Construction Comparative Guide

1 Legal framework

1.1 Which legislative and regulatory provisions govern construction projects in your jurisdiction?

The main legislation governing construction in Indonesia is the Construction Services Law (2/2017), as amended by the Job Creation Law (6/2023) along with its implementing regulations (eg, government regulations, ministerial regulations), as follows:

• Government Regulation 22/2020 on the Implementation of the Construction Services Law, as amended by Government Regulation 14/2021;
• Ministry of Public Works and Housing (MPWH) Regulation 6/2021 on Standards for Business Activities and Products in the Implementation of Risk-Based Business Licencing in the Public Works and Public Housing Sectors;
• MPWH Regulation 9/2020 on the Construction Services Development Agency;
• MPWH Regulation 10/2020 on Accreditation of Associations of Construction Services Business Entities, Associations of Construction Services Professionals and Associations Related to Construction Supply Chains;
• MPWH Regulation 14/2020 on Standards and Guidelines for the Procurement of Construction Services through Providers;
• MPWH Regulation 1/2020 on Standards and Guidelines for the Procurement of Integrated Design and Build Construction Work through Suppliers, as amended by MPWH Regulation 25/2020;
• MPWH Regulation 10/2021 on Construction Safety Management Systems; and
• MPWH Regulation 12/2021 on the Sustainable Professional Development of Indonesian Construction Experts.

1.2 What other legislative and regulatory provisions have relevance for construction projects in your jurisdiction?

Other laws and regulations that have relevance for construction projects include the following:

• Environment Law (32/2009), as amended by the Job Creation Law: This governs environmental permits, impact assessments and mitigation measures for construction projects.
• Manpower Law (13/2003), as amended by the Job Creation Law: This regulates labour rights, including safety and health standards, wages and working hours.
• Occupational Safety Law (1/1970): This ensures worker protection, safety measures and enforcement at construction sites.
• Basic Agrarian Law (5/1960): This regulates land ownership, use and registration, addressing land-related issues for construction projects.
• Building Structure Law (28/2000), as amended by the Job Creation Law: This covers building permits, design, safety standards and maintenance requirements.
• Law 2/2012 on Land Acquisition for Development in the Public Interest, as amended by the Job Creation Law: This regulates land acquisition for public development projects, including valuation and compensation.
• Government Regulation 51/2008 on Income Tax on Income from Construction Services Businesses, as amended: This addresses the income tax treatment of construction services.
• Presidential Regulation 16/2018 on Government Procurement of Goods/Services, as amended: This regulates government procurement rules.
• Government Regulation 29/2018 on Industrial Empowerment: This encourages the use of domestic products, particularly for projects funded by the state budget or regional budgets.
• MPWH Decree 602/KPTS/M/2023 on the Minimum Threshold of Domestic Component Level Value for Construction Services: This sets out requirements in relation to the use of domestic components for construction services.

1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

The bodies that are responsible for enforcing the applicable laws and regulations related to construction services include the following:

• MPWH: The MPWH oversees the construction laws, issuing regulations and conducting inspections to ensure compliance with technical standards and safety requirements. It also regulates business licensing and oversees reporting from construction service providers.
• National Construction Services Development Agency (LPJK): This agency was established by the MPWH to undertake some of the regulatory functions of the central government in the construction sector, including:
• • the registration of construction companies, construction experts, construction education and training facilities and appraiser experts;
  • the accreditation of construction associations (see below);
  • the provision of training, testing and certification for appraiser experts;
  • the determination of appraiser expert teams for building failure investigations;
  • the establishment of the professional certification agency;
  • the grant and withdrawal of licences for construction company certification agencies;
  • the qualification of foreign construction workers; and
  • the management of applications for sustainable professional development.
• The LPJK also has the authority to accredit:
• • associations of construction service companies;
  • associations of construction professionals; and
  • associations in the construction service supply chain.
• Local governments:
• • issue construction permits;
  • conduct inspections; and
  • enforce compliance with local building codes.
• They have the authority to impose fines or to halt construction activities for non-compliance.
• Professional and construction business associations: These associations supervise construction service implementation and membership is a prerequisite for obtaining a licence. They include:
• • associations of construction companies;
  • associations of construction professionals; and
  • associations in the construction service supply chain.
• Enrolment with these business associations is a prerequisite for construction companies and construction professionals to procure the relevant licences.
• Other sectoral agencies: Sectoral ministries – such as the Ministry of Manpower and the Ministry of Environment and Forestry – also play an important role in overseeing compliance with sectoral standards.

1.4 What is the general approach in regulating the construction sector?

The Construction Services Law governs construction services, with the aim of fostering a robust and competitive business environment while ensuring quality outcomes. It emphasises organised construction services, balancing the rights and obligations of project owners and service providers. The law promotes compliance with legal provisions and aims to boost public participation to ensure safety and a pleasant construction environment. Accordingly, the Construction Services Law sets out robust licensing regime criteria, as well as stringent procedures for construction procurement and contracting.

The Construction Services Law gives special attention to the protection of domestic players and small players. As a result of this policy, foreign construction service providers:

• are only allowed to participate in large construction projects; and
• are also subject to certain obligations in relation to technology transfer and partnership with domestic players.

In addition, as environmental concerns assume greater urgency globally, special attention is also given to ethical construction activity. In implementing construction projects, particularly large ones, the project owner must typically:

• undergo an environmental impact assessment; and
• procure an environmental permit as well as a construction permit.

2 Procurement methods

2.1 What procurement methods are most commonly used in your jurisdiction? Do these vary depending on whether international parties are involved?

The procurement method is determined on the basis of the source of funding. Procurements that are fully financed by private funding (including funding by state-owned enterprises) typically follow the internal guidelines of the procuring entity. For projects funded by offshore loans or grants from multilateral development banks or export credit agencies, the guidelines adopted by these agencies will apply.

For projects funded by state or regional budgets, the public procurement rules (under Presidential Regulation 16/2018, as amended) will apply. Generally, large construction projects must be procured through a competitive tendering process. However, where certain criteria are fulfilled, the procurement of construction services can take place through:

• e-purchasing;
• direct procurement;
• direct appointment; or
• a quick tender (see further question 2.2).

The government is generally required to prioritise the use of domestic products and services. The government is allowed to conduct international procurement only for:

• construction services with a minimum value of IDR 1 trillion;
• goods or services with a minimum value of IDR 50 billion;
• consultation services with a minimum value of IDR 25 billion; and
• projects funded by an export credit guarantor agency or foreign private creditor.

This requirement may be waived if there are no qualified domestic providers for the relevant construction services.

Separately, Indonesia has adopted a public-private partnership (PPP) regime – a procurement method for infrastructure projects involving cooperation between the public and private sectors. The primary legal framework for PPPs is Presidential Regulation 38/2015 and its implementing legislation.

