4 Research Findings
4.2 The Challenges in Adopting Standard Forms of Construction Contract in Indonesia
4.3.3 Results
After conducting the analysis as mentioned above, then a proposed model of standard form of construction contract can be made. This proposed model is not made in form of a contract document, but rather be made in form of a set similar with body of knowledge. This proposed model consists of 2
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(two) parts. The first part is about the anatomical structure of the construction contract which has been adopted from international standards and adapted to the Indonesian construction industry context, while the second part is about the embodiment of the various aspects in construction contract.
The anatomy of construction contract below is adopted from FIDIC and has been adapted to Indonesian context. FIDIC is selected because it is the most widely used international standard form of contract in Indonesia. Thus, it is expected that Indonesia can publish its own version of standard form of construction contract with international standard and it can be easily socialised and accepted by the industry.
Table 4 The Proposed Anatomy of Construction Contract
No Anatomy Sub-Anatomy
1 General Provisions Definitions Interpretation Communications
Governing Law and Language Priority of Documents
Contract Agreement Assignment
Care and Supply of Documents Delayed Drawings or Instructions
Employer’s Use of Contractor’s Documents Contractor’s Use of Employer’s Documents Confidentiality
Compliance with Laws Joint and Several Liability Rights and Obligations of Parties 2 The Employer Right of Access to the Site
Permits, Licenses or Approvals Employer’s Personnel
Employer’s Financial Arrangements Employer’s Claims
3 The Engineer/CA/
Superintendent
Engineer’s Duties and Authority Delegation by the Engineer Instructions of the Engineer Replacement of the Engineer Determinations
4 The Contractor Contractor’s General Obligations Performance Security
Contractor’s Representative Subcontractors
Assignment of Benefit of Subcontract Co-operation
Setting Out Safety Procedures Quality Assurance Site Data
Sufficiency of the Accepted Contract Amount Unforesseable Physical Conditions
Rights of Way and Facilities Avoidance of Interference Access Route
Transport of Goods Contractor’s Equipment Protection of the Environment Electricity, Water and Gas
Employer’s Equipment and Free-Issue Material Progress Reports
Security of the Site
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Contractor’s Operations on Site Fossils
5 Nominated
Subcontractors and Nominated Suppliers
Definition of NSC and NS Objection to Nomination Payments to NSC and NS Evidence of Payments
6 Staff and Labour Engagement of Staff and Labour
Rates of Wages and Conditions of Labour Persons in the Service of Employer Labour Laws
Working Hours
Facilities for Staff and Labour Health and Safety
Contractor’s Personnel
Records of Contractor’s Personnel and Equipment Disorderly Conduct
7 Plant, Materials and Workmanship
Manner of Execution Samples
Inspection Testing Rejection Remedial Work
Ownership of Plant and Materials Royalties
8 Commencement, Delays and Suspension
Commencement of Works Time for Completion Programmes
Extension of Time for Completion Delay caused by Authorities Rate of Progress
Delay Damages Suspension of Work
Consequences of Suspension
Payment for Plant and Materials in Event of Suspension Prolonged Suspension
Resumption of Work 9 Tests on Completion Contractor’s Obligations
Delayed Tests Retesting
Failure to Pass Tests on Completion 10 Employer’s Taking Over Acceptance of the Work
Taking Over of the Works and Sections Taking Over of Parts of the Works Interference with Tests on Completion Surfaces Requiring Reinstatement
11 Defects Liability Completion of Outstanding Work and Remedying Defects Cost of Remedying Defects
Defects Liability Period
Extension of Defects Notification Period Failure to Remedy Defects
Removal of Defective Work Further Tests
Right of Access Contractor to Search Performance Certificate Unfulfilled Obligations Clearance of Site 12 Measurement and
Evaluation
Works to be Measured Method of Measurement Evaluation
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Adjustments
Right to Vary Value Engineering Variation Procedure
Payment in Applicable Currencies Provisional Sums
Daywork
Adjustments for Changes in Legislation Adjustments for Changes in Cost 14 Contract Price and
Payment
The Contract Price Procedure of Payments Advance Payment
Application for Interim Payment Certificates Schedule of Payments
Plant and Materials intended for the Works Issue of Interim Payment Certificates Payment
Performance Bond Advance Payment Bond Retention
Delayed Payment
Payment of Retention Money Statement at Completion
Application for Final Payment Certificate Discharge
Issue of Final Payment Certificate Cessation of Employer’s Liability Currencies of Payment
15 Termination by Employer
Notice to Correct
Termination by Employer Valuation at Date of Termination Payment after Termination
Employer’s Entitlement to Termination 16 Suspension and
Termination by Contractor
Contractor’s Entitlement to Suspend Work Termination by Contractor
Cessation of Work and Removal of Contractor’s Equipment Payment on Termination
