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New Regulation Brings Big Changes For Indonesia’s Construction Sector – Real Estate and Construction

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

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enactment of GR 22, the following regulations have been revoked and
are no longer applicable:

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

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

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

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

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

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

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

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

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

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

B. Restriction on Construction Consultation Services

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

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

C. Classifications and Subclassifications Related to Electrical
Power

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

D. Construction Resources Supply Chain Business

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

  1. construction material suppliers;

  2. equipment suppliers;

  3. technology suppliers; and

  4. human resources suppliers.

Construction “resources” include:

  1. material resources;

  2. equipment resources;

  3. technological resources; and

  4. human resources.

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

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

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

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


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

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

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

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

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

E. Business Entity Certificate (“SBU”)

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

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

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

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

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

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

  1. tender or selection;

  2. direct appointment;

  3. direct procurement; and

  4. procurement through electronic catalog.

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

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

G. Construction Work Contract

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

  1. identity of the parties;

  2. consideration;

  3. scope of work;

  4. contract value and duration; 

  5. list of binding documents and their hierarchy; 

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

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

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

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

  10. statement letter from the owner; and

  11. statement letter from the construction service
    provider. 

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

a. Construction implementation system (delivery system):

  1. design-bid-build;

  2. design-build;

  3. EPC;

  4. construction management (CM) at-risk;

  5. agency construction management (CM); and

  6. partnership/cooperation;

b. Payment system:

  1. advance payment;

  2. progress;

  3. milestone; or 

  4. turnkey;

c. Work measurement system:

  1. lump sum;

  2. unit price;

  3. combination of lump sum and unit price;

  4. value percentage;

  5. cost reimbursable; and

  6. target cost.

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

H. Security, Safety, Health and Continuity Standards

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

I. Liability for Building Failure

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

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

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

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

J. Dispute Resolution

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

  1. Prevent disagreements between the parties;

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

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

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

K. Construction Services Information System

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

a. Business entity certification and registration;

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

c. Licensing for business entity certification agency;

d. Development of construction service business capitalization and
guarantees;

e. Licensing for national construction service companies;

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

g. Supervision of national construction service companies;

h. Supervision of BUJKA and construction service PMA
companies;

i. Information management for the construction services
industry;

j. Registration of construction service business entity
experience;

k. Development of a construction service provider selection
system;

l. Management of construction contracts;

m. Management of public complaints and dispute resolution;

n. Development of a construction service provider performance
system;

o. Development of a construction quality management system;

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

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

r. Registration of experts;

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

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

u. Management of construction education and training
institutions;

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

w. Management of a construction manpower competency certification
system;

x. Registration of construction manpower;

y. Registration of the professional experience of construction
manpower;

z. Standardization of foreign construction manpower;

aa. Determination of minimum remuneration standards for
construction manpower;

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

cc. Professional association certification;

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

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

ff. Development of priority technologies;

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

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

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

jj. Increasing the use of local products;

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

ll. Implementation of a construction services forum;

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

nn. Develop the capacity of construction regional bodies.

L. Imposition of Administrative Sanctions

The administrative sanctions under GR 22 are:

  1. Written warnings;

  2. Administrative fines;

  3. Temporary suspension of construction service activities;

  4. Inclusion on a blacklist;

  5. Suspension of accreditation;

  6. Suspension of license;

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

  8. Removal from the integrated list of experts;

  9. Revocation of accreditation;

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

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

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

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.

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