23 July, 2016
Indonesia is currently in a vigorous process of development. The new government elected in 2014 is set to accelerate infrastructure spending in Indonesia. With a signi cant cut in the fuel subsidy, the government should be able to increase capital expenditure spending, which includes capital investment as well as growth-generating infrastructure projects.
Regulations on construction services are made on the basis that construction services are one of the economic, social, and cultural activities that have an important role in achieving several objectives in order to support the realisation of the goal of national development in Indonesia.
Methods of procurement
Businesses engaged in construction services may take the form of natural persons or business entities, but high-risk construction services and/or high-technology construction services may only be performed by business entities in
the form of limited liability companies or equivalent foreign business entities. The government of Indonesia may grant
a license to a foreign construction company to establish a representative o ce in Indonesia. The representative o ce license will only be given to a foreign Contractor company that has the ability to perform complex, high-risk and/or high-technology construction projects, and is able to perform work up to an unlimited project value. The representative o ce will only be allowed to work on projects in Indonesia by establishing a cooperation with an Indonesian construction company of the same standard as the foreign construction company.
Any construction procurement services to the government of Indonesia must comply with the Presidential Decree concerning the government’s Procurement of Goods/ Services. This regulation governs the requirements that must be complied with by any construction company in order to perform construction work for the government of Indonesia. This regulation also provides that a foreign construction company may only be involved in a bid for construction work procurement over the amount of IDR 100 billion. Construction service procurement by a private party is not regulated by a speci c regulation but it must adhere to the principle of freedom of contract under Indonesian Civil Law.
Agreements in a construction service work relationship must be based on a healthy competition through selection of contractors by way of public o ers or limited o ers. Contractors may be appointed by way of a direct appointment only on the following conditions:
- handling of emergencies for the community’s safety and security;
- complex works that can only be performed by very limited Contractors or by the holder of the right;
- works that must be kept con dential and are concerned with the state’s safety and security;
- small-scale works;
- continued work that technically constitutes an integral construction whose nature of coverage against the building failure cannot be broken down from the work previously executed; and/or
- work being an assignment from the Government to State Owned Enterprises.
Standard forms of contracts
Construction work contracts between the Employer and Contractor must at least include descriptions regarding the parties, summary of work, security and/or maintenance periods, experts, rights and obligations, payment terms, defaults, dispute settlement, termination of employment in construction work, force majeure, building failure, workers’ insurance, and environmental aspect.
Common types of security that are the obligations of the Contractors include advance payment bond, performance bond,
work quality bond, insurance of building failure, and work construction failure bonds, insurance of the work, material and equipment, work force, and claims by the third party. Further, provisions regarding security for payment
of the Employer to the Contractors include penalties for payment delay and payment bond.
In large-scale projects where the nancing is partly provided by lenders, the lenders commonly require various forms
of security including, for example, a lien over the land and building under construction, pledge of shares, parent company guarantees, or guarantees from banks.
The terms concerning building failure must be stipulated pursuant to the age of the construction planned for a maximum of 10 years as from the delivery of the nal construction work, and must be stated explicitly in the construction work contract. In common construction works contracts, the Contractor is required to provide a retention in the amount of 5% to 10% of the project value to be allocated for the remedy of defective work by the Contractor.
Building failure is assessed and determined by a team of one or more expert assessors that must be formed at the latest one month after the report of the building failure is received. The government of Indonesia is responsible for taking certain actions if the building failure causes losses and/or endangers public safety.
To implement Law No. 18 of 1999 regarding Construction Services, the Government of Indonesia issued Government Regulation No. 29 of 2000 as amended by Government Regulation No. 79 of 2015 regarding Operation of Construction Services. Foreign parties may establish or own a limited liability company in the eld of construction services with high technology and/or high and medium risks and/or work values more than Rp50 billion with a maximum foreign ownership of 67%. However, ASEAN investors may hold up to 70%. All of the requirements are the same for construction consultation services, but the work value must more than Rp10 billion. This maximum foreign ownership requirement has just been updated by Presidential Regulation No. 44 of 2016 concerning Lists of Business Fields that are Closed to Investment and Business Fields that are Conditionally Open for Investment. The National Construction Services Development Board (Lembaga Pengembangan Jasa Konstruksi Nasional / LPJK) has also issued several additional regulations for the implementation of construction services in Indonesia deriving from Law No. 18 of 1999.
The Ministry of State Enterprises has signed a memorandum of understanding with the Indonesian National Contractors Association, which agrees to the prohibition of the state-owned construction service companies working on infrastructure projects that cost below IDR 30 billion.
The Indonesian National Contractors Association is requesting the government of Indonesia to assist with the capitalisation of private construction services for nancing the construction services.
There is no land bank in Indonesia that causes land acquisition for infrastructure development to be hampered.
Under construction service regulations, Contractors are obliged to be responsible for their work. However, construction service regulations do not further regulate any mechanism of responsibility for the work by the Contractor speci cally.
Construction service regulations state that the ful lment of responsibilities in construction contracts may be realised among others through an insurance system. Besides, to meet their liability to the Employer, Contractor companies are subject to administrative sanctions in relation to the professions. In undertaking construction projects procured by the government of Indonesia, any construction company is required to include its employees in the insurance program managed by the government, namely the Social Security Administrative Body.
Methods of dispute resolution
In standard construction contracts the parties select dispute settlement through alternative dispute resolution or arbitration or through a court under the prevailing law of civil procedure in Indonesia. Commonly, the Indonesian National Arbitration Agency (Badan Arbitrase Nasional Indonesia) is the authorised institution for dispute settlement through alternative dispute resolution or arbitration in the case of commercial disputes. In 2014, the government of Indonesia inaugurated an arbitration body to deal with complex construction disputes, the Indonesian Construction Dispute Arbitration and Alternative Resolution Agency Construction Dispute Settlement (Badan Arbitrase dan Alternatif Penyelesaian Sengketa Konstruksi Indonesia), which also may be considered an option for the parties to include in the contract of work as the dispute settlement agency.
- Advising PT Peruri Property in examining procurement documents for integrated zone building construction.
- Advising PT Priamanaya Djan International as the developer in the cooperation with PD Pasar Jaya regarding the redevelopment of a traditional market known as Pasar Tanah Abang Blok A into a modern market.
- Advising Pusat Investasi Pemerintah (PIP) Indonesia in relation to the nancing related to the construction of Kunciran – Cengkareng toll road and in relation to the infrastructure nancing to PT PLN (Persero) in the amount of IDR 15 trillion.
- Advising Local government of DKI JAKARTA on Jakarta Monorail Project.
- Advising PT Krakatau Steel (Persero) in establishing a JV with Pohang Iron and Steel Company (POSCO), a Korean company, for the development of integrated steel factory in Banten Province, Indonesia.
- Advising Marubeni Corporation on bidding project for EPC Patuha Geothermal Power Plant and in relation to bidding for railway project
- Advising government of Jakarta in reclamation and development of 1,200 hectares of Jakarta waterfront.
- Advising PT Perusahaan Pengelolaan Aset (Persero) on a JV with UAE company on planned construction of infrastructure managed by PT Pengembangan Pariwisata Lombok.
For further information, please contact:
Al Hakim Hanafiah, Partner, Hanafiah Ponggawa & Partners