Tuesday, April 16, 2024

Get to know common contractual issues in construction project

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Construction disputes can arise, among others, due to claims that are not served, such as late payments, late completion of work, differences in the interpretation of contract documents, technical and managerial incompetence of the parties. In addition, construction disputes can also occur if service users do not carry out management tasks properly and may not have sufficient financial support. Through this article we will provide the overview of common areas of potential disputes in the construction sector and how Indonesian law regulates it.

Governing laws and regulation 

  • Indonesian Civil Code (KUHPer)
  • Law No. 2/2017 concerning Construction Services
  • Government Regulation (PP) No. 22/2020 concerning the Implementation Regulation of Law No. 2/2017 concerning Construction Services as amended by Government Regulation (PP) No. 14/2021
  • Presidential Regulation (Perpres) No. 16/2018 concerning Procurement of Goods/Services as amended by Presidential Regulation (Perpres) No. 12/2021

Overview

In general, construction service disputes consist of disputes that occur before the contractual agreement and in the pre-contractual stage of the bargaining process, disputes that occur during the construction work (contractual), and disputes that occur after the building has been operating or used for 10 (ten) years (post contractual).

Potential issues

Late payment or refusal of payment

Law No. 2/2017 requires that the construction contract contains general provisions governing the engagement based on the implementation system, scope of work, payment method and work result calculation system. In the implementation of construction, it is the service user who is responsible for the cost of Construction Services in accordance with the agreement in the Construction Work Contract. The problem that often occurs in construction contracts is that at the time of construction, service users are late or fail to make payments which cause time and cost losses due to delays in construction work plans. Therefore, in the construction contract it is necessary to include evidence that the responsibility for the cost of construction services lies with the service user, namely through evidence that the service user is able to pay and evidence in the form of a commitment to the exploitation of construction service products. Evidence in the form of ability to pay can be in the form of documents from banking institutions and/or non-bank financial institutions, budget availability documents, or other documents such as guarantees in the form of movable or immovable goods. In the event that the responsibility for the cost of services for construction is proven by the ability to pay, the service user is obliged to make payments for the delivery of the work of the service provider in the right amount and on time. Service users who do not guarantee the availability of costs and do not make payments for the work of the Service Provider in the right amount and on time may be subject to compensation in accordance with the agreement in the construction work contract.

Building failure

Building Failure is a condition of the collapse of the building or the non-functioning of the building after the final delivery of the results of the Construction Services. To avoid uncertainty, Law No. 2/2017 requires that every construction contract contains provisions related to guarantees for risks that arise and legal responsibilities to other parties in the implementation of Construction Works or as a result of Building Failures.

In every construction service operation, service users and service providers are required to meet security, safety, health and sustainability standards. If the implementation of construction services does not meet these standards, the service user and/or service provider may become the party responsible for the failure of the building. In practice, the service provider may plan to replace the materials used in the construction operation. In such a situation, the service provider must notify the parties to the construction contract to agree. If the use of materials is not carried out in accordance with the agreement, then the action is considered a breach of contract. Especially, if these materials include materials that endanger security, safety, health, and sustainability standards, this certainly has the potential to violate the provisions in Law No. 2/2017.

Building failures in the implementation of construction are determined by the Expert Appraiser and are final and binding. Liability for building failure may be in the form of replacement for repair of Building Failure by the Service Provider and provision of compensation by the Service User and/or Service Provider. The service provider may transfer the responsibility for the replacement or repair of the Building Failure to a third party in the form of insurance.

In the construction contract, it is necessary to include the coverage period which includes the implementation and maintenance period which is the responsibility of the service provider. In addition, it is necessary to arrange a construction age plan so that the liability for a building failure can be determined. In Law No. 2/2017, service providers are required to be responsible for Building Failures within the specified period in accordance with the Construction age plan. In the event that the planned construction age is more than 10 (ten) years, the Service Provider must be responsible for the Building Failure within a maximum period of 10 (ten) years from the date of the final delivery of the Construction Services. However, if the building failure occurs after a predetermined period of time, the responsibility lies with the service user. Furthermore, people who are disadvantaged as a result of construction service activities can also file a lawsuit and seek compensation or compensation for the impacts caused.

