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Choosing a contractor or subcontractor can often have devastating consequences. The wrong one can plague a project like constant natural disasters. Some of the most typical consequences companies suffer from the making the wrong choice are as follows:
- Bad reputation. The project owner can begin to question your reputation. You have to be fully aware that keeping a good portfolio from the current project owner will help to land the next job.
- Loss of scheduling delays. If you choose the wrong subcontractor, it might cause your construction schedule to suffer delays. As a consequence, you might suffer penalties from the project owner as provided by the contract, which can also lead to serious disputes.
- Liens. If a material supplier has not been paid by the subcontractor on your project, a lien could be placed on the property.
- Defects. If you choose a subcontractor who’s was not capable of properly completing the project, building defects are likely to occur; these would cause serious damages to your bottom line. You will be held responsible by your project owner, and you might have to pay all the associated remedies.
- Job abandonment. If a large down payment was paid before any work was started or if a subcontractor requests more money than justified by completed work, the entire project risks being vacated.
Always remember to be very prudent before signing any construction contracts with your subcontractors. You must gather as much information as you can, and it is strongly recomended you seek legal counsel with specialities in construction law. Proper advice from well-qualified legal counsel can make or break the success of your projects.
But what can you expect from your legal counsel? In general practice, your counsel should conduct legal due diligence or a legal audit into the clear background of your subcontractor candidate. Any legal counsel, according to their expertise, would provide at least the following information on your prospective subcontractor :
- Experience. The legal counsel should check references regarding their completed jobs, their financial stability, and their qualifications to conduct certain project as delineated in their permit and license.
- Scope of Work. While many subcontractors claim they were capable to do a variety of projects, their legal documents show otherwise.
- Lawsuit History. To get a sense of their quality of work, your legal counsel should investigate whether the subcontractor has been sued before.
- Legal Compliance Record. In order to verify the subcontractor candidate’s quality of work and capabilities, the legal counsel should check and audit their legal compliance record.
- License Verification. According to our experience here at Schinder Law Firm, many subcontractors do not posses the appropriate licenses to conduct the construction work on specific projects. We have found that many subcontractors do not actually hold the correct Construction Business License (Ijin Usaha Jasa Konstruksi – IUJK) for the projects they engage in. For example, on a high rise building project, we discovered the subcontractor only held a license or IUJK for waste tunnel construction. Obviously, this is extremely dangerous as any your company would be liable for resultant building failure and damages.
- Contract Legal Compliance. Your legal counsel should make sure any contracts presented by the subcontractor adhere to the FIDIC Standard for Construction Contracts and comply with the Law on Construction Services. The FIDIC standard is there to ensure an almost perfect standard in construction contracts. And for construction projects in Indonesia, the contract should comply with the additional standards regulated by Law Number 2 Year 2017 concerning the Construction Services (“Construction Law”).
To examine in more depth, the Construction Law provides specific contract requirements as follows:
- Mandatory provision. This includes the transfer of knowledge obligation for foreign parties, risk and liablilites, dispute setlement, third parties protection, obligation to use Rupiah currency for any payment related to a project in Indonesia, performance bonds, building failure, certified construction manpower, solvency period, payment method, manpower protection, termination, risk guarantee, environment aspect and project description, and intellectial property rights for Planning Services.
- Contract’s Language. The construction law strictly stipulates that all construction contracts be written in the Bahasa Indonesia Language. Further, the law stipulates that any contract involving a foreign business entity must be constructed in both the Indonesian and English languages. Moreover, in the event of dispute arising from a contract, the Indonesian language version shall prevail.
The best way to reduce your chances of hiring the wrong subcontractors with poor portfolios and corresponding imminent headaches is to make all prospective subcontractors undergo a pre-contract assignment screening. Your company may not be able to prevent or control all the actions of your subcontractor, but due diligence can mitigate the risk of failure. Moreover, conducting a complete background screening will reduce the chances of lawsuits arising from the ‘negligent hiring’ of a subcontractor and your company’s liability in the event a subcontractor engages in harmful practices. Therefore, qualified and experienced legal counsel should play important roles in ensuring your company chooses the right candidates.
Budhi Satya Makmur, SH., M.H