to the execution of the contract. GR 22 does not elaborate on the definition of construction contract expert and the MPWH has not issued a regulation for this purpose.
 

H. Security, Safety, Health and Continuity Standards
 

GR 22 stipulates that in implementing construction services, the owner and contractor, including sub-contractors and suppliers, must meet security, safety, health and continuity standards. The fulfilment of these standards shall be determined by the relevant technical ministry.
 

I. Liability for Building Failure
 

Under the Construction Services Law, if construction services do not meet security, safety, health and sustainability standards, the owner and/or contractor shall be responsible for certain failures or defects in the construction/building. GR 22 further stipulates that the responsibility of the owner and/or contractor shall be in the form of (i) replacement or repair of the building defect by the contractor; and (ii) indemnification by the owner and/or contractor.
 

GR 22 also provides that where the planned construction life of a building/structrure exceeds 10 years, contractors may be held liable for building failure for up to 10 years from the date of the final handover of the construction service [read: project]. Thereafter, the owner shall be liable for any building failure.
 

Contractors and/or owners are liable to compensate third parties affected by building failure. GR 22 provides that compensation for building failure may be taken from third-party insurance.
 

In the event of a building failure, an expert will determine the party responsible for the failure. The expert’s determination is final and binding.
 

J. Dispute Resolution
 

GR 22 provides that construction disputes may be resolved by mediation, conciliation or arbitration. The regulation contains detailed provisions relating to dispute resolution by a Dispute Board appointed by the parties to the construction services dispute. The Dispute Board would have the following roles:
 

1. Prevent disagreements between the parties;

2. Resolve disagreements by giving a professional opinion as may be required; and

3. Resolve disputes through the issuance of a formal conclusion in the form of a Dispute Board decision.
    

If the parties to a construction contract wish to have their disputes resolved by a Dispute Board, the dispute resolution clause must appoint the Dispute Board as the dispute resolution body and a tripartite agreement between the parties to the construction work contract and the Dispute Board must be executed.
 

K. Construction Services Information System
 

GR 22 sets out further rules in relation to the Construction Services Information System (Sistem Informasi Jasa Konstruksi), which has not as of this writing been introduced. The system is intended to accommodate the following activities:
 

a. Business entity certification and registration;
 

b. Accreditation for associations of construction services companies and associations related to supply chains;
 

c. Licensing for business entity certification agency;
 

d. Development of construction service business capitalization and guarantees;
 

e. Licensing for national construction service companies;
 

f. Licensing for foreign construction service company representative offices (Badan Usaha Jasa Konstruksi Asing or “BUJKA”) and foreign-owned construction service entities (i.e. construction service PMA companies);
 

g. Supervision of national construction service companies;
 

h. Supervision of BUJKA and construction service PMA companies;
 

i. Information management for the construction services industry;
 

j. Registration of construction service business entity experience;
 

k. Development of a construction service provider selection system;
 

l. Management of construction contracts;
 

m. Management of public complaints and dispute resolution;
 

n. Development of a construction service provider performance system;
 

o. Development of a construction quality management system;
 

p. Development of construction services security, safety, health and sustainability standards;
 

q. Supervision of the implementation of construction services security, safety, health and sustainability standards;
 

r. Registration of experts;

 

s. Appointment of expert in the event of a building failure;
 

t. Development of construction services work competence and training standards;
 

u. Management of construction education and training institutions;
 

v. Training of construction manpower for strategic and pilot projects;
 

w. Management of a construction manpower competency certification system;
 

x. Registration of construction manpower;
 

y. Registration of the professional experience of construction manpower;
 

z. Standardization of foreign construction manpower;
 

aa. Determination of minimum remuneration standards for construction manpower;
 

bb. Supervision of the system for construction manpower certification, training and minimum remuneration standards;
 

cc. Professional association certification;
 

dd. Development of construction material and equipment and construction technology innovation standards;
 

ee. Development of cooperation schemes between research and development institutions;
 

ff. Development of priority technologies;
 

gg. Implementation of construction material and equipment standards according to the Indonesian National Standard (Standar Nasional Indonesia);
 

hh. Management of intellectual property for construction material and equipment and construction technology;
 

ii. Development of a supply chain system for construction material and equipment and construction technology;
 

jj. Increasing the use of local products;
 

kk. Development of the institutional capacity of the construction services community;
 

ll. Implementation of a construction services forum;
 

mm. Develop public participation in the supervision and business cultivation of building procurement;
 

nn. Develop the capacity of construction regional bodies.

