The essence of a contract is the agreement. Therefore, in Indonesian Civil Code, contract is considered as an agreement. According to Indonesian Civil Code Article 1313, an agreement is an act pursuant to which one or more individuals bind themselves to one another. Meanwhile, according to the Presidential Regulation No. 54/2010, contract is defined as a written agreement between PPK (official commitment maker) and contractor/supplier or independent practitioner. This Presidential Regulation’s definition is adjusted to set the context for governmental procurements.
When viewed from its orientation, construction contracts are essentially closer to engineering contracts compared with the general contracts. This is mainly because the construction contract is a manifestation of the construction project’s characteristics that are loaded with so many technical aspects of the cost, time and quality. These three aspects of cost, time and quality is the main focus of construction project and contract management. Meanwhile the general contract is focusing on the legal aspects so a contract can be legally binding. Therefore, engineering contract is not essentially talking about legal aspects of a contract, but also its technical aspects which become the main artery of construction business. Knowledge of the legal aspects of the contract remains as a crucial matter to ensure that the contract has the force of law.
A standard form contract is commonly defined as a contract between two parties involved where the terms and conditions of the contract have been set and therefore it leads to a “take it or leave it”
negotiation. This definition is not completely true especially with regard to the principle of freedom of contract. Therefore, this research paper is trying to define a standard form of construction contract as an attempt to equalize perceptions, terms and conditions which is manifested in the form of construction contract, and is made based on the correct principles of contract, and serves as the guidance in negotiating and drafting a construction contract. While the first and common definition focuses on the result and effect of a standard form of contract, the latter definition focuses on the essence and process of a standard form of contract.
Proceeding of The 1st International Joint Conference Indonesia-Malaysia-Bangladesh-Ireland 2015 Universitas Ubudiyah Indonesia, 27-28 April 2015, Banda Aceh, Indonesia
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The usage of standard form of construction contract has many advantages. There have been many researchers who are trying to highlight these advantages. Rameezdeen and Rodrigo [5] had summarized these advantages into 9 (nine) points:
1. It can be used for various types of projects and client requirements 2. It embodies industry practices and customs
3. Parties can be comfortable with the fact that it has been tried and tested over a long period of time
4. Fair allocation of risks between parties
5. In a competitive tendering environment, it provides a uniform basis for pricing without the fear of hidden costs
6. The tendered price is likely to be lower as contractors do not have to price additional risks associated with interpretation of bespoke contracts or clauses
7. Transaction cost involved in negotiating a contract is reduced
8. It looks at three dimensions together, namely: the wider legal context through statutes and case law, other documents forming the contract, and areas of possible disagreements between parties
9. The familiarity with clauses improves communication and efficiency of contract administration between client, contractor and the contract administrator
Meanwhile, Shnookal and Charrett [7] gave 4 (four) main advantages of using a standard form of construction contract, ie:
1. Contractors, employers and engineers who use a standard form contract become familiar with the rights and obligations that they have under that form of contracting. This improves communication and efficiency in contract administration. This is of particular importance in international contracting where communication is more difficult and misunderstandings are proportionately more likely to arise
2. The cost of tendering is reduced as contractors familiar with the standard form know there is no risk that is hidden in the detail of terms they are unfamiliar with
3. The cost of negotiating the contract is reduced. Increasingly negotiating the legal terms of a bespoke contract based on a major law firm’s contract has become a major cost of project delivery. Using a trusted standard form reduces the potential area of disagreements, or at the very least, provides an impartial starting point from which the parties can negotiate from 4. The tendered price is likely to be less than for a bespoke contract, as contractors do not have
to price additional risks they are not familiar with or are not usually required to assume
Another important highlight on the advantages of using standard forms of construction contract instead of composing a fresh contract document for each project has been set out by Ramus et al. [6]
ie:
1. Ambiguities and inconsistencies are minimized since they are written by legal experts
2. They set out clearly the rights and obligations of parties involved to the required degree of detail
3. Because of standardization, frequent users are familiar with the provisions, resulting in a greater degree of consistency in the application
4. The time and expense which would be incurred in preparing a fresh document for each occasion is avoided
5. They can provide a good source of knowledge for construction professionals
Based on its sources, Lestari [3] has classified construction contracts in Indonesia into 2 (two) types:
domestic contracts which normally used for construction projects owned by domestic institutions and international contracts such as AIA (American Institut of Acrhitect), FIDIC, JCT, and SIA. In practice, normally for international and private projects executed in Indonesia, FIDIC will be the most common standard form to be used. Zarabizan et al. [10] said that one of the advantages of FIDIC conditions is that it has become a standard international form where an agreement has been approved and made public by a prestigious body such as architects, engineers, and contractors.