Late completion of work

Law No. 2/2017 regulates that in the implementation of service providers and/or sub-service providers, they are required to submit the results of their work in a cost-effective, quality, and timely manner as stated in the Construction Work Contract. Dispute occurs when the service provider delays the execution of work resulting in additional time and costs. A Service Provider whose Sub-provider does not submit the results of his work in a cost-effective, quality-appropriately and/or timely manner may be subject to compensation in accordance with the agreement in the Construction Work Contract. In addition, to adjust the ability of workers and the costs incurred by service providers, it is necessary to consider the work result calculation system including, among others: lump sum, unit price, combined lump sum price and unit price, percentage value, cost reimbursable, and target cost.

Force majeure situation

Law No. 2/2017 requires that every construction work contract must include a description of force majeure, namely provisions regarding events that arise against the will and ability of the parties that cause harm to one of the parties. The issue in construction contracts related to force majeure is determining which event is a force majeure.

Due to the wide possibility of force majeure circumstances, in making a construction contract, it is advisable to make a clause listing force majeure events as detailed and comprehensive as possible. Events that are usually listed are events that are:

  1. God’s act (such as, but not limited to fires, explosions, earthquakes, droughts, tidal waves and floods);
  2. War, hostilities (whether war is declared or not), invasion, act of a foreign enemy, mobilization, demand, or embargo;
  3. Rebellion, revolution, or military or usurpation of power, or civil war;
  4. Contamination by radioactivity from any nuclear fuel, or from any nuclear waste from the combustion of nuclear fuel, radioactive toxic explosives, or other hazardous properties of explosive nuclear assemblies or nuclear components thereof;
  5. Riots, strikes, commotion, delays,  chaos or closures, except limited to employees of the Supplier or its Subcontractors;
  6. The act or threat of terrorism;

In addition, the parties need to make a clause that can expand the scope of force majeure if there are events that have never occurred before or have not been included in the agreement, which reads as follows:

“Other unforeseen circumstances beyond the control of the Parties where it is unreasonable for the affected party to take precautionary measures where the affected party is unable to avoid the incident using best efforts.”

Moreover, when there are difficulties and debates between the parties to determine a force majeure condition, the parties can refer to the provisions of Article 1244 and Article 1245 of the Civil Code which contains several main elements of force majeure, which are:

  • Unforeseen events occur;
  • There are obstacles that make an achievement impossible to carry out;
  • The inability is not caused by the fault of the debtor;
  • This inability cannot be risked to the debtor.

Force majeure conditions can also cause service providers to require work delays, time extensions, delay damages, and labor inefficiencies. Moreover, it often occurs in force majeure conditions where one party takes advantage of the other party. For example, service users tend to allocate more risk to service providers and service users accept as little risk as possible. After that the service provider does not accept to bear the risk which can then lead to legal disputes as a result of the irrational implementation of construction projects for the service provider. In addition, service providers often neglect workers in terms of work and wages when force majeure occurs. Therefore, it is necessary to regulate how the rights and obligations are balanced for the parties in the construction contract when a force majeure occurs and how to handle it in the future.

Change the scope of work and site condition 

Usually both signed contracts and unsigned contracts or are still in the auction stage, sometimes there is a difference between the data listed in the contract document and the real data at the construction site, thus requiring the contractor concerned to submit a proposed change to the contract which will give birth to an addendum or amendment to the contract.

Contract change order (CCO) is an additional provision of a contract which is an activity to change, improve, and detail the contents of a contract. A contract addendum is made in the event of a reduction, addition, or change to the substance of the contract without any changes to the articles contained in the contract documents. whereas contract amendments are made if there is a change in the provisions of a contract document.

Law No. 2/2017 stipulates that changes to the classification and business services of Construction Services as referred to in Article 12 to Article 15 of Law No. 2/2017 are carried out by taking into account changes in the classification of construction products that apply internationally and developments in terms of Construction Services business services. Furthermore, the provisions regarding contract changes can be seen in Perpres No. 16/2018 which explains that in the event that there is a difference between field conditions at the time of implementation and the drawings specified in the construction contract, the service provider may make changes to the contract, which include:

  1. Increase or decrease the volume stated in the Contract;
  2. Add and/or reduce the types of activities;
  3. Change the technical specifications according to field conditions; and/or
  4. Change the implementation schedule.

In the event that a change in the contract results in an increase in the value of the contract, the change in the contract is carried out provided that the addition of the value of the final contract does not exceed 10% (ten percent) of the price stated in the initial contract.

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