1 Legal framework
1.1 Which legislative and regulatory provisions govern construction projects in your jurisdiction?
The main legislative and regulatory framework governing construction projects in Indonesia is the Construction Law (2/2017) as amended by the Omnibus Law on Job Creation (11/2020).
The implementing regulations of the Construction Law include:
- Government Regulation (GR) 22/2020 on the Implementation of the Construction Law (as amended by GR 14/2021);
- Minister of Public Works and Housing (MOPW) Regulation 14/2020 on Standards and Guidelines for the Procurement of Construction Services through Contractors (as amended);
- MOPW Regulation 21/PRT/M/2019 of 2019 on Guidelines for Construction Safety Management Systems;
- MOPW Regulation 08/PRT/M/2019 of 2019 on Guidelines for the Business Licensing of National Construction Services;
- MOPW Circular Letter 22/SE/M/2019 of 2019 on Licensing Services Guidelines for Foreign Construction Service Agencies;
- Construction Services Development Agency (LPJK) Regulation 1/2017 on Registration Acceleration Procedures for Business Agency Certificates, Work Skills Certificates and Additional Work Skills Certificates;
- LPJK Regulation 5/2017 on Expert Certification and Registration;
- LPJK Regulation 3/2017 on Construction Service Business Certification and Registration;
- LPJK Regulation 4/2017 on Certification and Registration of Business Planning and Construction Supervision Services;
- LPJK Regulation 1/2015 on the Registration of Foreign Construction Services Business Agencies; and
- LPJK Regulation 5/2014 on the Registration of Integrated Construction Services Businesses.
1.2 What other legislative and regulatory provisions have relevance for construction projects in your jurisdiction?
Other laws which may have relevance for construction projects in Indonesia include:
- the Civil Code;
- Law 32/2009 on the Protection and Management of the Environment (as amended by the Omnibus Law);
- Law 25/2007 on Investment (as amended by the Omnibus Law);
- Law 13/2003 on Manpower (as amended by the Omnibus Law);
- Law 28/2002 on Buildings (as amended by the Omnibus Law);
- Law 6/1983 on General Tax Provisions and Procedures (as amended by the Omnibus Law);
- Law 1/1970 on Work Safety; and
- Presidential Regulation 16/2018 on Government Procurement of Goods and Services (as amended by Presidential Regulation 12/2021).
1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?
The MOPW is primarily responsible for enforcing the applicable laws and regulations. Its powers include the following:
- to manage the registration of construction services businesses;
- to manage the issuance of foreign representative office licences and business licences for foreign investments; and
- to supervise foreign construction services and large qualification construction services.
The MOPW also established the LPJK to implement certain powers of the central government. Under MOPW Regulation 2 on the Formation of the LPJK, the LPJK has the following powers, among others:
- to register construction services business entities, the experience of construction services business entities, construction workers and the professional experience of construction workers;
- to accredit the Construction Services Business Entity Association, the Construction Service Professional Association and associations relating to the construction supply chain;
- to appoint a registered expert appraisal team in the event of building failure; and
- to issue the Construction Services Business Entity Certification Agency licence.
The Construction Services Business Entity Association has the power to conduct the initial verification and validation of the application documents for the registration of the business agency certificates of its own members and those of the Construction Services Professional Association.
The Construction Services Professional Association has the following powers:
- to compile and enforce the code of ethics and code of conduct for its members;
- to oversee the continuous professional development of its members;
- to empower its members; and
- to perform other obligations under the prevailing laws and regulations.
The powers of governors include the following:
- to supervise the Construction Work Competence Certification System, training and wages of construction workers; and
- to manage the construction services information systems in the provinces;
Finally, the powers of the district/municipal regional governments include the following:
- to provide training to skilled construction experts; and
- to manage construction services information systems in the districts/municipalities.
1.4 What is the general approach in regulating the construction sector?
By implementing the Omnibus Law, which amended the Construction Law (among others), the government aimed to make it easier to do business in Indonesia.
From the Construction Law, we understand that the general regulatory approach is as follows:
- to provide direction for the growth and development of construction businesses, in order to promote solid, reliable, highly competitive construction services that produce quality results;
- to ensure the orderly provision of construction services, which guarantees equality between service users and service providers with regard to their rights and obligations, and to increase compliance with the prevailing laws and regulations;
- to increase public participation in the construction services sector;
- to manage the construction services system in order to ensure public safety and create a comfortable environment;
- to guarantee good governance in the provision of construction services; and
- to facilitate the value-added integration of all stages of the implementation of construction services.
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?
Under Indonesian law, the procurement method for a construction project depends on whether the project:
- uses private sector funds; or
- is funded by the state budget or a regional government budget (public procurement).
However, in our experience, a tender is the most commonly used procurement method.
The Construction Law is silent on the procurement method for construction services using private sector funds. However, if a construction services user intends to engage an affiliated contractor to undertake construction works for the public interest, it must do so through a tender selection or an electronic catalogue.
The procurement methods for the public procurement of construction services providers include:
- direct procurement;
- direct appointment;
- a quick tender; or
- a tender.
Meanwhile, the public procurement methods for consultancy services include:
- direct procurement; and
- direct appointment.
Presidential Regulation 16/2018 also acknowledges procurement in emergency circumstances which is undertaken to protect Indonesian people either at home or abroad. Examples of emergency circumstances include the following:
- a (non-)natural disaster or social disaster (including a standby emergency, a response emergency or an emergency transition to recovery);
- a search and rescue mission;
- damage to (state-owned) infrastructure or a facility which may affect public services;
- circumstances relating to a political or security situation abroad or the implementation of a foreign government policy which directly affects the safety of Indonesian people abroad; or
- the provision of humanitarian aid to other nations due to a disaster.
If international parties are involved in public procurement, the procurement method must be conducted through an international tender/selection. An international tender/selection can be aimed at:
- procuring goods or services funded by an export credit guarantor agency or foreign private creditor; and
- procuring goods or services with the following minimum values:
- construction services with a value of at least IDR 1 trillion;
- consultancy services with a value of at least IDR 25 billion; or
- other goods or services with a value of at least IDR 50 billion.
