Indonesian Construction Services Proposed Price Adjustment Amid Rising Material Prices
In a meeting of the Indonesian Chamber of Commerce and Industry (KADIN) with 13 associations of construction business entities last month, the heads of associations of construction business entities stated 2 problems that are currently being faced.
First, the requirements that are burdensome for construction businesses related to the implementation of the Omnibus Law on Job Creation and GR No. 05/2021 concerning the Implementation of Risk-Based Business Licensing. The majority of business entities experience difficulties in managing Business Entity Certificates (SBU).
From data from the Construction Services Development Agency (LPJK) of the Ministry of Public Works and Public Housing (PUPR), of the 130 registered construction companies, only about 11% are still in operation, the remaining 88% small and medium-sized companies had difficulties in meeting the requirements and participating in tenders so that the business continuation was challenged. KADIN and associations asked the government to issue relaxation of requirements in GR No. 05/2021, including increasing the validity period of Business Entity Certificates from 3 years to 9 years. The government was also expected to increase the number of LSPs (Professional Certification Institutions) which was not balanced with the required number of workers at all levels.
The Minister of Public Works has approved and granted easing of regulations that were effective as of August 11, 2022. Kadin and the associations appreciated the Indonesian government’s fast response.
The second is the impact of global inflation on operating prices. The increase in prices also pushes up material prices, transportation costs and other supporting costs, so there is a high risk that contracts cannot be completed according to the initial agreements. The Russia and Ukraine war triggered a domino effect and made the price of building materials soar. Steel, cement, aluminum prices have been up by 51%. The price of industrial diesel fuel has even increased by 156% in eastern Indonesia.
Businesses submitted an application to the Minister of Public Works to issue a policy on price adjustments for construction projects to maintain the quality of construction development. “At the end of 2022, if there is no price escalation for existing contracts, it is feared that contractors could face many lawsuits due to differences in specifications. It is the nature of profit-oriented businesses. With such price spikes, specifications are finally lowered, volume is reduced and quality is sacrificed,” said Andi, Secretary General of the National Construction Executor Association.
The Indonesian government promised to provide industrial diesel fuel subsidies to contractors participating in infrastructure projects of the Ministry of Public Works and the Ministry of Transportation, whereby Pertamina will reduce the price of industrial diesel for the projects, and the MoPW will reimburse Pertamina for the difference in the price of industrial diesel fuel. But for other projects other than the infrastructure state projects, no specific solutions were announced to resolve the price hike.
