The rapid development in the construction sector in Indonesia is concurrent with the increasing demand for infrastructure and facilities to support the population’s activities, moving towards industrialization and global competition. This has intensified competition among construction service providers. Therefore, the key to the success of construction projects involves various aspects such as time, cost, and the quality of work.
In the implementation of construction projects, project owners naturally seek the best contractors/service providers in the market through various mechanisms commonly found in best practices to select construction implementers assessed to have good performance based on pre-established criteria.1 Based on the exposition provided, regulations and provisions are necessary to accommodate the community’s needs regarding transparent and accountable service selection mechanisms, both within the scope of government and private-led developments.
The need for well-regulated provisions is essential to anticipate deviations in the construction procurement process. The impacts of deviations in construction procurement are significant, including a decline in the quality, quantity, and value of goods or services, financial losses for the government or corporations in the form of budget reductions, exclusion of more competent businesses from procurement, and, most importantly, harm to the public interest. This article will discuss the mechanisms for selecting construction service providers outlined in Indonesian legal regulations, covering government-led initiatives and private-sector businesses.
Service Provider Requirements
Law Number 2 of 2017 regarding Construction Services as amended by Law Number 6 of 2023 on the Determination of Government Regulations in Lieu of Law Number 2 of 2022 concerning Job Creation into Law (“Construction Services Law”), regulates the mechanism for selecting construction service providers. Primarily, providers eligible for selection must meet the requirements stipulated by the Construction Services Law.2
Construction service providers (individuals/corporations) must first obtain a business license issued by the Regional Government in accordance with the regulations set by the Central Government.3 This business license is valid throughout the territory of the Republic of Indonesia, and Regional Governments can follow up by formulating business licensing regulations at the local level.4
Specifically for construction service corporations, it is mandatory to obtain a corporate certificate issued through a certification and registration process by the Central Government. Previously, these corporations were also required to have a register of experience as a justification for their expertise in providing construction services, but this requirement has been eliminated in the latest amendment.5
However, at the ministry level, there is still Minister of Public Works and Public Housing Regulation Number 08/PRT/M/2019 concerning Guidelines for National Construction Service Business Licensing (“Permen PUPR 08/2019“), regulated in Article 33. Additionally, the Certificate for Construction Service Business Entities (“SBUJK“), issued by the Construction Services Development Institute (“LPJK“), must include the business entity’s database in the registration process, where one component of the business entity’s database is the experience data of the business entity in providing construction services.6
For the foreign construction service corporations to operate within Indonesian territory, they are obligated to establish a representative office or a legal entity in Indonesia through capital cooperation with a Indonesia construction service corporation.7 The requirements for establishing a representative office by foreign corporations also include having a large-scale business qualification, a business license, operational cooperation with a national corporation in accordance with regulations, a higher composition of Indonesian labor, the obligation to appoint Indonesian citizens as executives, the use of Indonesia construction materials and technology, as well as possessing advanced, efficient, environmentally conscious technology, and engaging in technology transfer.8
Furthermore, the process of selecting service providers in construction service contracts considers factors such as field of expertise, qualifications, workload, previous performance, and experience.9 In relation to the protection of public interests, service users in construction service contracts are prohibited from engaging affiliated service providers in public projects without going through a tender, selection, or electronic catalog process.10 Government protection in the execution of construction service selection is evident through provisions imposing administrative sanctions on individuals and businesses lacking business permits, which may include written warnings, administrative fines, and/or temporary suspension of construction service activities.11
The mechanism for selecting construction service providers discussed above can be summarized as predominantly governing the requirements for private entities wishing to participate and organize the selection process for service providers. The mechanism for selecting service providers within the scope of the government is mainly regulated in subordinate regulations, such as government regulations, presidential regulations, and ministerial/agency-level regulations, which will be further discussed in the following section.
