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Legal Updates | Indonesia’s New Construction Law: Changing the Regulatory Framework

The Government of Indonesia (”GOI”) recently issued Law No. 2 of 2017 regarding Construction Services (the “New Construction Law”). The New Construction Law revokes Law No. 18 of 1999 regarding Construction Services (the “Previous Construction Law”) and introduces several changes and new provisions related to construction services in Indonesia.

Below are the most significant changes and new provisions in the New Construction Law:

Types of Construction Services: The Previous Construction Law divided construction services into (i) construction planning and supervision services, (ii) construction implementation services, and (iii) integrated construction services. Under the New Construction Law, the names of the types of construction services have been changed to the following:

  1. Construction consultation business (previously known as construction planning and supervision services);
  2. Construction work business (previously known as construction implementation services); and
  3. Integrated construction work business (previously known as integrated construction services).

The above types of construction services are further divided as follows:

  1. Construction consultation business:
    1. General services:
      • Business classification: architecture, engineering, integrated engineering, and landscape architecture and spatial planning.
      • Business activities: assessment, planning, drafting, supervision and construction organisation management.
    2. Specialist services:
      • Business classification: scientific and technical consultation, and technical examination and analysis.
      • Business activities: surveys, technical examination and analysis.
  2. Construction work business:
    1. General services:
      • Business classification: buildings and civil construction.
      • Business activities: building plans and engineering, procurement and execution.
    2. Specialist services:
      • Business classification: installation, special construction, pre-fabrication construction, building finishing and tool rental.
      • Business activities: construction work for certain parts of buildings, or construction of other physical forms.
  3. Integrated construction work business:
    1. Business classification: buildings and civil construction.
    2. Business activities: construction, maintenance, demolition and reconstruction.

Certification for Construction Companies: The New Construction Law stipulates the same requirements as the Previous Construction Law for business entities (local and/or foreign) and individuals that want to engage in the construction business. Such business entities and individuals must possess the following:

  1. An Indonesian individual must possess a business registration certificate (Tanda Daftar Usaha Perseorangan) issued by the relevant regent/mayor.
  2. A business entity must possess the following licenses:
    • Construction Business License (Izin Usaha Jasa Konstruksi or “IUJK”) issued by the relevant regent/mayor (for local companies) or the Ministry of Public Works and Public Housing (the “Ministry”) (for foreign investmentcompanies); and
    • Corporate Certificate (Sertifikat Badan Usaha or “SBU”).

Under the Previous Construction Law, the SBU was issued by Lembaga Pengembangan Jasa Konstruksi (“LPJK”), an institution created under the Previous Construction Law. According to the New Construction Law, the SBU will now be issued by the Ministry through an institution to be formed by an accredited construction business association. This means the LPJK will no longer be authorised to issue SBU through the relevant construction business association where the company is a member.

We may, therefore, see a new institution formed for the purpose of issuing SBUs under the New Construction Law. Until then, however, institutions created under the Previous Construction Law will continue their function until the new institution stipulated in the New Construction Law has been created. Therefore, the LPJK will continue to play its role in issuing SBUs until the new institution is formed.

Registration Experience Certificate: In addition to an IUJK and SBU, the New Construction Law requires business entities to possess a Registration Experience Certificate (Tanda Daftar Pengalaman or “TDPN”). A TDPN is required only for medium- and large-scale companies. Under the New Construction Law, medium-scale companies are those in the construction market segment that involves medium risk, intermediate technology and medium cost, while large-scale involves high-risk, high-technology and high-cost construction projects.

To obtain a TDPN a contractor must register its experience with the Ministry. The TDPN will state (i) the names of previous projects, (ii) names of service users, (iii) year of implemented projects, (iv) value of projects, and (v) performance status of the service provider. Only work that has been completed and handed over to service users can be used when registering for a TDPN. Note that the TDPN is a new requirement under the New Construction Law and further details on the requirements and process for obtaining the certificate will be provided in an implementing regulation.

Head of Representative of Foreign Construction Representative Office: The New Construction Law still requires foreign individuals or companies that wish to engage in the construction business to establish a Foreign Construction Representative Office (“BUJKA Rep. Office”) and form a joint operation with a large-scale local construction company having the relevant IUJK and SBU. However, the New Construction Law stipulates that foreign nationals are no longer allowed to be the head representative of the BUJKA Rep. Office. It is now required that an Indonesian be appointed as the head representative of the BUJKA Rep. Office. However, foreign nationals may work in the representative office in some other position, keeping in mind that the ratio of local workers employed in the representative office must be higher than that of foreign workers.

Certification for Engineers: The New Construction Law changes the name of the certification for engineers, previously known as the Certificate of Expertise (Sertifikat Keterampilan or “SKA”), to the Work Competency Certificate (Sertifikat Kompetensi Kerja or “SKK”). The SKK must be registered with and issued by the Ministry. Under the New Construction Law, all service users and/or service providers must employ engineers who possess an SKK. To obtain an SKK, engineers must pass a competency test organised by a professional certification agency. However, until an implementing regulation for the SKK is issued, the SKA requirement will continue to apply.

In addition to the SKK, the New Construction Law requires engineers to register their professional experience with the Ministry, which will then issue a Professional Experience Certificate (Tanda Daftar Pengalaman Profesional or “TDPP”).

Regional Government Policies: In another change, the New Construction Law stipulates that if a construction project is funded using the regional budget and is classified as small- to medium-risk work using simple to mid-level technology, the Regional Government can issue special policies related to the project. These special policies can include (i) a requirement to cooperate with a regional Construction Services company, and/or (ii) a requirement to use regional Services Subcontractor(s).

Tender and Appointment: The New Construction Law stipulates that construction projects financed by the state budget shall be conducted through a tender or selection, using electronic procurement, direct appointment and/or direct procurement, in accordance with the prevailing laws and regulations.

Affiliated Service Providers: The New Construction Law prohibits service users from using affiliated Service Providers for construction projects for the public interest without undergoing a tender or selection, or electronic procurement process.

Construction Work Contracts: The New Construction Law requires that Construction Work Contracts must be in the Indonesian language. If a Construction Work Contract is entered into with a foreign party, the contract can be drawn up in the Indonesian language and in English, but the Indonesian-language version will be the governing one in the event a dispute arises between the parties.

Implementing Regulations: Various implementing regulations are still to be issued to further implement the New Construction Law. Pending such issuance, the regulations issued to implement the Previous Construction Law are still applicable as long as they do not contradict the New Construction Law. The implementing regulations for the New Construction Law must be issued at the latest two years from the enactment of the New Construction Law.

The New Construction Law has been in force since the date of its enactment on 13th January 2017.

SSEK - 18th april 2017

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Indonesia Snapshot

Capital: Jakarta
Population: 255 million (estimated, 2015)
Currency: Indonesian Rupiah
Nominal GDP: $895 billion USD (IMF, 2015)
GDP per capita: $3,415 USD at Current Prices (IMF, 2015)
GDP Growth: 4.7% (2015)
External Debt: 34.77% of GDP (BI, Q3 2015)
Ease of Doing Business: 109/189 (WB, 2015)
Corruption Index: 107/175 (TI, 2014)