2.2 What are the advantages and disadvantages of these different methods?

There are several procurement methods available under the public procurement rules, as follows:

• Competitive tender: This process results in the highest degree of competition and transparency, reducing the risk of fraudulent activities, conspiracies and other illegal acts. However, it may take extra time and involve additional requirements compared to alternative methods.
• E-purchasing: This process is likely to save cost and time, as providers can engage in the procurement process through a simpler procedure. However, this process is available only for goods or services that have been pre-listed in an electronic catalogue or online marketplace for procurement.
• Direct procurement: This process establishes a direct relationship between the project owner and the provider, resulting in cost-effectiveness and time efficiency. However, it may result in restricted competition and is limited to procurement with a maximum value of IDR 200 million.
• Direct appointment: This process offers a streamlined procedure but with limited applicability to specific circumstances as stated in Presidential Regulation 16/2018 (eg, goods or services that can only be provided by one entity).
• Quick tender: This process minimises the time required for the procurement process. However, it is exclusive to qualified providers included in the Vendor's Performance Information System and is restricted to projects with pre-established detailed specifications and volumes.

Under the PPP scheme, projects are usually structured as off-balance sheet projects with the involvement of a special purpose vehicle. This approach offers the government the opportunity to share the development and performance risks with the private sector, leaving it to bear only some limited residual risks.

2.3 What other factors may influence the choice of procurement method?

Employers should consider the value, complexity and urgency associated with the goods or services being procured. Different procurement methods are more appropriate to certain types of projects. For instance, in the case of a large and complex project, a competitive tender may offer the best value for money.

In addition, project owners should assess the availability of suppliers and contractors. In cases where there are limited qualified suppliers and contractors, limited tendering or sole source procurement may be more appropriate. The primary objective is to ensure the quality offered by the provider in the procurement process. Moreover, a sole source procurement process is also applicable to certain projects related to national security concerns, where accessibility to a broad pool of business entities could pose potential threats.

3 Project structures

3.1 How are construction projects typically structured in your jurisdiction? Does this vary depending on whether international parties are involved?

Project structuring will typically consider the complexity and risks associated with the project. The typical project structures include the following:

• Construct only: Under this structure, the contractor plays a limited role in the construction execution only while the design risks are borne by the project owner.
• Design and build: In this structure, the contractor handles the detailed design of the project along with the construction execution. The contractor assumes certain design risks compared to the 'construct only' approach.
• Engineering procurement construction (EPC): Under this structure, the contractor is responsible for the engineering of main assets in the project, including the procurement and installation or erection of such assets. Acceptance of the contractor's performance is subject to performance testing of the assets in compliance with the project owner's requirements and the engineering design.
• Design-build-operate-maintain (DBOM): Under this structure, the contractor designs, constructs, operates and maintain the assets. Accordingly, in addition to design and construction risks, the contractor bears the operation and maintenance risks.
• Performance-based contract (PBC): Under this structure, the contractor's performance is measured by the performance of the assets in relation to specified key performance indicators (KPIs). Failure to meet certain KPIs may result in deductions or penalties.
• Supply by owner (SBO): This is a variant of any of the above in which certain goods, services or equipment is supplied by the project owner. Accordingly, the project owner assumes the risk of the delay and quality of everything that it supplies.

3.2 What are the advantages and disadvantages of these different structures?

Each structure involves a different apportionment of risk. The more risks that are transferred to the contractor, the more costly it will be for the project owner.

Most public works construction projects – such as civil works, road construction, installation of water pipes and small housing projects – are typically structured using a 'construct only' method. The design of these projects is relatively straightforward. An experienced project owner will typically assume the design risks.

Larger civil work projects – such as elevated rail structures, large building complexes and large power plants – usually use the design and build or EPC structures. The design work for these projects is quite advanced. The designer must be able to carefully calculate the volume of work. Miscalculations may end up in delays, cost overruns and building failure. Accordingly, the project owner will typically transfer the risks to experienced contractors to better manage the project design and overall delivery.

Public-private partnerships (PPPs) usually adopt the DBOM and PBC structures, where the project company/contractor assumes most development and operation risks during the life of the project. Under this structure, the contractor is incentivised to ensure the optimal design of the facility, so that it does not fail at the operation stage. Otherwise, it will be at risk of penalties due to poor performance. This structure will potentially incur additional costs and fees, as the contractor will assume more risks. The project owner must weigh these benefits against the associated costs to determine the feasibility and effectiveness of utilising PPPs for specific construction projects.

3.3 What other factors may influence the choice of project structure?

Project owners should first evaluate the characteristics of the various project structures, as outlined in question 3.1. There are also other considerations that may assist the project owner in identifying the most suitable structure for the project.

Project owners should consider the complexity of the project, including design and technical challenges. For more complex projects, it may be more beneficial to implement the collaborative methods in a single agreement, such as the design and build, EPC, DBOM or PBC approach. This will make it easier for the project owner to supervise the progress of the project and minimise conflict between the parties involved in the construction phase. Project owners should also consider established market practices in the relevant sector.

In addition, project owners should consider the involvement of other business players, including small players. Accordingly, where appropriate, project owners should consider creating several packages that are suitable to be offered to small players.

4 Financing

4.1 How are construction projects typically financed in your jurisdiction? Does this vary depending on whether international parties are involved?

The financing structure of construction projects may vary depending on the size and nature of the project and the parties involved. Common sources of financing include the following:

• the state budget/regional budgets;
• offshore loans or grants from multilateral development banks or foreign countries;
• financing from commercial banks, financial institutions or Islamic financial institutions;
• equity financing; and
• the capital markets, through the issuance of bonds or other securities.

There are two approaches to financing: on on-balance sheet financing and off-balance sheet financing. On-balance sheet financing involves recording borrowed funds and corresponding assets on a company's balance sheet. A common example is obtaining a bank loan, which becomes a liability, while the financed assets are added as assets on the project owner's balance sheet. On-balance sheet financing is typically used for low to mid-capital projects.

On the other hand, off-balance sheet financing involves obtaining funds for a specific project without directly impacting a company's balance sheet. This is called 'project financing'. Off-balance sheet financing often involves the creation of separate legal entities such as special purpose vehicles (SPVs) that take on the project's liabilities and assets. This technique provides flexibility and risk mitigation for the sponsoring company. Public-private partnership (PPP) projects typically use the off-balance sheet approach.

4.2 What are the advantages and disadvantages of these different structures?

The choice between on-balance sheet and off-balance sheet financing involves trade-offs. On-balance sheet financing provides easier credit access but comes with the burden of recorded liabilities on the project sponsors. Conversely, off-balance sheet financing offers risk mitigation and enhanced financial flexibility but introduces complexity and potential bankability concerns. Lenders will undertake full-blown project due diligence and in some cases the project may fail to secure financing as it does not meet the lenders' bankability criteria.

In the context of PPPs with SPVs, a balanced approach is crucial. While these structures efficiently allocate risks, they also require compliance with legal requirements and can be resource intensive. Off-balance sheet financing, exemplified by the creation of an SPV in a PPP project, allows for the allocation of financial risk to other parties. In practice, SPVs can secure financing from institutions such as banks or entities that specialise in in project finance, such as PT Sarana Multi Infrastruktur and PT Indonesia Infrastructure Finance.

4.3 What other factors may influence the choice of financing structure?

The choice of financing structure for construction projects is influenced by various additional factors. The overall cost of financing – encompassing interest rates and fees – is a crucial consideration that impacts the decision-making process. Additionally, the size and scale of the construction project can influence financing preferences, with larger projects potentially favouring specific structures to meet diverse financing needs. The duration of the construction project, as part of its lifecycle, also plays a role in determining the financing structure. Short-term projects may opt for different financing mechanisms compared to long-term, multi-phase projects. The nature of the assets involved, whether tangible or intangible, can affect financing decisions, aligning certain structures with the characteristics of the project assets.