The above value restrictions can be waived if no qualified local services or goods provider is available.
2.2 What are the advantages and disadvantages of these different methods?
The advantages and disadvantages of the public procurement methods for construction services are as follows.
- Advantages: The process is straightforward.
- Disadvantages: The method is available only for goods or services which are already listed in an electronic catalogue; and (from the point of view of the construction services user) a performance guarantee is not mandatory.
- Advantages: The process is straightforward.
- Disadvantages: The method can be used only for the procurement of construction services up to a maximum value of IDR 200 million.
- Advantages: The process is straightforward.
- Disadvantages: The method is allowed only in certain circumstances (eg, where the goods or services can only be provided by one provider; or where the required goods or services are confidential in the state's interest).
- Advantages: From the point of view of the construction services provider, the method is competitive and transparent; and from the point of view of the construction services user, the method delivers competitive offers from potential construction services providers.
- Disadvantages: The method involves a lengthy procedure and many requirements.
- Advantages: The procedure is more straightforward that a tender (a quick tender does not require pre-qualification or post-qualification assessments, as required in a tender).
- Disadvantages: Only qualified potential construction services providers listed in the Vendor's Performance Information System are eligible to participate.
Emergency (special) procurement:
- Advantages: The procedure is more straightforward, as the government will appoint the closest vendor which can provide the required goods or services.
- Disadvantages: Emergency procurement is possible only in very limited circumstances.
2.3 What other factors may influence the choice of procurement method?
As explained in question 2.1, the following factors may influence the choice of procurement method:
- the source of funding for the project (whether the procurement is deemed to be public procurement);
- the value of the goods or services (for public procurement);
- the types of goods or services procured (for public procurement);
- the participants in the procurement procedure – for example, whether international parties are involved (for public procurement – for example, whether international parties are involved);
- the public interest; and
- other circumstances (eg, if the goods or services can only be provided by one provider or the goods or services required are confidential in the state's interest).
3 Project structures
3.1 How are construction projects typically structured in your jurisdiction? Does this vary depending on whether international parties are involved?
The structure of construction projects usually depends on how they are funded. Under the Construction Law, a construction contract can be funded from:
- state finances; or
- non-state finances.
Construction contracts funded from state finances must use a standardised contract; while for private projects, the construction contract may be tailored to the parties' agreement. The Ministry of Public Works and Housing will issue a regulation on standardised contract documents.
Construction projects involving local international parties – particularly those using contracts for engineering, procurement and construction (EPC) and turnkey projects – are typically split into onshore and offshore contracts. The onshore contract usually covers the civil construction work, while the offshore contract covers the engineering and offshore procurement work. This is not only for tax purposes, but also to allow the design and offshore materials to be procured outside of Indonesia by a foreign entity without being subject to the licensing requirements under the Construction Law. The parties also usually enter into a coordination agreement to link and combine the onshore and offshore contracts as if the work were performed under a single EPC contract. This type of offshore arrangement has also been used in EPC projects tendered by Indonesian state-owned entities.
3.2 What are the advantages and disadvantages of these different structures?
Construction contracts funded from state finances:
- Advantages: The employer obtains funding for the project from state finances and the project may also involve financing from international finance institutions.
- Disadvantages: For projects involving state-owned enterprises or government agencies, more stringent requirements may apply, including with regard to the procurement method for such projects, to which the Indonesian public procurement laws and regulations or the state-owned enterprise's internal procurement guidelines and policies will apply. The requirements for standardised contracts will also apply.
- Advantages: The construction contracts may be tailored to the parties' agreement.
- Disadvantages: The disadvantages of self-financed construction projects are minimal.
3.3 What other factors may influence the choice of project structure?
The project structure will depend on the source of financing for the project – that is, whether it is funded from state finances or self-funded.
For projects involving state-owned enterprises or government agencies, more stringent requirements may apply regarding the procurement arrangements, as the Indonesian public procurement laws and regulations or the state-owned enterprise's internal procurement guidelines and policies will apply.
4.1 How are construction projects typically financed in your jurisdiction? Does this vary depending on whether international parties are involved?
Under the Construction Law, the source of funding to finance construction projects can be the government (central or regional government), business entities or the public.
In practice, construction projects are financed through the employer's (the government or a private company) own funds or loans from third parties, regardless of whether international parties are involved.
4.2 What are the advantages and disadvantages of these different structures?
- Advantages: Where a construction project is self-financed by the employer, the employer will have no concerns about:
- finding lenders and entering into arrangements with any lenders or third parties regarding the granting of financing facilities;
- paying interest for the facilities; and
- the risk of having its secured assets executed by the lenders in the event of default.
- Disadvantages: From the Indonesian legal perspective, we do not believe that there are any disadvantages to self-financed construction projects. However, there may be certain disadvantages from the commercial perspective (eg, relating to the employer's financial condition or internal fund allocation).
Financed by third parties (loans):
- Advantages: From the Indonesian legal perspective, we do not believe that there are any particular advantages to entering into a loan arrangement to finance a construction project. However, there may be certain advantages from the commercial perspective (eg, relating to the employer's financial condition or capacity).
- Disadvantages: If the project is financed by loans from third parties, the borrower will have to address issues such as the following:
- finding lenders and entering into arrangements with the lenders regarding the granting of financing facilities;
- paying interest for the financing facilities; and
- the risk of having its secured assets executed by the lenders in the event of default.
4.3 What other factors may influence the choice of financing structure?
We are not aware of any legal aspects which may influence the choice between self-financing and using a facility granted by lenders. However, from the commercial perspective, certain factors may influence the choice of financing structure, such as the rate of interest on the loan and the fund allocation considerations.
4.4 What types of security and other protections are available to lenders to safeguard their position?
In general, security rights can be classified into two main categories:
- security rights conferred by law; and
- security rights conferred by agreement.