Regulations on the Selection of Service Providers by Government
The provisions regarding the mechanism of Government Service Provider Selection were previously regulated in Article 42 of the Construction Services Law; however, this article has been removed. Consequently, these provisions are now regulated at the government regulation level. The selection of Construction Service Providers by the Government is carried out by elements such as Budget Users, Budgetary Authority Delegates, Commitment-Making Officials, Procurement Officers, Selection Work Units, Procurement Agents, Self-Management Organizers, and Service Providers.12
The process of selecting service providers funded by state finances involves a system of qualification assessment and bid evaluation.13 The performance of service providers is evaluated based on performance reports recorded in the information system, and the Minister of Public Works and Public Housing (“MPWPH”) is authorized to announce a list of providers with good performance to the construction service community.14 The selection of service providers can be done through tender, direct appointment, direct procurement, or procurement through an e-catalog.15
The tender process involves pre-qualification, post-qualification, and fast-track tendering. Prequalification is for complex construction projects, post-qualification for simple construction projects, and fast-track tendering when specifications are detailed, providers are qualified, and the winner is determined based on the lowest price.16
The direct appointment mechanism can only be applied in emergency situations, limited complex projects, classified national security projects, small-scale projects, and specific conditions. Specific conditions for construction services include scenarios such as sudden state activities, classified national security projects, construction as an unplanned system, and emergency response. For consultancy services, specific conditions involve repeated orders, government assignments to state-owned enterprises, services feasible only by a single capable entity, and services with copyright holders or previous tender winners.17
Finally, direct procurement is applicable only for small-scale projects with simple technology and low risk, restricted to small enterprises or individuals unless specific technical competencies are required.18 Electronic catalog procurement applies solely to pre-listed projects in the e-catalog.19 In public interest construction, provider selection must follow a tender, selection, or electronic catalog process, involving projects with national, state, and/or community impact. Thus, direct appointments are prohibited in public interest contexts.20
With technological advancements, the need for transparent and accountable service provider selection in government operations has led to the implementation of electronic procurement policies. The execution of electronic procurement utilizes the Electronic Procurement System (“EPS”) and its supporting systems. The Government Procurement Policy Agency (“LKPP”) is authorized to develop SPSE and leverage an E-marketplace, providing electronic catalogs, online stores, and supplier selection. This process is supervised and managed by the LKPP in collaboration with the Procurement Unit and/or Business Entities.21
The aforementioned regulations are supported by ministerial and institutional regulations such as the Minister of Public Works and Housing Regulation Number 14 of 2020 concerning Standards and Guidelines for Construction Service Procurement through Providers (“MPWPH Regulation 14/2020”). This regulation specifically governs the procurement of construction services through service providers within the scope of ministries/institutions or regional apparatuses financed by the state budget (“APBN”) or regional budget (“APBD”), which includes funding from domestic and foreign loans or grants received by the government or local government.22
Additionally, there is also Regulation of the National Public Procurement Agency (LKPP) Number 12 of 2021. Its Annex II regulates the implementation provisions for the procurement of construction services within the government scope through providers, and Annex V outlines the provisions of the Selection Document for the procurement of construction services through providers that must be managed and possessed by service providers during the procurement process within the government scope.
As explained in the previous section, the provisions in the Construction Services Law mainly focus on requirements for private entities participating in and organizing the provider selection process. For private entities organizing the selection of construction service providers, it is left to the private sector itself, following the principle of Freedom of Contract and Pacta Sunt Servanda. However, this freedom is subject to limitations; from contract creation to project implementation, it must adhere to the applicable laws and regulations in Indonesia, particularly those related to construction services.
This also applies to the provisions for the selection of service providers by the government; however, technical and administrative requirements within the government’s scope are more specifically regulated. An example is the standardized procurement document for construction services stipulated in Appendix V of Regulation LKPP Number 12 of 2021. As a regulator, the government has an additional role in overseeing and developing a well-organized construction services system overall.
Furthermore, for the process of selecting construction service providers within the government’s scope, which is covered by various laws and regulations, from legislation to institutional regulations that comprehensively and firmly regulate, it can indirectly be interpreted that the process of selecting construction service providers using state financial funding is carried out with utmost caution and prioritizes transparency, both by the user and the service provider. This is, of course, a reasonable measure to ensure oversight of state finances and accountability to ensure the country’s development towards industrialization proceeds smoothly.
Fahlefi, Erdin, Akhmad Suraji, and Albani Musyafa. “A Study of Deviations in the Implementation of Legal Aspects in Construction Procurement.” Scientific Journal of Industrial Engineering and Innovation. Vol. 1. Number 3 (2023). Page 10-18.