The regulatory environment – encompassing tax implications and legal requirements – significantly influences the financing structure, highlighting the importance of compliance with local laws. Moreover, economic conditions, interest rate trends and the overall financial market environment should be considered, as they will impact financing decisions in line with prevailing market conditions. Stakeholder preferences – including those of investors, lenders and project partners – also play a role in the choice of financing structure. Aligning the structure with stakeholders' preferences enhances the likelihood of successful financing. Furthermore, the nature and level of the risks associated with the construction project are vital considerations, as high-risk projects require more robust and flexible financing structures. The availability and type of collateral for securing financing may also impact the choice of structure, as some financing options necessitate specific forms of collateral.

4.4 What types of security and other protections are available to lenders to safeguard their position?

There are several forms of security interests under Indonesian law. The most common include the following:

• Pledge: A security where the secured assets must be transferred to the possession of the security grantee. A pledge need not be registered; but for a pledge of intangible property, an acknowledgement by the third party by which the security will be executed is required.
• Fiducia security: A security where the secured assets can remain in the possession of the security grantor. Fiducia security must be registered with the Fiducia Security Office.
• Mortgage: A security interest for land and building (immovable property). A mortgage must be registered with the relevant land agency office.
• Hypothec: A security interest for large vessels (eg, ships). A hypothec must be registered with the harbourmaster.

The types of security vary depending on the characteristics of the assets. The assets typically encumbered and the type of security typically used are as follows:

• Tangible movable assets (materials, equipment and inventory) are typically encumbered by fiducia security.
• Land and buildings assets are typically encumbered by a mortgage.
• Receivables – including payments from project owners, customers and/or subcontractors – are typically encumbered by fiducia security.
• Insurance proceeds are typically encumbered by fiducia security.
• Bank accounts are typically encumbered by a pledge.
• Shares in the project company are typically encumbered by a pledge.

There are also some other contractual arrangements that provide 'quasi-security interest'. These include:

• conditional novation agreements, which are typically used to assign certain contractual rights to the grantee; and
• irrevocable power of attorney, which is typically a complementary document to a pledge agreement conferring, for example:
• • the power to sell shares;
  • the power to vote at shareholders' meetings; and
  • the power to operate bank accounts.

In personam rights cannot be encumbered under Indonesian law and thus operating permits and licences cannot be assigned to other parties, either by means of the creation of a security interest or through a contractual arrangement.

4.5 What law typically governs project finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

Lending contracts with Indonesian creditors will typically use Indonesian law as the governing law. Where lending contracts involve foreign creditors, foreign laws will typically be used as the governing law. As a general rule, there must be a connection between the chosen governing law and:

• the nationality of the parties to the contract;
• the object of the contract; and
• the place where the contract is to be performed.

English law is commonly adopted as the governing law for dollar-denominated loan facilities.

Lending activities by Indonesian banks and non-bank financial institutions are subject to maximum lending limits under the regulation of the Financial Service Authority.

For offshore commercial financing facilities (eg, loans from foreign banks), the borrower must typically report regularly to Bank Indonesia with respect to the foreign exchange transactions. Bank Indonesia also requires that the conversion of Indonesian rupiah to foreign currency or the purchase of foreign currency in an amount that exceeds $100,000 or its equivalent per month per customer be based on an underlying transaction, with a maximum amount required under the underlying transaction.

5 Bribery and corruption

5.1 What measures are in place to combat bribery and corruption in your jurisdiction?

Indonesia has implemented the following measures to combat bribery and corruption within its jurisdiction:

• Anti-corruption laws: Comprehensive anti-corruption laws, including the Anti-corruption Law (31/1999), as amended:
• • define corruption-related offences;
  • set penalties; and
  • outline investigation procedures.
• Corruption Eradication Commission (KPK): An independent institution with investigative and prosecutorial powers, the KPK combats corruption, targeting public officials, politicians and private individuals.
• Financial Transaction Reports and Analysis Centre (PPATK): The PPATK analyses financial transactions to detect and prevent money laundering and corruption-related activities. It works closely with law enforcement agencies and the KPK to investigate suspicious transactions and trace illicit funds.
• Whistleblower protection: Indonesia ratified the United Nations Convention Against Corruption 2003 through Law 7/2006. Whistleblowers are encouraged to provide information and their identities are kept confidential. The government also provides incentives for whistleblowers who provide valuable information that leads to successful prosecutions.
• Transparency and accountability measures: Indonesia has taken steps to improve transparency and accountability in public administration and procurement processes. This includes measures such as:
• • implementing an open procurement system; and
  • disclosing government budgets and expenditures.
• International cooperation: Indonesia collaborates with international organisations and other countries to fight corruption on a global scale. It is a signatory to various international conventions, such as the United Nations Convention Against Corruption, and participates in regional initiatives to address corruption-related challenges.
• Public awareness and education: Through campaigns and education programmes, the government raises awareness about the detrimental effects of corruption, promoting ethical conduct and integrity. These initiatives aim to foster a culture of integrity and accountability in society.

6 Standard form contracts

6.1 Which standard form contracts are typically used for construction projects in your jurisdiction? Does this vary depending on whether international parties are involved?

For contracts funded by the state budget or regional budgets, the contracting will be subject to the public procurement rules (see question 2.1). The Public Procurement Agency (LKPP) has introduced various model contracts under LKPP Regulation 12/2021 on Guidelines for the Implementation of Government Procurement of Goods/Services through Providers, which include model construction contracts (construct only) and design and build contracts. These model contracts are derived heavily from the International Federation of Consulting Engineers (FIDIC) forms, with some modifications to the local context.

State-owned enterprises with a rich history of construction service contracting will usually have their own templates for construction contracts. Sometimes these templates are not formally adopted but have been used customarily as starting drafts.

The FIDIC forms are well known and are often used as a reference point in contract negotiation. Some FIDIC forms have been translated into Indonesian and can thus be used in compliance with the Indonesian language requirement.

6.2 What are the advantages and disadvantages of using the different standard forms?

The determination of which standard forms to be used will be influenced by several factors, including:

• applicable regulations;
• corporate norms; and
• global benchmarks such as FIDIC.

Standard forms issued by the LKPP are mandatory for public procurement. These are designed to:

• ensure regulatory compliance;
• promote uniformity; and
• enhance transparency in the public procurement process.

However, their perceived rigidity and complexity can pose challenges, potentially limiting their adaptability to project nuances.

Standard forms used by private sector and/or state-owned enterprises can also be appropriate for use. These forms are thus often negotiated at the contracting between the project owner and the contractor.

6.3 What other factors may influence the decision to use standard form contracts and the choice of standard form?

Project owners will usually use their own internal templates that have been reviewed and internally cleared by their legal department or advisers. They will use different standard forms if:

• there is a regulatory requirement to use them (eg, in the case of public procurement rules); or
• this is required by key stakeholders – for example, some project financiers may require the use of standard forms.