Security rights conferred by law are general in nature. They encompass all of the (unencumbered) assets of a debtor. Conferment by law can be found in Article 1131 of the Civil Code, under which all assets of a debtor – moveable as well as immoveable – existing both presently and in the future may constitute security for its debts.
Security rights conferred by virtue of an agreement include:
- real security rights – specifically:
- hak tanggungan – a security right over land and land-related objects and the nearest equivalent to a ‘mortgage' as understood in other jurisdictions;
- pledge – a security right over moveable property, either tangible (eg, machinery and inventory) or intangible (eg, accounts receivable and shares); and
- fiduciary security – a security right over tangible and intangible assets, moveable and immoveable assets, with the exception of land and buildings, and certain vessels, aircraft and property which are the subject of a pledge; and
- a personal security right (jaminan perorangan) – a personal/corporate guarantee. Personal security rights are rights which establish a direct relationship with a specific natural or legal person and therefore can be exercised only against that natural or legal person and its assets in general.
4.5 What law typically governs project finance agreements in your jurisdiction? Do any specific requirements apply in this regard?
No Indonesian laws or regulations specifically govern project finance. However, in general, agreements are regulated under the Civil Code. If an Indonesian borrower and offshore lenders are involved in the project financing agreement, the following regulations (and their implementing regulations) on offshore loan reporting requirements apply:
- Bank Indonesia Regulation 16/21/PBI/2014 of 29 December 2014 on the Implementation of Prudential Principles in the Management of Foreign Debts of Non-bank Companies (as amended); and
- Bank Indonesia Regulation 21/2/PBI/2019 dated 9 January 2019 on the Reporting of Foreign Exchange Traffic Activities.
Under the above regulations, the Indonesian entity must:
- submit certain reports to Bank Indonesia on its offshore financial liabilities; and
- comply with the requirements relating to the implementation of the prudential principle in the management of offshore loans.
5 Bribery and corruption
5.1 What measures are in place to combat bribery and corruption in your jurisdiction?
The following measures aim to combat bribery and corruption in Indonesia:
- The Law on the Eradication of Criminal Acts of Corruption (31/1999, as amended by Law 20/2021) provides, among other things, that the following measures apply in order to prevent acts which may cause a loss to state finances:
- Anyone who commits crime to enrich himself or herself, another person or a company in a way which may cause loss to state finances or the state economy will be sentenced to imprisonment for life or for between four and 20 years, and fined from IDR 200 million to IDR 1 billion; and
- Anyone who, with the intent to benefit himself or herself, another person or a company, abuses his or her authority, opportunity or facilities given to him or her on account of his or her post or position in a way which may cause a loss to state finances or the state economy is liable to life imprisonment or a sentence of between one and 20 years, or a fine of between IDR 50 million and IDR1 billion.
- Bribery is regulated under the Law on Criminal Acts of Bribery (11/1980) and the Law on the Prevention and Eradication of Money Laundering Crimes (8/2010). The sanction for bribery is imprisonment for up to three years or a fine of up to IDR 15 million. Further, in the case of actions regarding assets obtained from criminal conduct (including bribery and corruption), the money-laundering sanctions may be imposed, including imprisonment for up to 20 years and a fine of up to IDR 10 billion.
- Under the Law on the Corruption Eradication Commission (KPK) (30/2002), the government established the KPK and authorised it to play an active role in tackling bribery and corruption in Indonesia. In order to exercise its authority, the KPK has published a Handbook on Preventing Corruption for the business sector. The handbook contains:
- steps to prevent corruption that adopt concepts and examples of practice at the national and international levels; and
- examples of cases and model documents that companies can adopt or refer to.
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?
In general, no specific construction contract is required under Indonesian law for construction projects and no particular standard form contract is used for projects in Indonesia. Each project usually involves a different form of contract.
However, state-owned enterprises – including PT Perusahaan Listrik Negara (Persero) (PLN), the state-owned electric power company, which has a monopoly over the transmission and distribution of electric power in Indonesia – usually requires their own standard construction/engineering, procurement and construction (EPC) contract to be entered into. PLN's standard EPC contract is derived and modified from the standard form of contract issued by the International Federation of Consulting Engineers (FIDIC), particularly the Yellow Book.
International parties involved in construction work in Indonesia usually have their own standard construction contracts. It is also common for projects involving international parties to use the standard form of contract issued by FIDIC. When a FIDIC form of contract is used, the most common standard forms are:
- the Red Book (building and engineering works designed by employers);
- the Yellow Book (electrical and mechanical works, building and engineering works designed by contractors); and
- the Silver Book (EPC and turnkey projects).
However, Indonesian construction contracts must also comply with the Indonesian Construction Law and regulations.
6.2 What are the advantages and disadvantages of using the different standard forms?
- Advantages: Where forms of contract are not standardised, the parties can use the form of contract to which they have agreed.
- Disadvantages: It is common for standard forms of contracts of state-owned enterprises to ‘loosely' use provisions of FIDIC and modify them for their own purposes. The use of these standard form contracts usually provides little room for modification, as the contract is often attached to the tender documents provided during the tender procedure for selecting the contractor.
6.3 What other factors may influence the decision to use standard form contracts and the choice of standard form?
The decision on whether to use a standard form contract and the choice of standard form contract mainly depend on the construction project and the parties involved in the project.
In projects involving international parties, the parties often opt (or are required – mainly for projects funded by international finance institutions) to use standard form contracts issued by FIDIC. For construction projects involving state-owned enterprises or government institutions, the parties are often required to enter into a standard form construction contract, with little room for modification.
6.4 Where standard form contracts are used, do parties typically modify their provisions?
Standard form contracts are usually modified to include the mandatory provisions required under the Construction Law.
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?
Generally, a choice of foreign law or jurisdiction is valid and enforceable under Indonesian contracts. However, for construction contracts in Indonesia, Indonesian law must prevail. Article 75(2) of Government Regulation 22/2020 requires construction contracts to comply with the prevailing Indonesian laws and regulations.
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?