 

L. Imposition of Administrative Sanctions
 

The administrative sanctions under GR 22 are:
 

1. Written warnings;

2. Administrative fines;

3. Temporary suspension of construction service activities;

4. Inclusion on a blacklist;

5. Suspension of accreditation;

6. Suspension of license;

7. Termination from post/place of work/employment;

8. Removal from the integrated list of experts;

9. Revocation of accreditation;

10. Revocation of license (construction service certification license); and/or

11. Revocation of license (construction service certification license).
     

GR 22 emphasizes that the above sanctions are to be imposed gradually. They may be imposed be either the Central Government or Regional Government (at either the provincial or city/regency level). The table below sets out the types of sanction that apply in respect of certain violations, along with the government official that would impose the sanction.
 

No.	Violation	Sanction	Government Official Imposing Sanction
1.	Individual performing construction services without a Business License	Administrative fine of 1% of the existing total contract value. Further non-compliance within 30 business days following the issuance of a further warning letter is punishable by the temporary suspension of construction services pending the fulfillment of the applicable obligations.	Regent/Mayor
2.	Business entity performing construction services without a Business License	Administrative fine of 10% of the existing total contract value. Further non-compliance within 30 business days following the issuance of a further warning letter is punishable by the temporary suspension of construction services pending the fulfillment of the applicable obligations.	Regent/Mayor
3.	PMA company performing construction services without a Business License	Administrative fine of 10% of the existing total contract value. Further non-compliance within 30 business days following the issuance of a further warning letter is punishable by the temporary suspension of construction services pending the fulfillment of the applicable obligations.	Minister
4.	Business entity performing construction services without an SBU	Administrative fine of 10% from existing total contract value. Further non-compliance within 30 business days following the issuance of a further warning letter is punishable by inclusion on the blacklist.	Regent/Mayor
5.	BUJKA performing construction services without an SBU	Administrative fine of 20% from existing total contract value. Further non-compliance within 30 business days following the issuance of a further warning letter is punishable by inclusion on the blacklist.	Minister
6.	PMA construction services company performing construction services without an SBU	Administrative fine of 10% from existing total contract value. Further non-compliance within 30 business days following the issuance of a further warning letter is punishable by inclusion on the blacklist.	Minister
7.	Accredited business association that fails to comply with its regulatory obligations	Non-compliance within 30 business days following the issuance of a further warning letter is punishable by suspension of accreditation. Further non-compliance following the issuance of the sanction of suspension of accreditation within another 30 business days is punishable by revocation of accreditation.	Minister
8.	Foreign construction services company that does not form a BUJKA or establish a PMA construction services company with a wholly Indonesian owned construction services company	Administrative fine of 20% from existing total contract value. Further non-compliance within 30 business days following the issuance of a further warning letter is punishable by temporary suspension of construction services pending the fulfillment of the applicable obligations.	Minister.
9.	BUJKA failing to comply with the applicable large-qualification requirement (i.e. B2 qualification).	Administrative fine of 20% from existing total contract value.	Minister
10.	BUJKA failing to form an operational cooperation agreement (kerja sama operasi) with a large-scale qualified wholly Indonesian owned construction services company for each construction service activity in Indonesia.	Administrative fine of 20% from existing contract value.	Minister
11.	BUJKA employs more foreigners that Indonesian nationals in its highest management structure	Administrative fine of 10% from existing contract value.	Minister
12.	BUJKA employs a foreigner as the BUJKA Chief Representative Officer	Administrative fine of 10% from existing contract value.	Minister
13.	BUJKA fails to comply with local-content obligations relating to construction material and technology	Administrative fine of 10% from existing contract value.	Minister
14.	BUJKA fails to comply with the obligation to maintain technology that is state-of-the-art, efficient, environmentally friendly and observes local wisdoms.	Administrative fine of 10% from existing contract value.	Minister
15.	BUJKA  fails to comply with its technology transfer obligation	Administrative fine of 10% from existing contract value.