6.4 Where standard form contracts are used, do parties typically modify their provisions?

Government offices will usually use the standard forms issued by LKPP with very little modification. They will usually subscribe to provisions stated in the standard forms for compliance or audit purposes.

In the private sector, parties will typically undertake in-depth negotiation which will involve the modification of some of the general conditions in the standard forms to better suit the project context or the preferences of the parties. These modification may include, for example:

• exceptions to certain risks (eg, inflation risk);
• changes to grace periods (eg, notice period, payment period): and
• limitation of liability.

7 Contractual issues

7.1 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application?

Unless specific laws require otherwise, parties are generally free to agree on the governing law of the contract. As a general rule, however, there must be a connection between the chosen governing law and:

• the nationality of the parties to the contract;
• the object of the contract; and
• the place where the contract is to be performed.

The Construction Services Law expressly provides that all construction service contracts must be governed by Indonesian law.

7.2 What formal, substantive and procedural requirements typically apply to construction contracts in your jurisdiction? Are there any mandatory terms? What terms are typically included? Are any terms prohibited?

In general, a contract is valid and enforceable when it meets the four basic requirements set out in Article 1320 of the Civil Code, as follows:

• There is consent between the parties;
• The parties have legal capacity to contract;
• The object of the contract is specific; and
• The contract is for a lawful cause.

If one of the parties has Indonesian nationality, the contract must be executed in the Indonesian language or in a bilingual document where one of the languages is Indonesian. Nominal stamp duty of IDR 10,000 will be payable to make this agreement admissible as evidence in court or legal proceedings.

The Construction Services Law provides that a construction service contract must include the following, at minimum:

• the identities of the parties;
• a description of the work;
• the warranty/defect period;
• the rights and obligations of the parties;
• the use of construction workers;
• the payment terms;
• breach of contract provisions;
• dispute resolution provisions;
• termination provisions;
• force majeure provisions;
• provisions on building failure;
• provisions on the protection of workers;
• provisions on the protection of third parties for losses;
• provisions on environmental issues;
• risks and indemnities due to construction implementation or building failure; and
• the choice of forum for disputes.

Such contracts must also address IP rights in planning and design services and incorporate provisions on service subcontractors and suppliers of materials, building components and/or equipment, ensuring compliance with applicable standards. Contracts with foreign parties must additionally include a technology transfer commitment.

7.3 How is risk typically allocated between the parties? What steps can the parties take to mitigate these risks?

The effective allocation of risk is crucial in construction projects. Typical risks and measures to mitigate them include the following:

• Cost overrun risk: Mitigated by utilising a lump-sum or fixed contract payment system to prevent excessive payments in case of cost overruns. Additionally, parties can incorporate clauses that grant subcontractors certain rights, indemnities and warranties, while ensuring that insurance coverage is in place to safeguard against unexpected costs.
• Design risk: Mitigated by adopting a design-build scheme to prevent the implementation of defective designs. It is crucial to allocate responsibilities clearly and include indemnity provisions to protect against design defects. Comprehensive insurance coverage should also be secured to mitigate potential liabilities arising from design-related issues.
• Delay risk: Mitigated by incorporating performance bonds and imposing cumulative penalties. Parties should establish clear contractual obligations for timely completion and contractors should be granted rights to indemnification in case of delays beyond their control. Adequate insurance can further protect against unforeseen events that cause delays.
• Payment risk: Mitigated by requiring payment guarantees that can be executed in case of default or non-payment. Contractors should be granted specific rights, indemnities and warranties related to payment.

7.4 How can liability be excluded or restricted in your jurisdiction? Are parties able to cap their liability?

Indonesian law does not specify heads of loss or causes of action which cannot be excluded.

Book III of the Civil Code, governing contract law, adopts an open system, which means that the parties to a contract can agree to waive certain provisions in Book III or other general liabilities. This includes making waivers, indemnities, limitations/caps or exclusions of certain provisions. However, this is subject to the following limitations:

• The parties cannot waive mandatory law (normative law), including laws imposing a penalty on a person; and
• A waiver cannot contradict public order or morality.

The requirement of non-contravention of public order and morality applies to all contractual terms.

7.5 In the event of delay to the project, what consequences will this typically have for the parties?

A delay will typically constitute a breach of obligations. A construction service contract will typically include a delay provision, requiring the contractor to pay a certain sum of money (similar to the concept of liquidated damages) for any days of delay, subject to a cap amount. A prolonged delay beyond the given grace period may give rise to a right to termination. In addition, the non-defaulting party will have the right to liquidate the performance bonds.

If delay occurs due to the project owner's risk – for example, a delay in providing site access – the contractor may be excused for such delays in accordance with the terms of the contract.

7.6 Is the concept of force majeure recognised in your jurisdiction? If so, what are the typical implications for the parties?

The concept of force majeure is stipulated under Articles 1244 and 1245 of the Civil Code. Under Article 1244, a defaulting party will be released from liability if it can prove that such a breach happened for a reason that was:

• unforeseen;
• beyond its control; and
• not under its responsibility.

Under Article 1245 of the Civil Code, a party that fails to perform certain obligations due to force majeure will not be liable for costs, damages and interests for which it would be otherwise liable as a result of the contractual breach.

Although the Civil Code provides a general definition of 'force majeure', parties to Indonesian law-governed commercial agreements frequently provide:

• an agreed definition of 'force majeure' (or 'force majeure events'); and
• a specific regime relating to the effect of force majeure on the parties' obligations and any duties relating to the same (eg, an obligation of the party affected by force majeure to notify the other party accordingly).

Parties can generally override or supplement the general Civil Code provisions on force majeure through express agreement.

Under Indonesian law, the rights and obligations of the parties to a contract are generally subject to the principle of good faith, which applies to reliance on force majeure provisions.

7.7 What scope do the parties typically have to make material variations to the works?

Material variations to the works can arise from external factors beyond the control of the involved parties. These may include:

• altered environmental conditions or occurrence of force majeure events, such as weather fluctuations, floods, earthquakes or pandemics;
• unanticipated or unrealistic expectations, differing conditions from those initially envisioned and unforeseeable ground conditions (geological/hydrological or utilities-related) that may vary from contractual predictions. On-site physical conditions may deviate materially from those anticipated and unique challenges might differ from typical situations within a specific region;
• the discovery of archaeological artefacts;
• political event, such as material adverse government events, change in laws or interference by governmental authorities; and
• an interest in enhancing the project during execution, encompassing technological innovations, time and cost-saving measures and acceleration efforts.

Moreover, variations may occur due to actions or circumstances related to the parties involved:

• The project owner's default may involve issues such as:
• • technical errors in contractual documents;
  • defective and inadequate descriptions in the drawings and specifications;
  • inefficient coordination between specific contractors and the project owner's representatives;
  • insufficient instructions;
  • site access delays;
  • permission delays; and
  • funding shortages.
• The contractor's default may result from inadequate performance due to:
• • ignorance of on-site conditions;
  • unfamiliarity with local conditions;
  • inability to manage suppliers and subcontractors; or
  • a lack of understanding of contractual obligations.