The terms of a construction contract must comply with the Construction Law. The Construction Law requires a construction contract to include provisions regarding at least the following:
- the identities of the parties;
- the formulation of the work, including a clear description and details of the following:
- unit price;
- lump sum; and
- timeframe for completion;
- the term of the insurance cover – the period during which the work and maintenance are the responsibility of the service provider;
- the equal rights and obligations of the parties;
- the use of construction workers, which includes the obligation to employ certified construction workers;
- the method of payment, which includes the obligation of the service user to complete payment for the work and provide a payment guarantee;
- dispute settlement;
- termination of the construction contract;
- force majeure;
- building failure, which includes the obligations of the service provider and/or service user due to building failure and the period of liability for building failure;
- protection of workers, which includes the obligations of the parties in case of an event which causes loss, accident and/or death;
- protection for third parties other than the parties and workers;
- the environment;
- guarantees for risks that arise and legal liability to other parties for the construction work or building failure; and
- the choice of construction dispute resolution forum.
In addition, construction contracts:
- for planning and design services must contain provisions on IP rights;
- for the provision of construction services may include provisions on service subcontractors as well as suppliers of materials, building components and/or equipment, which must comply with the applicable standards; and
- which are entered into with foreign parties must include the obligation to transfer technology.
Further, the Construction Law requires construction contracts to be drawn up in the Indonesian language. If a construction contract is entered into with a foreign party, it must be drawn up in both Indonesian and English; if a dispute arises, the Indonesian version of the contract will prevail. Given this, the parties to the contract should bear in mind that they must rely on the Indonesian translation as the prevailing version.
7.3 How is risk typically allocated between the parties? What steps can the parties take to mitigate these risks?
For a foreign construction service provider which establishes a foreign construction representative office in a joint operation (JO) with a qualified local construction company, the construction contract entered into between the employer and the contractor in the form of a JO must apply the principles of equivalence of qualifications, similarity of services and joint and several liability, as required under the Construction Law. Therefore, it is important to agree under the JO agreement that each party will be jointly and severally liable to the project owner under the construction contract. It is also common for a JO agreement to name a party as the leader of the JO, which will be responsible on behalf of the JO for certain matters, including liaising and negotiating with the employer on specific matters.
Further, to mitigate any risk arising, the parties can agree under the JO agreement to specify what each party is responsible for, so that it is clear which party (ie, the Indonesian or the foreign party) will be held liable to the project owner in the event of any fault or damage.
7.4 How can liability be excluded or restricted in your jurisdiction? Are parties able to cap their liability?
Contractual limitations on overall liability are generally enforceable in Indonesia under the Civil Code. However, limitations on liability may not apply under certain laws, such as the Environmental Law (32/2009, as amended), under which a party that is responsible for the activities of a business which have a major and significant impact on the environment, involve the use of hazardous or toxic substances or produce hazardous or toxic substances must assume strict liability for any losses incurred, with an obligation to pay compensation directly and immediately to any affected parties in the event of any environmental pollution or damage.
Therefore, while contractual limitations on overall liability are generally enforceable as a matter of contract law, such limitations may not be enforced if the underlying act or omission giving rise to liability also constitutes:
- a crime;
- a violation of certain statutory laws (eg, the Environmental Law or the Consumer Protection Law (8/1999)); or
- an unlawful act violating norms of good faith or public decency (eg, fraud or wilful misconduct).
7.5 In the event of delay to the project, what consequences will this typically have for the parties?
This will generally depend on the conditions that the parties have agreed under the contract. However, the Civil Code covers delays in performance or the fulfilment of an agreement (commonly referred to as ‘penalties' – that is, provisions under an agreement which require a party to do something (eg pay money) in the event of its non-performance).
7.6 Is the concept of force majeure recognised in your jurisdiction? If so, what are the typical implications for the parties?
The basic concept of force majeure is recognised under the Civil Code. Under Article 1244 of the code, a debtor must compensate for costs, damage and interest if it cannot prove that the non-performance or late performance of its obligation under an agreement was caused by an unforeseen event for which it was not responsible, even if it was not acting in bad faith. Under Article 1245 of the code, a debtor need not compensate for costs, damage or interest if:
- a force majeure or accidental event prevented it from paying or performing an obligation; or
- for this reason, it committed a prohibited act.
Indonesian construction contracts usually contain several clauses on force majeure events. For example, in a clause regarding an extension of time and recovery of costs, if the contractor believes that it is being delayed due to a force majeure event, the contractor may claim an extension of time and costs from the employer. Meanwhile, in a clause regarding termination, if a force majeure event continues for a prolonged period of time, some construction contracts allow the parties to terminate the contract.
With regard to the current COVID-19 pandemic situation, pandemics are usually excluded from a definition of force majeure events, because the parties can now anticipate the effects of the COVID-19 pandemic and thus it should have no implications for a construction contract.
7.7 What scope do the parties typically have to make material variations to the works?
Subject to the terms which the parties have agreed under the construction contract, it is common for any change to the works to be deemed a variation, without any specific requirement or provisions on material variations. We have seen a variation to be deemed material if it involves a change of at least 5% to the agreed contract price.
7.8 Are there any particular requirements for completion or taking-over in your jurisdiction?
The Construction Law is silent on any particular requirements regarding completion or taking over of the work. In Indonesia, the requirements for completion or taking over are usually agreed between the parties to the construction contract. Taking over usually occurs when the contractor has completed the work. Even if the contractor has not completed the work, the employer can take over the work and appoint a third party to complete the work in accordance with the provisions of the relevant construction contract.
7.9 What requirements and restrictions typically apply to the termination of the construction contract in your jurisdiction?
Generally, the parties to a contract governed by Indonesian law must agree to waive Article 1266 of the Civil Code so that prior judicial approval will not be required to terminate the contract. There are no specific requirements or restrictions to terminate a construction contract in Indonesia. However, it is usually agreed that a party which intends to terminate a contract must serve the other party with a certain notice before deciding to do so.
