How Construction Companies in Indonesia should Prepare a Construction Agreement

It’s crucial for construction companies entering into a construction project in Indonesia to have a written agreement. Here’s your guide.

Prior to the Coronavirus crisis, the Indonesian construction sector had been growing at a rate of 5.8% (2019). The major driver to fuel this growth was the investment in national strategic projects, mostly in the transportation infrastructure sector.

However, in 2020, the government’s Large-Scale Social Restrictions (PSBB) imposed to combat the spread of Covid-19, as well as global travel restrictions, hampered the availability of manpower and raw materials, putting a damper on the Indonesian construction industry’s growth in the first half of the year.

On the plus side, the government’s emphasis on infrastructure development to resuscitate the country’s economy is projected to assist the industry’s growth. The IDR2.8 quadrillion (US$185.3 billion) proposed budget for 2021 was adopted by the Indonesian Parliament in late September 2020. It set aside IDR413.8 trillion (US$29 billion) for infrastructure development, with the goal of revitalizing the economy, providing basic amenities, and boosting connectivity.

How Can Construction Companies in Indonesia Engage in Construction Projects?

Engage through PT PMA or BUJKA

Forming a foreign-owned limited liability company (PT PMA), or establishing a representative office for their foreign construction firm (BUJKA) are all alternatives for foreign investors wishing to develop their construction companies in Indonesia.

In Indonesia, a foreign-owned corporation is known as a PT PMA (Limited Liability Company with Foreign Capital). It is a popular and preferred company structure among international businesses and investors.

BUJKAs, on the other hand, are best suited for bigger global construction businesses since they are only authorized to engage in large-scale building projects.

The following are some of the reasons why BUJKA has an advantage over PT PMA:

  • BUJKA does not require any local shareholders, unlike PT PMA.
  • A BUJKA can participate in tenders and get information about building projects all throughout Indonesia after it is established.

Note that, unlike PT PMA, BUJKA, although providing a quick entry into Indonesia’s construction sector, requires collaboration with a local construction business while working on a project, necessitating an agreement.

How Construction Companies in Indonesia should Prepare a Construction Agreement

Items that Need to be Included in Construction Agreement

In general, Indonesian law acknowledges and protects the right to contract, subject to certain legal requirements. The adoption of a standard form of contract is not required under Indonesian law. However, according to Law No. 2 of 2017 on Construction Services (Construction Law), a construction agreement must include specific requirements, such as:

  • A clause that specifies the scope of work, including a detailed explanation of the worth of the job, unit pricing, lump-sum payments, and time constraints.
  • A provision specifying the length of time the contractor will be responsible for the work and upkeep.
  • A clause describing the payment mechanism, as well as the employer’s commitment to fulfilling payments for building services and payment guarantees.
  • Provisions in case of default
  • A clause that allows a contract to be terminated if a party fails to meet its commitments
  • A force majeure clause and
  • A dispute resolution clause

The Indonesian government released a Construction Law (GR 22/2020) implementing regulation on April 21, 2020. The rule clarifies:
the construction resources supply chain;

  • direct appointment provisions (i.e., no public tender/selection procedure);
  • public interest issues; and
  • construction services agreements, among other things.

Under “certain situations,” the Construction Law, for example, allows state entities to designate service suppliers directly.

Language and Currency Requirements

The use of the Indonesian language in a memorandum, agreement, or contract involving an Indonesian party is a legal requirement in Indonesia. Regardless of the contract’s controlling legislation, this condition applies. If a non-Indonesian party is involved, the contract must be written in the foreign party’s native language or English.

In general, the Presidential Regulation No. 63 of 2019 states that if the Indonesian and non-Indonesian versions of a contract conflict in interpretation, the parties may agree on the contract’s controlling language. The Construction Law, on the other hand, clearly says that contracts involving foreign parties must be written in both English and Indonesian, with Indonesian being the dominant language in the event of a dispute.

Contracting parties should also be aware that Indonesian law mandates the use of the Indonesian Rupiah (IDR) in all commercial transactions conducted in the country.

Unless a contractual party meets one of the following exceptions, noncompliance with this legislation will result in a year in prison, a fine of IDR 200 million, or both:

  • It’s a transaction that has something to do with state revenue or spending
  • The income or grant will come from or go to another country
  • Transactions in international trade
  • International financial transactions or foreign currency bank deposits.

How Cekindo Can Help

Having company registration professionals, like Cekindo, by your side can save you a great deal of time as well as provide you with a hassle-free experience. Cekindo provides a wide spectrum of ancillary services, like legal consultancy, market research, and due diligence to help you stay on top of legal compliances. Moreover, Cekindo can help you while entering into a partnership with our legal agreement services.

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Verified by:​

Pandu Biasramadhan

Pandu is the Consulting Manager at Cekindo. He has extensive experience in working with government agencies. Notably, he has provided market-entry solutions for enterprises in Indonesia and managed regional partnership channels in Southeast Asia. At Cekindo, Pandu aspires to lead the consulting team to provide top-quality market-entry services and maintain a portfolio of global clientele. His specialty is market-entry advisory and business process outsourcing.