17 Risk and Responsibility Indemnities
Contractor’s Care of the Works Employer’s Risks
Consequences of Employer’s Risks Intellectual and Industrial Property Rights Limitation of Liability
18 Insurance General Requirements for Insurance
Insurance for Works and Contractor’s Equipment
Insurance against Injury to Persons and Damage to Property Insurance for Contractor’s Personnel
19 Force Majeure Definition of Force Majeure Notice of Force Majeure Duty to Minimise Delay
Consequences of Force Majeure Force Majeure Affecting Subcontractor Optional Termination, Payment and Release Release from Performance under the Law 20 Claims and Disputes
Settlement
Contractor’s Claims Amicable Settlement Arbitration
21 Addendum and Amendment
Addendum and Amendment
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Because the construction contract serves as the main guideline in implementing construction projects, all aspects of the construction business should be incorporated into the contract in simple form and language. The embodiment of various aspects of construction contract can be seen in the following table.
Table 5 The Embodiment of Various Aspects in Construction Contract
No Aspects Commentaries
Legal Aspect
1 Preamble 1. There should be a contract title
2. Contract should have a contract number
3. Ensure that there shall be stated date and place of contract signing
2 Type of contract 1. Ensure whether the project is a government project or private project
2. Ensure what type of contract procurement does the project have (traditional, design-build, EPC or else) 3. Ensure what type of contract pricing does the project have
(lumpsum, unit price, or else)
3 Validity 1. Ensure that the both parties have legality in doing business process in Indonesia (notarial act, identity card, etc)
4 Contract background 1. There is a procedure from the tendering period up to awarding period
2. All parties agreed to sign the contract pursuant to the terms and conditions of the contract
3. There is basis of the agreement
5 Hierarchy of documents 1. There is a clause which stipulate the hierarchy of documents
6 Object of the agreement 1. Scope of work must be stated clearly and firmly
2. Clear time-related condition (commencement date, construction period, defect liability period, contract period, extension of time)
7 Rights and obligations 1. All rights and obligations of the parties involved should be clearly written down and balanced
8 Governing law and language 1. There should be clauses which state the governing law and language of the project
2. All work carried out in Indonesia are subject to the Indonesian Law
3. The contract should be written in Bahasa Indonesia 9 Dispute settlement 1. There should be clauses which describe how to settle any
disputes between the parties involved
2. Amicable settlement between parties must be prioritize 3. Arbitration as a higher level of alternative dispute
resolution should be enforced if no amicable settlement reached
10 Addendum and amendment 1. There should be a provision which provide a necessary way for both parties to make an addendum and/or amendment to the contract
Business Aspect
11 Contract Value 1. The amount of contract price should be clearly stated and written (both in numbers and spellings)
12 Completion time 1. The date of completion must be clearly stated 2. The duration of work must be clearly stated
13 Extension of time 1. Commitment to complete the works by any stipulated time must be subject to extension of time
2. Conditions which are subject to extension of time must be clearly stated in the contract (force majeure, variations, suspensions not cause by the contractor’s faults, change of law, etc)
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14 Working hour 1. Examine the local regulations and practices in respect of working hours (shift work, night work, daylight work, rest days, public holidays, etc)
2. The contract price and duration must be estimated accordingly
15 Variations and claims 1. The contract scope of work must be clearly defined without ambiguity
2. The contract must have a definitive procedure on variations
3. There must be rules of valuation for variations
4. The contract should provide reasonable time bar to notify and quantify a claim or variation
16 Cost of delay 1. The contract should provide for conditions where one party must compensate for the cost of delay
17 Acceptance of work 1. The contract must have definitive acceptance procedure 2. There should be clauses which describe the acceptance
procedure and the result of the acceptance (release of retention money)
18 Liquidated damages 1. There should be a clause which imposes an obligation upon one party to pay a fixed sum of money in the event of one party’s breach
19 Defect liabilities 1. The period of defect liability should be stated in the contract
20 Warranties 1. Warranties must be limited to express warranties set forth in the contract and to the extent permissible under applicable law
2. Clear definitions of performance test procedures, tolerances, and acceptance criteria
21 Nominated subcontractors and suppliers
1. There should be clauses which describe the procedure of nominated subcontractors and suppliers appoinments 2. The contract should give a chance for the main contractor