7.10 How are delay or liquidated provisions dealt with in your jurisdictions?
It is common for delay or liquidated provisions to be agreed under construction contracts in Indonesia. The Civil Code also recognises a penalty for a delay in the fulfilment or performance of an agreement. In our experience, the payment of defined liquidated damages can also be agreed to the exclusion of any further claims (ie, as the sole recourse for a delay and/or plant performance).
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?
We have seen issues with regard to the coordination of the interface by the contractor under the main construction contract between the contractor and the employer with a subcontract entered into with a subcontractor.
8.2 Are there nominated subcontractors in your jurisdiction?
The Construction Law does not allow a main contractor to subcontract all of the work to a subcontractor; only specialist work may be subcontracted.
The employer may need to approve the subcontracting of main works that are specialist works to subcontractors. It is also common for the parties to a construction contract in Indonesia to agree on:
- the names of nominated subcontractors; or
- the procedures for appointing a subcontractor – often:
- these require the prior approval of, or must be reported to, the employer; and
- the subcontractors must meet the employer's requirements.
9.1 Are there any statutory or other requirements which govern how parties are paid?
As a mandatory provision, the Construction Law requires that the method of payment be specified in the construction contract, which includes the obligation of the employer to complete payment for the work and provide a guarantee for the payment. The Construction Law allows for payment to be made:
- periodically, on a percentage basis according to the progress of the work; or
- at once upon completion of the project.
Under the Construction Law, payments for services generally include payment in advance, progress payments, milestone and turnkey payments, among others.
9.2 Are ‘pay when paid' clauses valid? In what circumstances?
There are no specific provisions or restrictions under Indonesian law on ‘pay when paid' clauses. They can be agreed contractually between the parties to the construction contract.
9.3 How are retentions typically dealt with?
It is common for parties to agree under a construction contract to retain a certain percentage of the contract value (eg, 5%) to be held back until after completion of the construction project, to secure the contractor's obligations during the warranty period of the construction works.
10 Health and safety
10.1 What key health and safety requirements apply to construction projects in your jurisdiction?
Under the Construction Law and Government Regulation (GR) 14/2021, in the provision of construction services:
- employers and contractors (including subcontractors) must comply with the applicable security, safety, health and sustainability standards (which also include work health and safety requirements);
- construction services for buildings or civil buildings must comply with the principles of:
- (the utilisation of) resources (including land, energy, water, materials, human resources and the ecosystem); and
- the lifecycle of buildings and civil buildings; and
- every employer and contractor must adopt a construction safety management system which aims to ensure construction safety in order to:
- meet the applicable standards; and
- ensure the safety of construction engineering, the safety and health of workers, public safety and environmental safety.
The Work Safety Law and its implementing regulations also set out work health and safety requirements in the provision of construction services. Under these regulations, employers must, among other things:
- engage first aid officers who have obtained a licence from the Ministry of Manpower;
- report any construction work to the relevant authorities;
- procure national standardised personal protective equipment;
- post written notices and signs regarding the mandatory use of personal protective equipment in the workplace; and
- take necessary precautionary/preventive measures to prevent accidents in the workplace and file a written report in the event of an accident to the head of the local manpower office.
10.2 What reporting requirements apply with regard to construction site accidents in your jurisdiction?
The Construction Law and its implementing regulations are silent on the requirement to report construction site accidents. However, this requirement is regulated under certain sectoral or technical regulations and is implemented on a case-by-case basis, such as under the following regulations:
- According to the Work Safety Law and Ministry of Manpower Regulation 1/1980, every accident or dangerous incident at work should be reported to the ministry.
- Under Ministry of Manpower Regulation 03/MEN/1998 of 1998 on Accident Reporting and Examination Procedures, the employer must report an accident in writing to the head of the local manpower office within 48 hours of the occurrence of the accident, using the accident report form provided in the regulation. Before filing the written report, the report can be conveyed orally.
- From Government Regulation 22/2021 regarding the Implementation of the Protection and Management of the Environment, we understand that in the event of an accident which causes pollution, the party responsible for the construction activity must take the following countermeasures:
- Provide information to the public regarding the pollution;
- Halt the source of the pollution by ceasing production, halting activities related to pollution and taking certain actions to eliminate pollution; and
- Utilising other methods according to developments in science and technology.
The halting of the pollution must then be reported to the Ministry of the Environment/governor and/or mayor/regent (as appropriate).
10.3 What are the potential consequences of breach of these requirements – both for the contractor itself and for directors, managers and employees?
Under the Construction Law and GR 14/2021, failure to comply with the work health and safety requirements may cause contractors to be subject to the following administrative sanctions:
- written warnings;
- administrative fines;
- temporary suspension of construction services;
- licence suspension; and/or
- licence revocation.
Further, failure to comply with the following requirements may cause contractors to be subject to criminal sanctions of imprisonment for three months or a fine under Article 15 of the Work Safety Law:
- the requirement to prevent/take precautions against accidents at work;
- the requirement to submit a written report of an accident;
- the requirement to provide licensed first aid officers;
- the requirement to procure and provide personal protective equipment in the workplace; and
- requirements regarding health, safety and sustainability regarding lifting and conveying equipment.
10.4 What best practices in relation to health and safety should construction contractors consider adopting in your jurisdiction?
In Indonesia, health and safety practices in construction must comply with the Construction Law, the Work Safety Law and their implementing regulations, under which contractors have obligations to comply with the applicable standards and provide safety and personal protective equipment for workers, among other things.
Furthermore, as contractors must also take any preventive measures required to ensure the safety of the workers, they should also consider the following aspects when providing their construction services:
- the use of scaffolding equipment and work equipment;
- any construction machinery malfunctions;
- proper ventilation for underground construction work;
- the safety of concrete construction operations; and
- the application of occupational health and safety requirements for lifting and conveying equipment.
Due to the COVID-19 pandemic, the Ministry of Public Works and Housing (MOPW) has issued:
- MOPW Instruction 02/IN/M/2020 of 2020 on the Prevention Protocol for the Spread of Corona Virus Disease 2019 (Covid-19) in the Implementation of Construction Services; and
- through the director general for construction, COVID-19 prevention protocols in construction projects. The protocols cover the following matters:
- the establishment of a COVID-19 prevention taskforce;
- health facilities in sites;
- the implementation of COVID-19 prevention; and
- the COVID-19 prevention protocol scheme.