Law on Construction Services. Law Number 2 of 2017. LN 2017 Number 11. TLN Number 6018.
Law on the Ratification of Government Regulations in Lieu of Law Number 2 of 2022 concerning Job Creation into Law. Law Number 6 of 2023. LN 2023 Number 41. TLN Number 6856.
Government Regulation on the Implementation of Law Number 2 of 2017 concerning Construction Services. Government Regulation Number 22 of 2020. LN 2020 Number 107. TLN Number 6494.
Government Regulation on Amendments to Government Regulation Number 22 of 2020 concerning the Implementation of Law Number 2 of 2017 Regarding Construction Service. Government Regulation Number 14 of 2021. LN 2021 Number 24. TLN Number 6626.
Presidential Regulation on Government Procurement of Goods/Services. Presidential Regulation Number 16 of 2018. LN 2018 Number 33.
Presidential Regulation on Amendments to Presidential Regulation Number 16 of 2018 concerning Government Procurement of Goods/Services. Presidential Regulation Number 12 of 2021. LN 2021 Number 63.
Minister of Public Works and Public Housing Regulation on Standards and Guidelines for Procuring Construction Services through Providers. MPWPH Regulation Number 14 of 2020.
Regulation of the Government Procurement Policy Agency on Guidelines for Implementing Government Procurement of Goods/Services through Providers. LKPP Regulation Number 12 of 2021.
Sang Rafi Syuja
- Erdin Fahlefi, Akhmad Suraji, and Albani Musyafa, “A Study of Deviations in the Implementation of Legal Aspects in Construction Procurement,” Scientific Journal of Industrial Engineering and Innovation, Vol. 1, Number 3 (2023), page 11.
- Law on Construction Services, Law Number 2 of 2017, LN 2017 Number 11, TLN Number 6018, hereinafter referred to as the Construction Services Law, Article 41.
- Law on the Ratification of Government Regulations in Lieu of Law Number 2 of 2022 concerning Job Creation into Law, Law Number 6 of 2023, LN 2023 Number 41, TLN Number 6856, hereinafter referred to as the Law on the Ratification of Job Creation Omnibus Law, Articles 26-28.
- Law on the Ratification of Job Creation Omnibus Law, Art. 29.
- Law on the Ratification of Job Creation Omnibus Law, Article 30-31.
- Regulation of the National Construction Services Development Institute concerning Certification and Registration of Construction Services Business, LPJKN Regulation Number 3 of 2017, Article 48 paragraphs (1) and (2).
- Construction Services Law, Art. 32.
- Law on the Ratification of Job Creation Omnibus Law, Art. 33-34.
- Construction Services Law, Art. 43.
- Law on the Ratification of Job Creation Omnibus Law, Art. 44.
- Law on the Ratification of Job Creation Omnibus Law, Art. 89.
- Presidential Regulation on Amendments to Presidential Regulation Number 16 of 2018 concerning Government Procurement of Goods/Services, Presidential Regulation Number 12 of 2021, LN 2021 Number 63, Article 8.
- Government Regulation on the Implementation of Law Number 2 of 2017 concerning Construction Services, Government Regulation Number 22 of 2020, LN 2020 Number 107, TLN Number 6494, Article 60.
- Government Regulation on Amendments to Government Regulation Number 22 of 2020 concerning the Implementation of Law Number 2 of 2017 Regarding Construction Services, Government Regulation Number 14 of 2021, LN 2021 Number 24, TLN Number 6626, Article 61.
- GR Number 22 of 2020, Art. 62.
- GR Number 22 of 2020, Art. 63.
- GR Number 22 Tahun 2020, Art. 65.
- GR Number 22 of 2020, Art. 67.
- GR Number 22 of 2020, Art. 69.
- GR Number 14 of 2021, Art. 72.
- Presidential Regulation on Government Procurement of Goods/Services, Presidential Regulation Number 16 of 2018, LN 2018 Number 33, Article 70-71.
- Minister of Public Works and Public Housing Regulation on Standards and Guidelines for Procuring Construction Services through Providers, MPWPH Regulation Number 14 of 2020, Article 2-3.