to object the nomination (giving reasonable refusal) 22 Subcontracting 1. There should be a provision which states the contractor’s
right and limitation to appoint subcontractors
2. The main contractor is responsible for the subcontractors’
work
23 Insurance 1. There should be a clause which provides the general requirements for insurance
2. At least three types of insurance should be provided:
- Insurance for Works and Contractor’s Equipment - Insurance against Injury to Persons and Damage to
Property
- Insurance for Contractor’s Personnel 24 Progress evaluation and
payment terms
1. There should be clauses which provide the procedures to evaluate work progress
2. There should be clauses which provide the payment procedures
25 Adjustments 1. There should be a clause in adjusting the contract value or work for changes in legislation and cost (escalation) 26 Bonds 1. There should be clauses which describe the various bonds
required for the work:
- Performance bond - Advance payment bond - Other bonds
27 Correspondence 1. The contract should provide a clear representative’s correspondence address
28 Contract Documents 1. All contract documents should be stated clearly
2. The priority of documents should be stipulated in a clause 29 Unforeseeable physical 1. There should be a clause which describes the definition of
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conditions unforeseeable physical conditions
2. There should be a clause which describes the procedure in case the contractor faces unforeseeable physical conditions
30 Reports and Instructions 1. Reports should be made by the contractor and be submitted to the engineer
2. Contractor should comply with the engineer’s instructions 3. Instructions should be made in written form
31 Liquidated damages 1. There should be clauses which describe the rules and procedures for liquidated damages
32 Suspension and termination 1. There should be clauses which state the procedures and conditions for:
- Suspension of work - Termination of the contract
33 Force Majeure 1. There should be clauses which explain what constitutes force majeure conditions, the procedures and settlement of obligations between parties involved
34 Termination 1. There should be a clause which defines the termination for both parties
2. There should be a clause which describes the procedure of termination
35 Taking Over 1. There should be clauses which describe the handing over procedure from contractor to the employer
2. Partial hand over procedure and requirements must be stated clearly if both parties agrees to have partial hand over in the contract
36 Taxation 1. Taxation should be stated whether it has already been included in the contract sum or not
37 Resource Utilization 1. The contractor is encouraged to use local materials, equipments and manpower
38 Environmental 1. Contractor in doing his work should comply with the applicable environmental laws and regulations
5 Conclusion
The focus of this research is the importance of standard form of construction contract which is expected to be introduced and be used in Indonesia. This is started with the definition of standard form of construction contract viz. 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.
The findings show that there are at least 17 (seventeen) advantages of using standard form of construction contract against 8 (eight) disadvantages. The main benefit of the implementation of standard form is to provide education and good understanding on the principles of construction contract to the public. Currently there are still many people who do not understand how to make a correct contract and how to distribute the rights, obligations and risks appropriately. Since preparing and negotiating construction contract is part of the principle of freedom of contract, this standard form may at least serve as a guideline for people when they are starting a contract negotiation.
Meanwhile, this research has also identified 11 (eleven) challenges in adopting standard form of construction contract in Indonesia. Some of these challenges are lack of awareness and socialization, and the reluctant to change the current practices. Solution is given for each challenge which essentially tries to promote the usage and benefits of standard form of construction contract in Indonesia.
In addition, this research also examines various aspects of construction industry which will be stipulated in the form of construction contracts. There are 2 (two) main aspects i.e. legal aspect and business aspect. Business aspect consists of technical aspect, administrative aspect, financial aspect, taxation aspect, insurance aspect, socio-economic aspect, and environmental aspect. By
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understanding the various aspects of construction contract, then a proposed model of standard form of construction contract can be made.
Since standard form of construction contract is a new thing to be implemented in Indonesia, further researches can be made and developed. Two of them are the various types of standard form of construction contract in Indonesia and the impacts of the implementation of construction contract standard forms in Indonesia.