In 2021, the value of government procurement of goods and services will reach IDR 1,214 trillion or around 52% of the total State Budget (APBN). One of the government procurement of goods or services that is in great demand by business actors is the procurement of construction services. In construction projects, guarantees function to control and mitigate the risk of possible failures or delays in the service procurement process, both at the stage of selecting providers, executing contracts and maintaining work results. This article will explain what insurance is needed in the government procurement of construction services in Indonesia and related regulations.
Governing laws and regulation
- Law No. 2/2017 concerning Construction Services as amended by Law No. 11/2020 concerning Job Creation
- President Regulation (Perpres) No. 16/2018 concerning Government Procurement of Goods/Services
Overview
Construction work is the whole or part of the activities that include the construction, operation, maintenance, demolition and rebuilding of a building. Every stage of a construction project has risks. These risks can be measured to overcome failures in carrying out contracts in the construction sector. These risks can be the responsibility of the employer or the party carrying out the work. To overcome the failure to carry out the contract in the construction sector, both parties involved in the contract can transfer the risk to a third party. When there is a failure of one of the parties involved in the construction contract, the third party has the responsibility to pay the claims resulting from the failure to carry out the construction contract.
Guarantee is mentioned in Perpres No. 16/2018 as a guarantee letter which defined as a written guarantee issued by a Commercial Bank/Guarantee Company/Insurance Company/special financial institution running a business in the fields of financing, guarantee and insurance to encourage Indonesian exports in according to the provisions of the legislation in the field of financing institutions. Guarantee can be in the form of insurance or guarantee issued by a bank or non-bank institution for the implementation of work, receipt of advances, accidents for workers and the community.
Guarantee in construction project
Offer Guarantee (Jaminan Penawaran)
Offer guarantee is a guarantee given by election participants to the procurement service unit working group before the deadline for submitting bids. This guarantee applies to the total value of the Self Estimated Price (Harga Perkiraan Sendiri or HPS) of at least IDR 10,000,000,000 (ten billion rupiah). The offer guarantee is from 1% (one percent) to 3% (three percent) of the total value of the HPS. For integrated Construction Works, the Bid Guarantee is between 1% (one percent) and 3% (three percent) of the value of the Budget Ceiling.
Performance Bond (Jaminan Pelaksanaan)
Performance guarantee is a guarantee that the Service Provider will complete the work in accordance with the provisions of the Construction Work Contract. The Performance Guarantee is applied to Contracts for the Procurement of Goods/Construction Works/Other Services with a value of at least over Rp 200,000,000 (two hundred million rupiahs). The value of the Performance Guarantee is as follows:
- for the corrected bid value between 80% (eighty percent) to 100% (one hundred percent) of the HPS value, the Performance Guarantee is 5% (five percent) of the contract value
- for the corrected bid value below 80% (eighty percent) of the HPS value, the Performance Guarantee is 5% (five percent) of the total HPS value.
The amount of the Performance Guarantee for integrated work is as follows:
- for the bid value between 80% (eighty percent) to 100% (one hundred percent) of the value of the Budget Ceiling, the Implementation Guarantee is 5% (five percent) of the contract value; or
- for the bid value below 80% (eighty percent) of the value of the Budget Ceiling, the Implementation Guarantee is 5% (five percent) of the value of the Budget Ceiling.
The Implementation Guarantee is valid until the handover of the Procurement of Goods/Other Services or the first handover of the Construction Work.
Advance Payment Bond (Jaminan Uang Muka)
Advance payment bond is a guarantee given by the Service Provider to the Service User before the Service Provider receives an advance payment to start the Construction Work. The bond is submitted by the Provider to the Contract Signing Officer (PPK) in the amount of the down payment. The value of the advance payment bond can be reduced proportionally according to the remaining down payment received.
Maintenance Bond (Jaminan Pemeliharaan)
Maintenance bond is a guarantee given by the Service Provider to the Service User during the insurance period, namely the time between the first submission of the final result of the work and the second submission of the final result of the work. The maintenance bond applies to Construction Works or Other Services that require a maintenance period, in the event that the Provider receives a retention fee on the first work handover (Provisional Hand Over). The maintenance bond is returned 14 (fourteen) working days after the maintenance period is over. The value of the maintenance bond is 5% (five percent) of the contract value.
The Bond of Objection Appeal (Jaminan Sanggah Banding)
The bond of objection appeal is a guarantee that must be submitted by the Service Provider who will make a disclaimer of appeal. The bond is 1% (one percent) of the total value of the HPS. For integrated construction works, the bond of objection appeal is 1% (one percent) of the value of the Budget Ceiling.
Guarantee Requirements for The Procurement of Construction Services
Guarantees for the procurement of construction services can be in the form of bank guarantees or surety bonds. The guarantee must be:
- Unconditional, at least meet the following criteria:
- in the settlement of claims, it is not necessary to first prove the loss suffered by the Guarantee Beneficiary (Obligee), but it is sufficient with a statement letter from the PPK that there has been a termination of the contract from the PPK and/or the default provider;
- in the event of a dispute between the Provider and the guarantor or with the PPK, the dispute shall not delay the payment of the claim;
- in the event that the guarantor re-insures the guarantee issued to the bank, insurance company, or other guarantee company (reinsurance/contra guarantee), the execution of the disbursement of the guarantee letter does not wait for the disbursement process from the said Bank, Insurance Company, or other Guarantee Company;
- The guarantor will not delay the obligation to pay the guarantee claim for any reason, including the reason that efforts are being made by the guarantor so that the Guaranteed party (Principal) can fulfill its obligations and/or the payment of premium/remuneration has not been fulfilled by the Guaranteed (Principal);
- in the event of objection from the Provider, the objection does not delay the process of disbursement and payment of claims; and
- in the letter of guarantee there is no clause which states that the guarantor does not guarantee losses caused by the practice of Corruption, Collusion and Nepotism, which is carried out by the Guaranteed (Principal) or by the Guarantee Beneficiary (Obligee).
- Easy to cash out, at least meet the following criteria:
- the guarantee can be immediately disbursed after the Guarantor receives a letter of request for disbursement/claim and a statement of breach of contract termination from PPK;
- in payment of claims, the Guarantor will not demand that the goods of the Guaranteed party (Principal) be confiscated and sold first in order to pay off the debt; and
- The Guarantor pays compensation to the Guarantee Beneficiary (Obligee) due to the inability or failure or non-fulfillment of the Guaranteed obligations (Principal) in accordance with the main agreement.
- Must be disbursed by the issuer of the guarantee no later than 14 (fourteen) working days after the order for disbursement from the Pokja Pemilihan/PPK/Parties authorized by the Pokja Pemilihan/PPK is received.