10.5 Which bodies are responsible for enforcement of health and safety obligations?
The MOPW and Ministry of Manpower (MOM) are responsible for enforcing the work health and safety requirements in construction projects.
As part of the MOM's supervisory function, the MOM must appoint supervisory staff and experts in work health and safety to directly supervise the implementation of the Work Safety Law in construction sites.
Further, specifically for the construction sector, the MOPW has formed the Construction Safety Committee under MOPW Decree 76/KPTS/M/2020 of 2020. The Construction Safety Committee has the following duties, among others:
- to monitor and evaluate construction works which are considered to have high construction safety risks;
- to investigate construction accidents;
- to provide suggestions, considerations and recommendations to the MOPW based on the monitoring and evaluation conducted; and
- to perform other tasks assigned by the MOPW.
To perform the above duties, the Construction Safety Committee has the following authorities:
- to enter construction sites;
- to request information from the relevant parties;
- to request data relating to the duties of the committee; and
- to coordinate with parties in relation to construction safety.
10.6 What is the general approach in regulating the construction sector from a health and safety perspective?
The requirements under the regulations in the construction sector from a health and safety perspective include mandatory preventive measures and countermeasures, as described in question 10.
In relation to health and safety protocols during the pandemic, the Ministry of Health (MOH) has issued MOH Regulation 9/2020 on Guidelines on Large-Scale Social Restrictions for the Acceleration of the Mitigation of Corona Virus Disease 2019 (COVID-19). The regulation requires regional governments to ensure compliance with the large-scale social restriction policies. This regulation became the basis for the issuance of Jakarta Regional Government Regulation 2/2020 on Countermeasures for Corona Virus Disease 2019 on the handling of the pandemic in Jakarta.
Under Regulation 2/2020, the head of the Department of Manpower, Transmigration and Energy of Jakarta issued Decree 24/2021 on the Protocols for the Prevention and Control of COVID-19 In Private-Owned Offices/Work Places, State-Owned Business Entities and Region-Owned Business Entities, to impose health and safety protocols in workplaces.
Given the above, other regulations on health and safety protocols for COVID-19 may be issued by the respective regional governments.
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?
Under the Law on the Protection and Management of the Environment (32/2009), as amended by the Law on Job Creation (11/2020), all businesses and activities require the following environmental licences according to how they affect the environment, ranked from the simplest to the most complicated:
- a written statement of the company's ability to manage the environment (SPPL), for activities which do not require a UKL-UPL (see below);
- environmental management efforts and environmental monitoring efforts (UKL-UPL), for activities which do not have a significant effect on the environment; or
- an analysis of the effect of the company's activities on the environment (AMDAL), for activities which have a significant effect on the environment.
From Government Regulation (GR) 5/2021 on Risk-Based Business Licensing Services, we understand that:
- an SPPL or UKL-UPL can be issued for low-risk activities, low-medium risk activities and medium-high risk activities, depending on whether the particular activity requires an UKL-UPL; and
- an AMDAL is issued for high-risk activities.
Under the Environmental Law, one of the factors for determining how significantly an activity affects the environment is the number of environmental components which are affected by the activity.
Given the above, yes, the type of project and the location of the site do affect what type of environmental licence is required.
11.2 What is the process for obtaining environmental authorisations?
Under GR 5/2021, the process for obtaining environmental licences is as follows:
- SPPL: The business identification number (NIB) – a general identification number issued by the government's Online Single Submission (OSS) system that all business actors require – of a company engaged in low-risk activities is treated as its SPPL.
- UKL-UPL: The company must complete the UKL-UPL form made available in the OSS system before obtaining its NIB.
- AMDAL: After obtaining its NIB, the company must submit its AMDAL document (which may be prepared by a qualified AMDAL drafter) through the OSS system to be verified by the Ministry of the Environment.
11.3 What environmental requirements must the contractor observe while the site is operational?
We believe that contractors must obtain the following environmental licences under the Environmental Law, among others:
- a management of dangerous and hazardous waste (B3 waste) licence; and
- a waste dumping licence.
Moreover, under the Construction Law, a construction contract must cover the obligations of the parties thereto to comply with the environmental regulations.
11.4 What are the potential consequences of breach of these requirements – both for the contractor and for directors, managers and employees?
Administrative and criminal sanctions can be imposed for violations of the Environmental Law.
Administrative sanctions can take the form of:
- a written warning;
- government coercion;
- an administrative fine;
- suspension of the business licence; and/or
- revocation of the business licence.
Government coercion (which may be without prior warning, depending on the severity of the violation) can take the following forms, among others:
- temporary suspension of production activities;
- closure of the waste disposal system;
- seizure of equipment which may potentially cause an environmental violation; and/or
- temporary suspension of all activities.
Criminal sanctions include:
- imprisonment for between one and 15 years; and
- a fine of between IDR 1 billion and IDR 15 billion.
11.5 What environmental requirements apply to new buildings?
We believe that the SPPL, UKL-UPL and AMDAL requirements apply to new buildings.
11.6 Which bodies are responsible for enforcement of environmental obligations?
The Ministry of the Environment and Forestry (of the central government) or the Environmental and Forestry Agency (of the regional governments) is authorised to supervise compliance with the Environmental Law.
11.7 What is the regulators' general approach in regulating the construction sector from an environmental perspective?
The regulators typically will not act until they receive a complaint from the public before taking any action against any company.
In addition, under the Environmental Law, a certain regular periodical environmental report must be submitted to the government.
11.8 What is the impact of Net Zero in your jurisdiction?
According to media reports (https://industri.kontan.co.id/news/kementerian-esdm-gunakan-lima-strategi-guna-capai-net-zero-emission-di-2060), the Indonesian minister of energy and natural resources has stated that in order to achieve net-zero emissions by 2060, the government will adopt five main strategies:
- increasing the use of new and renewable energy;
- reducing the use of fossil fuels;
- promoting the use of electric vehicles in the transportation sector;
- increasing the use of electricity in households and industry; and
- utilising carbon capture and storage.