7.8 Are there any particular requirements for completion or taking-over in your jurisdiction?

Regulations governing completion or handover are not specified in the Construction Services Law. Typically, these requirements are determined in the contract between the parties. For government construction projects, the handover process is outlined in the standard form adopted in Public Procurement Agency Regulation 12/2021. The standard form provides a process for provisional handover conditions, including:

• supplier submission of a handover request;
• inspection of the completed work;
• signing of the handover minutes; and
• payment of 95% of the contract price, with the remaining 5% held as retention for the maintenance period.

Following provisional handover, the contractor must undertake a temporary maintenance period lasting at least:

• six months for permanent works; and
• three months for semi-permanent works.

Upon completion of the maintenance period, the final handover can proceed once the following conditions are met:

• submission of a request for final handover;
• inspection of the works;
• signing of the final handover minutes; and
• payment of the remaining 5% of the contract price.

7.9 What requirements and restrictions typically apply to the termination of the construction contract in your jurisdiction?

Articles 1266 and 1267 of the Civil Code provide that any cancellation or termination of a contract and demand for losses thereof requires court approval. The requirement to seek court approval for termination is usually waived in commercial contracts (including construction service contracts).

7.10 How are delay or liquidated provisions dealt with in your jurisdictions?

Under the Civil Code, the amount of compensation for breach of contract that must be paid by the defaulting party may be determined:

• by provisions of law pursuant to Article 1250 of the Civil Code; or
• by agreement by the parties to the contract pursuant to Article 1249 of the Civil Code, which states that: "If it is decided in a contract that the person who fails to fulfil the contract has to pay, in terms of compensation, a certain amount, then it is not allowed to give to the other party a bigger or smaller amount." According to this provision, if the parties to a contract have agreed on a maximum payment for any breach of contract (which will serve as the exclusive remedy for such breach), the claimant can only claim compensation limited to the amount that has been agreed in the contract.

Accordingly, a pre-agreed form of compensation may be stipulated in a contract (including in the form of a contractual penalty for delay). As long as the parties have agreed to the amount and the amount is not so excessive that it would be deemed contrary to public policy, liquidated damages (or penalty for delay) should be enforceable under Indonesian law.

8 Subcontractors and suppliers

8.1 Are there any particular issues which arise when dealing with subcontracts and/or subcontractors which are different from the issues discussed elsewhere?

Contractors must understand the restrictions and limitations in the relevant contract. Some construction service contracts include restrictions and limitations on subcontracting. For example, the standard forms of the Public Procurement Agency generally restrict contractors from subcontracting the main scope of work. Subcontracts are allowed for specialised work and/or ancillary works only.

8.2 Are there nominated subcontractors in your jurisdiction?

The Construction Services Law includes no specific requirements regarding nominated subcontractors. Accordingly, project owners may require certain suppliers to be appointed as subcontractors. In many cases, this is done by establishing an approved suppliers' list, which will usually relate to specialist work. Contractors can subcontract parts of work to the suppliers in the list. Risks associated with the performance of the subcontractors will be stipulated in the contract. Where the contractor can select suitable suppliers from the list, the contract will typically place the risks of delays and performance with the contractor. In some cases, the contractor may negotiate for the risks to be placed with the project owner (ie, direct recourse to the subcontractor), particularly where there is only one supplier nominated by the project owner.

9 Payment

9.1 Are there any statutory or other requirements which govern how parties are paid?

Article 1604 of the Civil Code provides that a construction service contract may include a 'service only' contract or a contract under which the contractor also provides the materials. Further, the Construction Services Law provides that contractors may be compensated for the work performed based on the following systems:

• Lump sum: The contract price is fixed regardless of the volume of work actually performed by the contractor.
• Unit price: Payment is based on the work volume actually performed by the contractor.
• A combination of lump sum and unit price: Payment is partially paid in a lump sum and partially based on unit price.
• Percentage: Payment is based on an agreed percentage of the contract price for each milestone.
• Cost reimbursable: Payment is based on costs (at least covering the costs of materials, equipment and labour) plus fees agreed between the parties.
• Target cost: Payment is calculated on the basis of a pre-agreed market price which is deducted from the expected profits.

The Construction Services Law allows for the following methods of payment of the contract price:

• advance payment;
• payment by monthly progress;
• payment by milestones; or
• turnkey payment.

9.2 Are 'pay when paid' clauses valid? In what circumstances?

The Civil Code imposes no specific restrictions or limitations on the inclusion of 'pay when paid' clauses in construction subcontracts. Under the freedom of contract principle, parties are free to adopt the payment clauses that they deem suitable, including 'pay when paid' clauses. However, as there are as yet no court cases dealing with this issue, the enforceability of this clause is yet to be tested – particularly considering that many jurisdictions have found 'pay when paid' clauses unfair for the subcontractor, especially if there is no reasonable time limit for such payment.

9.3 How are retentions typically dealt with?

A construction service contract will typically include a retention moneys provision, whereby the project owner will typically retain some percentage (usually between 5% and 10%) of the contract price. The project owner will usually deduct these retention moneys from any payment milestones and will release them once the maintenance period has expired and all contractor's obligations to remedy any defects have been satisfied. The contractor will usually be allowed to exchange the retention moneys for a maintenance bond in the form of a bank guarantee or surety bond.

10 Health and safety

10.1 What key health and safety requirements apply to construction projects in your jurisdiction?

The Construction Services Law stipulates that project owners and contractors (as employers) must comply with the applicable security, safety, health and sustainability standards. The primary legislation setting out health and safety requirements include:

• the Occupational Safety Law (1/1970);
• the Manpower Law, as amended by Law 6/2023;
• Government Regulation 50/2012 on Implementation of Occupational Health and Safety Management System;
• Ministry of Public Works and Housing (MPWH) Regulation 10/2021 on Construction Safety Management System Guidelines; and
• Ministry of Manpower and Transmigration Regulation Per.08/Men/VII/2010 on Personal Protective Equipment.

In addition, specific sectors – such as oil and gas and mining – may have more definitive guidelines for occupational health and safety.

Generally, employers must:

• adopt preventive measures for managing work hazards and avoiding accidents;
• monitor the physical health, mental condition and physical ability of their workers;
• inform workers of potential work hazards and safety protocols before they commence work;
• provide sufficient information and signage relating to all safety requirements in the workplace;
• provide all protective equipment needed at the workplace; and
• take all necessary precautions to prevent accidents in the workplace and submit a written report on the occurrence of accidents to the local labour office.

Companies that employ at least 100 workers or that have high hazard potential must implement a health and safety management system in accordance with the guidelines set out in Government Regulation 50/2012. Companies with high hazard potential must have their health and safety management system audited, and such audits must be reported to the Ministry of Manpower.

10.2 What reporting requirements apply with regard to construction site accidents in your jurisdiction?

Employers must submit an incident report for each occurrence to the local labour office and the Social Security Agency for Employment within 48 hours of each occurrence.

10.3 What are the potential consequences of breach of these requirements – both for the contractor itself and for directors, managers and employees?

Project owners and contractors that fail to comply with the applicable security, safety, health and sustainability standards may be subject to administrative sanctions, including:

• written warnings;
• administrative fines;
• the temporary suspension of construction service activities;
• blacklisting; and
• suspension and/or revocation of licences.

Furthermore, employers that fail to comply with the Occupational Safety Law may be subject to imprisonment for up to three months or a fine under Article 15.

