Jul

27

Construction Consortiums in Indonesia

A consortium is a group of two or more individuals or companies that work together to achieve a common objective. Entities participating in a consortium pool resources but are otherwise only responsible for the obligations set out in the consortium’s agreement. Therefore, every entity under the consortium remains independent regarding their normal business operations and has no say over another member’s operations that are unrelated to the consortium. The law in Indonesia does not require using a particular standard form of agreement issued by a specific organization.

Furthermore, Indonesian law recognizes the principle of freedom of contract, which is explicitly stated in Article 1338 of the Civil Code. Article 1338 of the Civil Code provides that parties to an agreement are free to include any provisions they wish, subject only to the mandatory provisions of law in Indonesia, which shall not violate Indonesian statutory laws and regulations, public policy and the public order.

Working collaboratively in a consortium has many advantages. It facilitates the development of innovative project solutions, including how to manage commercial risks. It may also help combine different sources of project funding and complementary business aims. It also ensures that bidding costs are shared among the consortium members. Its value comes from properly combining the member’s strengths, capabilities and resources.

Working together in a consortium needs to be managed carefully. Significant efforts must be focused on finding the best partners for the construction project. In some cases, due diligence is carried out by one partner on another to obtain assurance about its technical and financial capabilities, experience and reputation. The things to consider for a productive and effective partnership, and consequently, to ensure a successful consortium are as follows:

  • Early involvement of key sponsors across institutions.
  • Commitment from each of the sponsor’s senior management.
  • Common goals between sponsors.
  • Clear understanding of responsibilities, risks and rewards between the consortium’s members and key suppliers.
  • Identification of key individuals/teams who will work together.
  • Selection of bidding partners based on value (not price).
  • Shared cultural values and processes across consortium members and critical suppliers.
  • Ideally, consortium members have practical experience working together and building successful joint bidding/working teams.
  • Previous experience and track record of being consortium members.
  • The relationship a proposed partner has with the procuring authority.

The general guidelines for construction consortium are regulated under Article 13 of Regulation of the Minister of Public Works and Public Housing No. 14 of 2020 concerning Standards and Guidelines for Procurement of Construction Services Through Providers. A consortium can be made by businesses that:

  1. have a Large business qualification working with those that have a Large business qualification;
  2. have a Medium business qualification working with those that have a Medium business qualification;
  3. have a Large business qualification working with those that have a Medium business qualification; or
  4. have a Medium business qualification working with those that have a Small business qualification.

Meanwhile, the consortium cannot be conducted by: Construction service providers with a Large business qualification working with those that have a Small business qualification; and

  1. Construction service providers with a Small business qualification working with those that have a Small business qualification too.

The number of parties in a consortium are limited to:

  1. for work that is not complex in nature, the limit is a maximum of 3 (three) companies in 1 (one) joint operation; and
  2. for complex work, the limit is a maximum of 5 (five) companies in 1 (one) joint operation.

One of the parties in a consortium shall become the lead firm and must have qualifications of the same level or higher than the other parties in the consortium with a majority capital portion and a maximum of 70% (seventy percent).

If you intend to establish and engage in a consortium as explained above, Schinder Law Firm is one of many corporate law firms in Indonesia that have handled a lot of similar construction projects, with many experienced and professional corporate lawyers in Indonesia, including dispute lawyers, in its arsenal, making it one of the top corporate consulting law firms in Indonesia. Feel free to contact us at info@schinderlawfirm.com for further consultation.

Author: Dewi Susanti