To support this plan, the government has stopped issuing new permits for steam power plants. This plan is reflected in the Greener State Electricity Company's Power Supply Business Plan for 2021 to 2030.
12.1 What types of insurance arrangements - whether compulsory or optional - are typically put in place for construction projects in your jurisdiction?
In Indonesia, all construction projects must be covered by insurance or guarantee arrangements. Under the Construction Law, construction contracts must include provisions regarding at least among other things, the scope of the work, which also covers insurance or guarantees. Under the Construction Law, the insurance or guarantees must provide protection for, among other things:
- the performance of the work;
- the receipt of advances;
- the maintenance of the construction; and
- accidents involving workers or the public.
The above protection can be provided through insurance or guarantees issued by banks or non-bank institutions, among others.
The Construction Law also requires contractors to provide manpower social security for their workers, which is managed by the Social Security Administration Agency.
In practice, it is also common for Indonesian construction contracts to require the following insurance arrangements:
- construction all-risk insurance;
- third-party liability insurance; and
- professional indemnity insurance.
12.2 If local insurance is required, can local insurers assign reinsurance contracts in your jurisdiction?
The Indonesian laws and regulations on insurance and guarantees for construction services do not require local insurance or guarantees for constructions services.
According to the Law on Insurance (40/2014), the purpose of reinsurance is to provide protection against the risks faced by insurance companies, guarantee companies and other reinsurance companies.
In relation to the above and reinsurance in construction projects, we believe that insurers (including local insurers) can enter into reinsurance contracts, as the construction laws and regulations impose no restrictions or prohibitions regarding this matter.
12.3 Is it possible to obtain insurance for fitness for purpose design obligations?
The Construction Law and other laws and regulations on insurance and guarantees for construction services in Indonesia are silent on any specific type of insurance for fitness for purpose design obligations. However, in practice, professional indemnity insurance may also cover fitness for purpose warranties.
12.4 What other forms of insurance feature in construction projects in your jurisdiction?
The types of guarantees or insurance recognised by the Construction Law are as follows:
- advance payment guarantees;
- maintenance guarantees;
- performance guarantees;
- objection appeal guarantees;
- bid guarantees;
- guarantees which provide protection against accidents involving workers or the public; and
- guarantees which provide protection against risks arising from a force majeure event.
13.1 What legislation must employers and contractors be aware of when hiring labour?
The Construction Law and Government Regulation (GR) 14/2021 impose the following requirements regarding construction workers:
- All construction workers (including operators, technicians/analysts and experts) must have a construction work competence certificate, which is obtained after completing a competence test conducted by a professional certification agency.
- All construction workers must register their professional experience with the Construction Services Development Agency (LPJK), which will be evidenced by a certificate of registration of professional experience. The registration must cover at least the following:
- the types of professional services provided;
- the value of the construction work relating to the results of the professional services;
- the duration and year of the performance of the work; and
- the name of the employer.
- The following requirements apply with regard to foreign construction workers:
- Foreign construction workers, who must hold an expert's qualification, must go through a competence equivalency process followed by registration with the LPJK;
- Technology transfer to the Indonesian workers is required; and
- More Indonesian workers than foreign workers must be employed at the expert level.
In addition, when hiring labour, employers and contractors must comply with the Law on Manpower (13/2003) (as amended by the Omnibus Law) and its implementing regulations, such as:
- the Law on the National Social Security System (40/2004) (as amended by the Omnibus Law);
- GR 34/2021 on the Utilisation of Foreign Manpower; and
- GR 36/2021 on Wages.
14.1 What issues must be considered from a taxation perspective in relation to construction projects in your jurisdiction?
Construction services businesses are among the types of businesses whose income is entirely subject to final income tax (under Article 4 (2) of the Income Tax Law (7/1983), as amended).
Further, as explained in question 3, the scheme of splitting engineering, procurement and construction (EPC) contracts into an onshore contract and an offshore contract (for design and procurement) is commonly used in construction projects in Indonesia – in particular, those involving foreign construction businesses. We understand that one of the reasons for splitting an EPC contract is the tax aspect. Foreign contractors usually opt for a split contract structure to reduce their tax exposure.
Please note that in Indonesia, taxation advisory services traditionally fall within the scope of work of the big accounting firms, as a close working relationship with the tax authorities is required to keep fully abreast of all of their written and unwritten practices, policies and procedures. In this regard, we would advise that further consultation be sought from a local tax consultant in relation to the tax aspects of construction projects.
14.2 Are any exemptions or incentives available to encourage construction in your jurisdiction?
Under Ministry of Finance Regulation 130/PMK.010/2020 on the Granting of Tax Deduction Facilities for Corporate Income Tax, the Indonesian government grants corporate income tax deduction facilities (tax holidays) to eligible pioneer industries – that is, industries with broad interconnectedness which:
- provide higher added value and externalities;
- introduce new technologies; or
- have a strategic value for the national economy.
Indonesian corporate taxpayers which make new investments (of at least IDR 100 billion) in pioneer industries may receive corporate income tax deductions on the income received or obtained from the primary business activity for up to 20 years.
14.3 What strategies might parties consider to mitigate their tax liabilities in the construction context?
Please see question 14.1. However, although the onshore and offshore arrangement discussed in question 14.1 is commonly adopted in Indonesia, its legality – particularly from the taxation point of view – has not been fully tested. We would advise that further advice be sought from a local tax consultant on split contracts.
15.1 How is Building Information Management (BIM) dealt with in your jurisdiction? Does the government mandate any particular BIM standards or other requirements?
BIM relates to the design of a building, including its architectural, mechanical and electrical structure.
Under Government Regulation 16/2021 regarding the Implementing Regulation of Law 28/2002 on Buildings, the design of a building is one of the documents required to obtain a building approval (previously known as a ‘building permit'). A building approval is a permit granted to the owner of a building to:
- construct a new building;
- renovate, expand or reduce the size of an existing building; or
- maintain a building according to the building technical standards.