10.4 What best practices in relation to health and safety should construction contractors consider adopting in your jurisdiction?

To enhance safe construction operation, construction companies in Indonesia will usually procure international standard certificate ISO 45001:2018. This promotes a healthy work environment by providing a framework for identifying, controlling and managing risks and opportunities arising from occupational health and safety.

10.5 Which bodies are responsible for enforcement of health and safety obligations?

The Ministry of Manpower (through the Directorate General for Labour Inspection and Occupational Health and Safety) is the main government agency responsible for employment matters, including occupational health and safety. This ministry:

• establishes and enforces regulations relating to workplace safety;
• carries out inspections; and
• monitors compliance with occupational health and safety standards.

In addition, the MPWH has established a Construction Safety Committee based on MPWH Decree 76/KPTS/M/2020. The duties of this committee include:

• monitoring and evaluating construction work that is considered to have high construction safety risks;
• conducting construction accident investigations; and
• providing suggestions, considerations and recommendations to the MPWH based on the monitoring and evaluation carried out.

This committee is empowered to:

• enter the construction site;
• request information from related parties;
• request data relating to the committee's duties; and
• coordinate with parties in relation to construction safety.

In addition, the Social Security Agency for Employment pays compensation in the event of accidents and work-related sickness.

10.6 What is the general approach in regulating the construction sector from a health and safety perspective?

Under Indonesian law, special attention is given to the protection of workers, especially in industries with high hazard potential, including construction. The laws require all employers to take preventive measures to:

• mitigate accidents, fires and explosions; and
• maintain workers' wellbeing.

The laws thus oblige large companies and companies whose operations have high hazard potential to implement occupational health and safety management systems in order to ensure compliance with health and safety standards.

11 Environmental and sustainable development issues

11.1 What environmental authorisations are required for construction projects in your jurisdiction? Do these vary depending on the type of project or the location of the site?

All construction activities require environmental approval before construction can commence. There are three types of environmental documents on which such approval is based:

• Projects with a high potential environment impact require an environmental impact assessment (AMDAL), which will serve as the basis for obtaining environmental approval from the Ministry of Environment and Forestry;
• Projects with a moderate potential environmental impact require an environmental management and monitoring plan (UKL-UPL); and
• Projects with low to no potential environmental impact require an environmental undertaking letter (SPPL).

The relevant criteria are set out in Ministry of Environment and Forestry Regulation 4/2021 on List of Businesses and/or Activities that are Required to Obtain AMDALs, UKL-UPLs and SPPLs.

11.2 What is the process for obtaining environmental authorisations?

• AMDAL: This process involves the following steps:
• • public announcement and consultation;
  • examination of the terms of reference form;
  • submission of an environmental impact analysis and an environmental management and monitoring plan;
  • assessment; and
  • issuance of environmental approval by the Ministry of Environment and Forestry, governor or regent/mayor in accordance with their authority.
• The examination process for an AMDAL includes both administrative and substantive assessment, the latter of which can take up to 50 days.
• UKL-UPL: This process involves the following steps:
• • preparation of a specific standard UKL-UPL form;
  • submission of a request for examination of the form;
  • examination of the form; and
  • issuance of environmental approval by Ministry of Environment and Forestry, governor, or regent/mayor in accordance with their authority.
• The examination process for a UKL-UPL includes both administrative and substance assessment, the latter of which can take up to five days.
• SPPL: This process involves the following steps:
• • completion and submission of the SPPL form through the online environmental document information system maintained by the Ministry of Environment and Forestry; and
  • automatic approval of the SPPL form by the Ministry of Environment and Forestry, governor or regent/mayor in accordance with their authority through the online environmental document information system.

11.3 What environmental requirements must the contractor observe while the site is operational?

Contractors must comply with all environmental laws and standard, which will typically include standards on the following:

• emissions;
• groundwater usage;
• waste handling;
• treatment of hazardous materials;
• noise;
• vibrations; and
• odour pollution.

For projects with an AMDAL, the AMDAL will include the RKL-RPL, which will outline the relevant indicators for environmental management and the measures to be taken. Furthermore, the AMDAL will be followed up with an environmental feasibility decree (environmental approval) issued by relevant authorised officials (ministers, governors or regents/mayors according to their authority). This environmental feasibility decree requires bi-annual reporting to the relevant authority (in accordance with the issuer of its environmental feasibility decree).

11.4 What are the potential consequences of breach of these requirements – both for the contractor and for directors, managers and employees?

Any entity that violates the environmental laws may be subject to administrative sanctions or criminal sanctions. Administrative sanctions can take the form of:

• written warnings;
• government coercion;
• administrative fines; and
• licence suspension and/or revocation.

Criminal sanctions for environmental crimes can also be imposed:

• on people in the form of imprisonment and fines; and
• on business entities in the form of:
• • confiscation of profits from criminal acts;
  • closure of business premises;
  • remediation of the consequences of criminal acts;
  • an obligation to remedy unlawful omissions (ie, failure to fulfil legal duties or take required actions as mandated by relevant regulations); and/or
  • placement of the company under guardianship for a maximum period of three years.

11.5 What environmental requirements apply to new buildings?

Land use clearance (KKPR) is required for the construction of new buildings. An application for KKPR can be made through the Online Single Submission System. The project owner must also obtain environmental approval as described in questions 11.1 and 11.2.

Where construction requires the demolition of existing buildings, a building demolition permit is required based on MPHW Regulation 18/2021 on Building Demolition Standards.

11.6 Which bodies are responsible for enforcement of environmental obligations?

The central and regional governments have the authority to enforce environmental obligations. The central government is represented by the Ministry of the Environment and Forestry; while regional governments are represented by the specific environmental agencies established within their organisational structure. Environmental licensing is also facilitated by the Online Single Submission System.

With regard to the enforcement of environmental obligations, the police and environmental civil servant investigators have a right to investigate alleged environmental crimes.

11.7 What is the regulators' general approach in regulating the construction sector from an environmental perspective?

From an environmental perspective, the government's approach to regulating the construction sector is based on:

• sustainability;
• the prevention of pollution; and
• the protection of public safety.

11.8 What is the impact of Net Zero in your jurisdiction?

According to a statement issued by the Ministry of Finance in 2022, Indonesia is committed to achieving net-zero emissions by 2060. It also announced the Just Energy Transition Partnership at the G20 Summit in 2022, in relation to which it has since launched the Energy Transition Mechanism Country Platform managed by PT Sarana Multi Infrastruktur.

Indonesia is in the process of revitalising its policies – including customs policies and fiscal policies relating to tax instruments such as income tax and value-added tax – to create a favourable investment climate for the upstream industry and enhance its ability to produce the right energy mix.

Among other things, a carbon tax has been adopted which will be imposed on individual or corporate taxpayers that purchase carbon-containing goods and/or conduct activities that produce carbon emissions.

With regard to the energy transition plan, Indonesia has issued:

• Presidential Regulation 14/2024 on Carbon Capture and Storage;
• Presidential Regulation 112/2022 on Acceleration of the Development of Renewable Energy for Electricity Provision;
• Presidential Regulation 98/2021 on the Implementation of Carbon Economic Value;
• Ministry of Finance Regulation 103/2023 on the Grant of Fiscal Support Energy Transition in the Electricity Sector; and
• Financial Services Authority Regulation 4/2023 on Carbon Trading through Carbon Exchanges.

