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Legal Updates | Procurement Arrangements in the Indonesian Construction and Projects Sector

Indonesia's construction and projects market are growing and are predicted to continue to strengthen. Infrastructure development has been one of the main focuses of the current administration of President Joko "Jokowi" Widodo.

In the private sector, projects typically involve the development of residential and commercial real estate, with the construction of new apartments, housing units, office buildings and shopping malls. Indonesia has also announced that developing its tourism sector is a priority, and private parties are involved in the development of resorts and hotels in tourist destinations such as Bali and Lombok.

Under Indonesian Law No. 2 of 2017 on Construction Service (the “Construction Law”), procurement arrangements in Indonesia are made through the execution of a construction work contract between the project owner/employer and the service provider/contractor. The Construction Law sets out various types of construction work contracts that are typically used, including contracts based on:

  • Delivery systems, including:
    • design-bid-build;
    • design-build;
    • engineering-procurement-construction;
    • construction management; and
    • partnership contracts.
  • Service payments, including:
    • advance payment;
    • progress payment;
    • milestone; and
    • turnkey contracts.
  • Work calculation systems, including:
    • lump sum;
    • unit pricing;
    • combination lump sum and unit pricing;
    • cost reimbursable; and
    • target cost contracts.

International construction contractors or consultants must establish a local presence in Indonesia and face certain additional requirements compared to domestic contractors. For example, foreign construction contractors are only allowed to perform large-scale projects with high risk, high technology and high costs.

Procurement arrangements cannot be generalised, as certain business sectors have their own particular procedures and regulations. For example, procurement arrangements for construction related to upstream oil and gas infrastructure are regulated by the Second Book of PTK-007/SKKMA0000/2017/SO issued by SKK Migas, a special government work unit overseeing the upstream oil and gas sector.

When a project involves a state-owned enterprise or direct cooperation with government bodies, specific regulations governing those procurement arrangements, along with the internal policies of the state-owned enterprise or government bodies involved, must also be observed.

The Construction Law states that construction work using state funds must be carried out through:

  • Tender or selection.
  • Electronic procurement.
  • Direct appointment.
  • Direct procurement.

SSEK - 10th July 2018

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)