New implementing regulation seeks to increase legal certainty in the Indonesian construction industry

The Indonesian Government recently enacted Government Regulation No. 22 of 2020 (GR 22/2020) to further implement the current construction services law, which was issued back in January 2017 (Construction Law). Our previous e-bulletin in relation to the Construction Law is available here.

GR 22/2020 largely seeks to consolidate and retain the provisions set out in the three Government Regulations issued under the old 1999 construction law (including, for example, keeping the requirement that all construction services contracts be governed by Indonesian law). However, GR 22/2020 also contains several notable changes and clarifying provisions, including:

• detailed requirements on the form of Indonesian construction contracts;
• potentially limiting the ability to adopt onshore/offshore contracting structures for integrated construction services contracts;
• clarification on the procurement procedures for complex and high risk projects funded by the state or that relate to public interest projects; and
• further details regarding the procedures for resolution of construction contract disputes, including through the appointment of a Dispute Board.

We summarise here the key provisions of GR 22/2020.

CONSTRUCTION SERVICES CONTRACTS

Form of contracts

GR 22/2020 now mandates that all Indonesian construction services contracts must include:

• a letter of agreement, setting out the subject matter and scope of work;
• the contract’s general terms and conditions;
• the contract’s specific terms and conditions;
• the relevant request for proposal (RFP) documents;
• the contractor’s proposal document;
• minutes of agreement between the contractor and services user;
• a statement letter of acceptance from the services user; and
• a statement letter of acceptance from the contractor.

While these requirements are generally consistent with standard construction contract forms (such as FIDIC), the requirements set out in GR 22/2020 reduce the flexibility of parties to negotiate and agree both bespoke complex contractual arrangements and simpler short-form contracts.

Integrated construction services contracts

In recent years, for both commercial risk and tax reasons, parties have often sought to use a combination of onshore and offshore contractual structures. However, under GR 22/2020, all integrated construction services contracts (including EPC contracts) are now required to be set out in a single contract document. This is a significant departure from the previous construction services contract framework, where the parties were free to determine the contractual structure to be used for the construction work.

It is unclear whether this new requirement means that there can only be one integrated construction services contract for each project, or if GR 22/2020 allows for one integrated construction services contract for each portion of a project.

In any event, it appears that GR 22/2020 may be an attempt by the Indonesian government to restrict the ability of integrated construction services contracts to adopt an onshore/offshore structure. However, as this restriction only applies to integrated construction services contracts, it should still be possible to implement onshore/offshore structures by adopting un-integrated construction services contracts.

In addition, GR 22/2020 states that all integrated construction services contracts must be reviewed, prior to signing, by a construction contract expert. We expect that future ministerial regulations will provide further clarity regarding the role, identity, qualifications and appointment process for these experts.

Standard form contracts for government projects

GR 22/2020 also introduces the mandatory use of a government-approved template contract for all construction projects that are funded through state or regional budgets. However, the form of this government-approved template contract is not yet available and will be set out in further ministerial regulations.

CONSTRUCTION WORKS FOR GOVERNMENT PROJECTS

Direct appointment

In general, complex and high risk projects funded by the state or that relate to “public interest projects” should be procured through a public tender/selection process. However, projects which have “specific conditions” can instead be procured through direct appointment.

GR 22/2020 clarifies the list of “specific conditions” which allow a direct appointment procurement process, which include:

• government projects that have been assigned to state/regionally-owned entities and whereby such state/regionally-owned entity directly appoints another state/regionally-owned entity to perform the construction works;
• construction work which has been subject to repeat failed tender/selection processes; and
• construction work which can only be provided by one capable contractor.

Determination of contractors

GR 22/2020 now also sets out the procedure for awarding projects funded by the state or that relate to “public interest projects.” In determining the contractor through a procurement process, the services user must evaluate proposals using four specific criteria: (i) qualifications; (ii) administrative requirements; (iii) technical requirements; and (iv) pricing.

Public interest projects

The elucidation of GR 22/2020 clarifies the meaning of “public interest projects” by setting out a complete and detailed list of such projects, which includes (but is not limited to) oil and gas, geothermal, water, port, airport, power, telecommunication, waste management and social infrastructure projects.

DISPUTE RESOLUTION

GR 22/2020 introduces some important principles on the process to resolve construction services contract disputes. In particular, GR 22/2020 states that all dispute resolution processes should be carried out efficiently, cheaply and with legal certainty, to maintain good relations between the parties, and that the dispute should not be open to the public, unless determined otherwise by the parties or a court.

GR 22/2020 also provides further clarity on the parties’ ability to agree to appoint a Dispute Board (Dewan Sengketa) to resolve construction disputes. GR 22/2020 states that the role of a Dispute Board is to prevent and resolve disputes between the parties through expert and professional considerations or formal decisions based on the principles of justice. The role of a Dispute Board is similar to the expert determination arrangements often included in construction contracts.

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We would welcome the opportunity to clarify how these changes may affect your construction projects and business in Indonesia. Please reach out to your usual contact.