Indonesia's new capital city, Ibu Kota Nusantara (IKN), is also committed to the concept of net-zero emissions. The IKN Authority has published the Nusantara Net Zero Strategy 2045 and included a net-zero emissions vision in the IKN master plan.

12 Insurance

12.1 What types of insurance arrangements - whether compulsory or optional - are typically put in place for construction projects in your jurisdiction?

The insurance policies for construction projects typically include:

• construction all-risk, which provides coverage for loss or damage to construction work, materials and equipment during the construction period;
• public liability insurance, which provides coverage for the insured's legal liability for third-party claims due to physical loss or damage to third-party property or accidents or physical injuries (including death) suffered by third parties;
• professional indemnity, which provides coverage for design professionals, such as architects and engineers, against claims of professional negligence, errors or omissions that result in financial loss; and
• workers' compensation, which provides coverage for accidents or deaths of workers (this is covered by mandatory social security programme through the Social Security Agency for Employment (BPJS Ketenagakerjaan)).

12.2 If local insurance is required, can local insurers assign reinsurance contracts in your jurisdiction?

Local insurance companies can assign reinsurance contracts to reinsurance companies.

12.3 Is it possible to obtain insurance for fitness for purpose design obligations?

In the Indonesian insurance market, it is possible for designers and contractors to obtain single-project professional indemnity insurance.

12.4 What other forms of insurance feature in construction projects in your jurisdiction?

For construction all-risk, common extensions may include coverage for:

• damage to existing buildings or property on-site;
• demolition and removal of debris;
• expedited costs;
• professional fees;
• damage to neighbouring property;
• employees' tools and personal effects on-site; and
• legal liability for hired-in plant.

Coverage variations may include:

• advance loss of profits; and
• an integrated project or wrap-up insurance programme.

13 Employment

13.1 What legislation must employers and contractors be aware of when hiring labour?

The primary statutes governing employment in Indonesia include:

• the Manpower Law (13/2003), as amended;
• Government Regulation 35/2021 on Fixed-Term Employment Agreements, Outsourcing, Working Time and Leave, and Termination of Employment Relations; and
• Government Regulation 36/2021 on Wages, as amended.

Construction companies must also comply with Government Regulation 22/2020 on Implementing Regulations to Construction Services Law, as amended. Under this regulation, construction companies must employ qualified and competent workers that meet the Indonesian National Competency Standard. Certain technical and managerial positions within construction companies must be held by personnel who hold appropriate certifications from the authority.

Furthermore, construction companies that employ foreign workers must comply with Government Regulation 34/2021 on the Use of Foreign Workforce.

14 Tax

14.1 What issues must be considered from a taxation perspective in relation to construction projects in your jurisdiction?

The generally applicable corporate income tax rate in Indonesia is 22%.

Construction services are subject to final income tax pursuant to Article 4 (2) of the Income Tax Law, as amended. Project owners must withhold final income tax at the rate stipulated in Government Regulation 51/2008 on Income Tax for Construction Services, as amended. The currently applicable rates are as follows:

• 1.75% for construction companies that are classified as small;
• 2.65% for:
• • construction companies that are classified as medium or large; and
  • construction companies that provide integrated construction services;
• 4% for construction companies that do not possess a business entity certificate;
• 3.5% for providers of construction consulting services; and
• 6% for providers of construction consulting services that do not possess a business entity certificate.

In addition, construction services are classified as taxable services. Accordingly, large construction companies must also collect value-added tax (VAT) for the construction services they provide. The currently applicable VAT rate is 11%. This rate will increase to 12% on 1 January 2025.

Construction companies that enter into a joint operation with other construction companies may register such joint operation as a taxpayer. Once the joint operation obtains a tax ID on its name, it will assume its own tax obligations, including:

• paying income tax;
• withholding tax (of workers and suppliers); and
• collecting VAT (if the joint operation provides taxable services).

14.2 Are any exemptions or incentives available to encourage construction in your jurisdiction?

Under the Indonesian investment laws, foreign investment companies may enjoy tax incentives in the form of tax holidays and tax allowances.

A tax holiday is an incentive in the form of a tax exemption for newly established entities (particularly foreign owned companies) incorporated in Indonesia. It applies only for a limited duration. Tax holidays are regulated under Ministry of Finance Regulation 130/PMK.010/2020 on the Grant of Tax Holidays. Only companies and investors that are active in pioneer industries are eligible for tax holidays. 'Pioneer industries' are industries which:

• have a wide-ranging impact;
• have a broad scope;
• provide added value;
• introduce new technologies; and
• have strategic significance for the national economy.

To qualify for such exemptions, investments of a minimum of IDR 100 billion must be made.

The extent and duration of the tax holiday is contingent on the size of the investment. Notably:

• the deduction percentage may reach a maximum amount of 100%; and
• the maximum period of implementation is 20 fiscal years.

This initiative is aimed at attracting substantial investments in sectors deemed pivotal to national economic growth.

Tax allowances are another type of incentive granted to companies that make investments. They take the form of a tax reduction based on the investment value. They are currently regulated by Government Regulation 78/2019 on Income Tax Facility for Investments in Certain Business Sectors and/or Certain Areas.

Tax allowances may be provided in the following forms:

• an additional net income reduction of up to 30% of the amount of investment in tangible fixed assets which will be charged at 5% per year for six years;
• accelerated depreciation and amortisation;
• a 10% withholding tax rate for dividends distributed to foreign shareholders, unless relevant tax treaties provide for a lower tax rate; and
• an extension of the loss carry-forward period to 10 years.

14.3 What strategies might parties consider to mitigate their tax liabilities in the construction context?

Please see question 14.1. In addition, investors should consider any applicable tax treaties between Indonesia and the country in which they are domiciled, which may provide for more advantageous tax treatment.

15 Technology

15.1 How is Building Information Management (BIM) dealt with in your jurisdiction? Does the government mandate any particular BIM standards or other requirements?

In Indonesia, the application of BIM is regulated by Ministry of Public Works and Housing (MPWH) Regulation 22/PRT/M/2018 on the Construction of State Buildings. This states that:

15.2 Are smart contracts used in your jurisdiction? Are there any special restrictions or regulations?

The existence of electronic contracts is recognised pursuant to Law 11/2018 (as amended) on Information and Electronic Transactions. An 'electronic contract' is defined as an agreement between parties which is concluded through an electronic system. Electronic contracts may be used as evidence in legal proceedings as long as they are created through an electronic system. High-risk electronic transactions must be secured by an electronic certificate.

An electronic signature will have legal effect if it satisfies certain requirements, which include the following:

• The data used to make the e-signature must relate only to the signatory;
• The data used to make the e-signature must be within the control of the signatory only;
• All changes to the e-signature and to any electronic information relating to the e-signature must be traceable;
• The system must be capable of identifying the signatory; and
• The system must be capable of showing that consent has been given by the signatory.

Providers of electronic systems and electronic certificates are regulated and must obtain certain licences and registrations from the Ministry of Communication and Information for the systems they operate.