However, the prevailing laws and regulations are silent on other standards or requirements regarding the design of a building.
15.2 Are smart contracts used in your jurisdiction? Are there any special restrictions or regulations?
Smart contracts are digital contracts stored on a blockchain that are automatically executed when pre-determined terms and conditions are met.
In our experience, we have not yet experienced the use of smart contracts in the construction industry.
The prevailing laws and regulations in Indonesia are silent on the use of smart contracts.
15.3 What developments in digital technology do you see having a major impact on the construction industry?
Currently, business licensing in Indonesia (including business licensing in the construction industry) can be processed through an online system – the Online Single Submission System. Other than this, advances in digital technology have not had a major impact on the construction industry.
16.1 In which forums are construction disputes typically heard in your jurisdiction?
In Indonesia, if one of the parties to a construction contract is a state-owned enterprise, any disputes must usually be resolved in the district court with jurisdiction. However, in some cases, the parties may choose arbitration before the Indonesian National Arbitration Board (BANI) or an international dispute resolution forum such as the Singapore International Arbitration Centre (SIAC) to resolve any dispute that may arise.
In the case of Indonesian construction contracts involving foreign parties, the parties usually choose SIAC as the dispute resolution forum.
16.2 What issues do such disputes typically involve?
Disputes relating to construction contracts in Indonesia usually involve issues such as:
- building failure – defined under the Construction Law as a building's collapse or non-functioning after final delivery of the results of the construction services; or
- variation orders.
With regard to the choice of dispute forum, in disputes submitted to the district court with jurisdiction, it is possible that the panel of judges may rule beyond what was agreed to under the contract. This is because under Indonesian law, the panel of judges should always apply the principle of fairness and justice (ex aequo et bono) in its rulings.
Meanwhile, the main issue with choosing BANI as the arbitration forum is that there is currently an ongoing dispute over whether BANI Mampang or BANI Sovereign has authority to resolve disputes. Therefore, disputing parties must choose either BANI Mampang or BANI Sovereign.
The main issue with choosing SIAC as the arbitration forum is the higher costs involved.
16.3 How are disputes typically resolved?
The Construction Law requires that a dispute over a construction contract be settled through deliberation to reach a consensus. If the parties are unable to reach a consensus, the parties can resort to the dispute resolution efforts agreed to under the construction contract.
If the construction contract is silent on the resolution of disputes, the parties must enter into a written agreement on the procedure for resolving the dispute. The stages of dispute resolution efforts include:
- conciliation; and
In addition to these dispute resolution efforts, the parties may set up a dispute board.
Given the above, Indonesian construction contracts usually include a clause under which the parties must first attempt to settle the dispute amicably, failing which they will submit the dispute to the dispute settlement forum agreed to under the construction contract. Indonesian law does not require a specific alternative dispute resolution forum to be chosen under construction contracts, but the parties to an Indonesian construction contract usually choose a foreign arbitration forum.
16.4 Is the use of alternative dispute resolution common and/or encouraged by legislation or the courts?
See question 16.3.
16.5 Is the use of dispute boards common in your jurisdiction?
According to the Construction Law, in addition to mediation, conciliation and arbitration, the parties to a construction contract can set up a dispute board. If the dispute is to be resolved by a dispute board, the members of the dispute board must:
- be selected according to the principle of professionalism; and
- not be associated with either of the parties.
In practice, dispute boards such as the Dispute Avoidance/Adjudication Board and the International Federation of Consulting Engineers (FIDIC) books are not commonly used for construction contracts in Indonesia. However, construction contracts that do not adopt the FIDIC books usually require that disputes be resolved amicably, failing which they will be submitted to a dispute settlement forum (eg, the district court, BANI or SIAC), not a dispute board.
16.6 Have there been any recent cases of note?
To our knowledge, there is an ongoing dispute relating to a construction contract involving a state-owned entity in Indonesia as well as private entities, which is currently being resolved through arbitration before SIAC and in the district court.
17 Trends and predictions
17.1 What has been the impact of the COVID-19 pandemic on construction in your jurisdiction?
Due to the COVID-19 pandemic, the Ministry of Public Works has issued regulations in the construction sector, particularly relating to health and safety aspects. Please see questions 10.4 and 10.6 for further details.
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?
Following the enactment of the Omnibus Law on 2 November 2020, the government recently issued several implementing regulations of the Omnibus Law relating to construction services and construction licensing requirements. These include:
- Government Regulation (GR) 14/2021; and
- GR 16/2021 on the Implementing Regulation of Law 28/2002 on Buildings (which replaced the previous implementing regulation of the Building Law, GR 36/2005).
With regard to the anticipated new regulations, according to GR 14/2021, the Ministry of Public Works and Housing will issue regulations on, among other things:
- the procedures for construction work quality assurance and quality control;
- standardised contact documents;
- building failure and expert assessors; and
- the conceptual draft construction safety management system.
In addition, according to GR 14/2021, a presidential regulation will be issued on:
- the financial rights and facilities of the Construction Services Development Agency; and
- the selection of a construction contractors using financing sourced from state finances.
Meanwhile, construction services business qualifications and sub-classifications will be further regulated under the laws and regulations on risk-based business licensing.
GR 14/2021 is silent on when the above regulations will be issued. However, according to several nationwide news articles, the Omnibus Law is expected to be implemented as soon as possible in order to make it easier to do business and accelerate investment in Indonesia. Therefore, we expect that these regulations will be issued within the year.
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?
In recent years, government supervision (through the Ministry of Public Works and Housing (MOPW)) of construction works has increased, due to numerous construction defects and construction-related accidents which have occurred in Indonesia.
Given this, the parties to a construction contract – specifically, the contractors – should always comply with the prevailing laws and regulations on construction and hold all of the licences required to provide construction services in Indonesia. The construction industry is heavily regulated and supervised by the government, mainly by the MOPW.
Co-author: Gaudencia Vania
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.