“Efforts to resolve construction dispute are through Mediation, conciliation, and arbitration. What is interesting is that in Law No. 2/2017 regulates that the parties, which are the provider and the user of construction services, may form a dispute board.”

On several occasions, we are often asked about construction law, such as: “what legal aspect should be considered in conducting construction work?”

Before further explanation, we need to understand the definition of construction work, which is set forth in Article 1 Law No. 2 of 2017 concerning Construction Services (“Law No. 2/2017”):

“Construction Work is whole or a part of activities including construction, operation, maintenance, dismantle, and rebuilding of a building.”

Therefore, activities of construction, operation, maintenance, dismantle, and rebuilding of a building are certainly included as a construction work.

It is also important to know that Construction Service Business Enterprises according to Law No. 2/2017, has small, middle, and large qualifications, in accordance with the annual sales, financial capability, availability of construction labor and capability to supply construction equipment. Qualifications are used to determine the limits and capabilities of the construction services’ business and market segmentation.

For example, a middle-qualified Construction Services Business Enterprise can only conduct construction services in a medium-risk market segment; middle-level technology; and moderate cost. In contrast, a large qualified Construction Services Enterprise with a legal entity and a representative of a Foreign Construction Services business may only provide Construction Services in a high-risk, high-tech market segment; and high cost.

Thus, it becomes important for businessmen, especially those engaged in construction business to understand what things must be known in running their business to prevent greater losses in the future, and to prevent the occurrence of disputes between users and providers of construction services.

1. 1. Legality of Construction Services Business

Any individual business which will provide Construction Services under Law No. 2/2017 is required to have an Individual Business License. Similarly, every Construction Service Business Enterprise that will provide Construction Services must have a Business License.

Individual Business License shall be provided by the local Regency/Municipal Government in accordance with the domicile. This authority is also the same for Business Licenses applicable to Business Enterprise or Legal Entities.

Although the license is given by the Regency/Municipal Government, the Business License and Individual Business License are applicable to be carried out for Construction Services business activities throughout the Republic of Indonesia.

Especially for Construction Business Enterprise according to Law No. 2/2017 is required to have a Certificate of Business Enterprise (SBU). This certification shall at least contain: business type, business nature, classification and qualification of the business. To obtain a Certificate of Business Enterprise, the Construction Service Business Enterprise shall apply to the Minister through an agency for Certification of Business Enterprise established by an accredited business enterprise association.

Related to the recognition of business experience, Law No. 2/2017 stated that every middle and large qualified construction service business enterprise must register its experience to the Minister.

This registration is proved by a certificate of experience registration. This certificate shall at least contain: title of job projects, service user, years of work, values of works, and service provider performance. All of the experience data of such Construction Services must be through the handover process.

1. 1. Obligations and Responsibilities of Construction Services Provider

The responsibility for conducting construction services, in this case related to the building failure, according to Article 1 number (10) of Law No. 2/2017 that the Building Failure is a state of collapse of the building and/or non-functioning of the building after the final Construction Services results.

The obligations for conducting Construction Service, User and Provider of Construction Service must comply with Security, Safety, Health and Sustainability (SK4) Standards. This is stipulated in Article 59 of Law No. 2/2017. In this regard, there is a duty for both the user and the service provider to provide approval of several matters, including:

1. 1. 1. Results of assessment, planning, and/or design;
      2. Technical plan of building, maintenance, demolishing, and/or rebuilding process;
      3. Implementation of building, maintenance, demolishing, and/or rebuilding process;
      4. Use of material, equipment and/or technology; and/or
      5. Result of Construction Services.

If there is a failure of the building, it will be seen when the failure occurs to determine who can be held accountable. This can be found in Article 65 of Law No. 2/2017 which states:

1. 1. 1. The Construction service provider shall be held responsible for Building Failure within the specified period in accordance with the construction age plan.
      2. In the case of the construction age plan as referred to in paragraph (1) more than 10 (ten) years, the Service Provider shall be responsible for the Building Failure within a period of no more than 10 (ten) years from the date of the final delivery of Construction Services.
      3. The User is responsible for Building Failure that occur after the specified time period as referred to in paragraph (1) and paragraph (2).
      4. 4The provisions on the period of accountability for Building Failure as referred to in paragraph (1) and paragraph (2) shall be stated in the Construction Work Agreement.

Why should the responsibility be determined for this failure? Because Law No. 2/2017 stated there is an obligation of both the Service Provider and/or the Service User to provide compensation in the event of a Building Failure.

1. 1. Construction Work Agreement 

Construction Work Agreement is the entire agreement document on legal relationship between Service Users and Service Providers in the implementation of Construction Services. It is expressly mentioned in Article 1 number 8 of Law No. 2 of 2017 concerning Construction Service (“Law No.2 / 2017”).

According to the Law, the construction work contract shall at least include:

1. 1. The Parties, clearly state the identity of the parties;
   2. Formulation of work, contains a clear and detailed description of the scope of work, the value of work, unit price, lump sum, and time limits of implementation;
   3. The period of coverage, contains the period of implementation and maintenance which is the responsibility of the Service Provider;
   4. Equal rights and obligations, which shall contain the user’s rights to obtain the results of Construction Services and its obligations to comply with the agreed terms, as well as the service provider’s right to obtain information and remuneration services and obligations to carry out Construction Services;
   5. The use of construction labor, contains the obligation to employ certified construction workers;
   6. The method of payment shall contain provisions concerning the obligations of the User in making payment of the results of the Construction Services, including the guarantee of payment;
   7. Breach of contract, contains provisions on liability in the event that either party does not perform the obligations as agreed;
   8. Dispute settlement, containing provisions on procedures for dispute settlement due to disagreement;
   9. Termination of Construction Work Agreement, shall contain provisions concerning termination of Construction Work Agreement arising from non-compliance of one party’s obligations;
   10. The state of force, contains provisions concerning events arising out of the will and ability of the parties to cause harm to either party;
   11. Building Failure, shall contain provisions concerning the obligations of the Service Provider and/or User for Building Failure and the period of Liability for Building Failure;
   12. Protection of workers, contains provisions on the obligations of the parties in the implementation of occupational safety and health as well as social security;
   13. Protection of third parties other than the parties and workers, contains the obligations of the parties in the event of an event that causes loss or causes an accident and / or death;
   14. Environmental aspect, contains the obligations of the parties in fulfilling environmental requirements;
   15. Guarantees of risks and legal liability to other parties in conducting Construction Works or the consequences of Building Failure; and
   16. Choice of construction disputes settlement.

The explanation above shows how important it is for both businessmen as users and service providers in particular related to construction services are required to understand and understand the construction work agreement carefully.

Disputes occurring in the Construction Work Agreement are settled on the basis of amicable to reach consensus. However, if in the case of amicable settlement, the parties cannot reach a consensus, the parties take the stage of dispute resolution efforts contained in the Construction Work Agreement.

In the case of dispute resolution method is not covered in the Construction Work Agreement, the parties to the dispute make a written agreement on the procedure for dispute resolution to be elected.

In the case of dispute resolution efforts shall be made by establishing a dispute board, the membership elections shall be held on the basis of the principle of professionalism and shall not be part of either party.

That is, the parties must appoint other parties deemed competent and have experience in dispute resolution.
We hope this article is useful.

BP Lawyers can assist you: we can assist you in providing the best solution to the legal program of your business or your company’s.  You can contact us via bpl@smartlegal.id or +62821-1234-1235

Author :
Iskandar D.P., S.H.