15.3 What developments in digital technology do you see having a major impact on the construction industry?

The development of digital technology in the digital era is having a major impact on the construction industry in Indonesia. BIM can improve project planning, design, construction and operations. Furthermore, drones can:

• conduct site surveys, monitor progress and inspect construction sites; and
• provide real-time aerial views, collect high-resolution imagery and produce 3D models, helping to improve site planning, logistics, safety and quality control.

Virtual reality and augmented reality tools can:

• visualise and simulate construction projects;
• improve the design review process;
• provide an immersive training experience for workers; and
• allow stakeholders to explore virtual environments, visualise design concepts and identify potential design issues before construction begins.

Blockchain technology and smart contracts have the potential to transform the contracting process by automating contract execution and reducing administrative costs and disputes.

From a compliance perspective, business permits in Indonesia (including business permits in the construction industry) can be processed through the Online Single Submission System, which is further regulated by MPWH Regulation 6/2021 on Standards for Business Activities and Products in the Implementation of Risk-Based Business Licencing in the Public Works and Public Housing Sectors.

16 Disputes

16.1 In which forums are construction disputes typically heard in your jurisdiction?

Construction disputes in Indonesia are usually resolved through arbitration, although for smaller projects the parties usually opt for the competent district court to resolve their dispute. The Indonesia National Board of Arbitration (BANI) is the primary arbitration board in Indonesia that resolves commercial contracts. In 2014, the government of Indonesia also established the Indonesian Construction Arbitration and Dispute Resolution Board, an arbitration body that specialises in resolving construction disputes.

Indonesia has ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and therefore foreign arbitral award should be enforceable in Indonesia without re-examination on the merits of the case, provided that the following criteria are satisfied:

• The award was rendered in a country with which Indonesia has entered into a treaty, either bilateral or multilateral, concerning the recognition and enforcement of international (foreign) arbitration awards;
• The award arises from a dispute which is 'commercial' in nature under Indonesian law;
• The award is not contrary to the Indonesian public order;
• The award has been registered with the clerk of the Central Jakarta District Court; and
• An exequatur has been obtained from the chairman of the Central Jakarta District Court.

16.2 What issues do such disputes typically involve?

Disputes relating to construction contracts in Indonesia usually relate to issues such as:

• the construction contract;
• payments;
• claim delays and disruptions;
• professional negligence;
• building failure;
• insurance coverage; and
• dispute resolution forum options.

16.3 How are disputes typically resolved?

Disputes are typically resolved through alternative dispute resolution (ADR). The parties will usually attempt to resolve their dispute through:

• mutual deliberation;
• expert determination (if it relates to factual issues); or
• mediation.

The parties will usually initiate arbitration or court proceedings only as a last resort.

Article 88 of the Construction Services Law stipulates that if dispute resolution is not addressed in the construction service contract, the disputing parties may enter into a written agreement regarding the dispute resolution procedure that will be chosen. The different types of ADR available in Indonesia include mediation, conciliation and arbitration. In addition to efforts to resolve disputes, the parties can form a dispute board (dewan sengketa). If efforts to resolve disputes involve the formation of a dispute board, the board members are selected based on the principles of professionalism and independence.

16.4 Is the use of alternative dispute resolution common and/or encouraged by legislation or the courts?

ADR – which is supported by statutory regulations and judicial implementation – is commonly used in Indonesia and is recommended. While litigation remains an option, ADR methods such as arbitration, mediation and conciliation are increasingly preferred for their efficiency and potential to preserve business relationships. This is specifically encouraged in the Job Creation Law (6/2023).

16.5 Is the use of dispute boards common in your jurisdiction?

The Construction Services Law recognises the use of dispute boards as a method of dispute resolution. The Ministry of Public Works and Housing (MPWH) has issued technical guidelines (MPWH Regulation 11/2021 on Construction Dispute Board Procedures and Technical Guidelines) for the use of dispute boards in construction disputes involving government entities. The purpose of a dispute board is to prevent disputes from escalating. The dispute board is empowered to issue a recommendation on the matter in question and if neither the project owner nor the contractor submits an objection to the recommendation within 28 days, it will become binding on the parties.

16.6 Have there been any recent cases of note?

In 2022, BANI ordered PT Pollux Aditama Kencana – a subsidiary of PT Pollux Properties Indonesia Tbk – to immediately pay a debt of more than IDR 100 billion to Joint Operation Qinjiang International (South Pacific) Group Development Co PTE Ltd and PT Nusa Construction Enjiniring Tbk for structural, architectural and plumbing work in Case 45041/V/ARB-BANI/2022.

17 Trends and predictions

17.1 What has been the impact of the COVID-19 pandemic on construction in your jurisdiction?

The COVID-19 pandemic was declared over in Indonesia through Presidential Decree 17/2023 on the Final Decree on the Status of COVID-19 Pandemic. The pandemic accelerated the use of technology in parties' communications, including for serving notices and gathering technical data.

During the pandemic, the government issued an Instruction of the Minister of General Employment and Housing 2/2020 on Protocols for Preventing the Spread of COVID-19 in the Implementation of Construction Services, which included provisions on:

• measures for preventing the spread of COVID-19;
• construction service contract follow-up; and
• the attendance (crowd control) mechanism.

17.2 How would you describe the current construction landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Law 3/2022 on the National Capital City, as amended, sets out the regime for the development of Indonesia's new capital city. Ibu Kota Nusantara (IKN) is being built on sustainable principles and the law includes provisions on issues such as:

• facilities;
• ease of doing business; and
• government support.

New regulations will be issued in connection with the development of IKN in the coming years.

18 Tips and traps

18.1 What are your top tips for smooth completion of construction projects in your jurisdiction and what potential sticking points would you highlight?

To ensure the success of construction projects in Indonesia, it is crucial to establish clear and comprehensive contractual agreements. The contract should cover:

• project scope;
• timelines;
• payment terms; and
• dispute resolution mechanisms.

It is imperative to incorporate clauses regarding:

• unforeseen circumstances;
• force majeure events;
• dispute resolution; and
• a robust risk management strategy.

Thorough due diligence prior to engaging with contractors, subcontractors and suppliers enhances reliability and success of the team. Clearly delineated payment procedures and systematic verification process of completed work within contracts are paramount to prevent misunderstandings and maintain quality standards.

Quality control and inspections are integral in upholding project standards. Prompt documentation of any deviations or defects enables swift resolution. Effective communication with stakeholders through transparent channels will help to ensure the success of the project. Additionally, insurance coverage and performance bonds provide protection and mitigate risks relating to contractor defaults.

Potential traps include the following, among others:

• Land acquisition and ownership: Verification is crucial to prevent disputes over property rights.
• Permitting issues: Familiarity with the permit application process and swift action in case of any delays or denials are crucial, including in relation to environmental compliance.
• Labour issues: Safety issues, employment contracts and potential disputes should be addressed promptly to prevent any disruption.
• Dispute resolution: Clearly defined mechanisms for resolving disputes, including payment disputes, help to minimise their impact on the project.
• Force majeure events: Clear definitions of force majeure events help to ensure that unexpected events can be effectively managed.
• Regulatory changes: Changes to regulations during the project should be closely monitored.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.