All of these contract forms used and executed in Indonesia – both domestic and international contracts – must follow the Indonesian Contract Law. The law which governs the agreement/contract is contained in the Indonesian Civil Code Book III on Obligations. This Civil Code actually is a legacy of the Dutch East Indies, namely the Burgerlijk Wetboek.
Proceeding of The 1st International Joint Conference Indonesia-Malaysia-Bangladesh-Ireland 2015 Universitas Ubudiyah Indonesia, 27-28 April 2015, Banda Aceh, Indonesia
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In addition, the Indonesian Contract Law is further stipulated in other legislations which have been issued by the government of the Republic of Indonesia relevant in the field of construction services, among others are:
Indonesian Law No. 18/1999 on construction services
Government Regulation No. 28/2000 on the business and the role of construction service community
Government Regulation No. 29/2000 on the implementation of construction services
Government Regulation No. 30/2000 on the implementation of construction services development
Presidential Decree No. 80/2003 on the guidance for governmental procurement
According to Suraji et al. [9] the following strategic agenda is recommended in order to improve the competitiveness of Indonesia construction industry, namely:
1. Revitalization of construction sector
2. Strengthening and growth of construction sector 3. Establishment of regulatory framework for construction 4. Establishment of fair construction trade
5. Empowerment of institutions for construction development 6. Improvement of synergy among construction related sectors 7. Development of construction technology
8. Improvement of competency of human resources 9. Monitoring of construction business
10. Protection of user and beneficeries of construction product 11. Improvement of construction investment
12. Capacity building of local government for local construction
13. Development of traditional construction and non-engineered buildings
In response to Suraji’s recommendations, the need for standard forms of construction contract is becoming more important in Indonesia in order to increase and improve the business process and competitiveness of this industry. However as pointed out by Patterson [4], many standardized contracts are created under circumstances that put control of the process in the hands of parties on one side of the contract.
Another challenge is that there are so many types of construction procurement which need different approaches and different standard forms of construction contract to be applied with. Institutions which produce international standard forms of construction contract have already pointed out this problem and published not only one standard form but many standard forms of construction contract which have been adjusted with the current construction procurement methods.
Gould [2] stated that the most easily identifiable benchmark is the simple distinction between traditional procurement and the design-and-build procurement. Essentially, standard forms could be divided into those where the contractor simply constructs the design and those where the contractor is responsible for the design.
Since there is still no common standard forms of construction contract published in Indonesia, the construction professionals often use their own bespoke contracts or the international standard forms of contract such as FIDIC. In practice, they tend to amend these standard forms of contract which sometimes result in construction disputes between parties involved. This is another challenge which Gould [2] has already concerned about. He said that the guidance notes to most of the standard forms state that the forms have been drafted to carefully balance the rights and obligations of the employer and contractor or other parties as the case maybe. On this basis users are warned not to upset this balance by amending the standard form.
The practices in this industry have also been critized with lack of fairness and professionalism, and even with the conflicting regulations. Moreover, according to Soemardi and Wirahadikusumah [8], globalization also requires the Indonesian construction industry to be able to respond with the development of international contract and regulations.
Proceeding of The 1st International Joint Conference Indonesia-Malaysia-Bangladesh-Ireland 2015 Universitas Ubudiyah Indonesia, 27-28 April 2015, Banda Aceh, Indonesia
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