Turnkey Contract and Lump Sum Contract for Construction Services in Indonesia



A.LEGAL BASIS

  1. Law Number 2 Year 2017 on Construction Services (Law 2/2017);
  2. Governmental Regulation Number 29 Year 2000 on The Implementation of Construction Services as amended a few times, the last time by Governmental Regulation Number 54 Year 2016 (GR 29/2000);
  3. Presidential Regulation Number 54 Year 2010 on Procurement of Goods and Services as amended a few times, the last time by Presidential Regulation Number 4 Year 2015 (PR 54/2010); and
  4. Red Book and Silver Book of Federation Internationale Des Ingenieurs-Conseils (FIDIC).

B. TURNKEY AND LUMP SUM CONTRACT IN GENERAL

In common construction services contract, there are two (2) types of contract that are often used between the owner as goods and/or services’ users and the contractor as goods and/or services’ suppliers, namely Turnkey Contract and Lump sum Contract.

A Turnkey contract is the type of contract under which the contractor shall provide the works ready for use at the agreed price and a fixed date. In the turnkey contract, the contractor shall do the construction services for the required works and once it is ready for operations, the contractor shall hand over the “keys” to the owner so that the owner may operate the facility. In principle, Turnkey contract means a contract whereby the contractor provides whatever is necessary for a certain purpose. Turnkey contract price will be expensive due to the contractor’s calculation that they would only be paid for the works after the works is 100% done and taken over by the owner.

A Lump sum contract is the type of contract under which the contractor shall submit a total price for the project instead of bidding on individual items. A Lump-sum contract is the most recognized agreement for projects with a well-defined scope or construction projects where the risk of different site conditions is minimal. In the Lump sum contract, the owner has essentially assigned all of the risks to the contractor, who in turn is expected to ask for a higher markup that will cover contractor’s overhead and profit margin in order to take care of unforeseen contingencies. The payment for the Lump sum contract will be made to the contractor on the basis of the progresses of the works, achieved by the contractor.

C. TURNKEY AND LUMP SUM CONTRACT ACCORDING TO INDONESIA REGULATION

Article 46 of Law 2/2017 classifies Turnkey as a payment method, meanwhile the same article classifies Lump sum as a calculation system of the works.

Article 21 of GR 29/2000 classifies lump sum as a form of remuneration/reward. The article further stipulates that the lump sum contract shall constitute a completion of all works within a certain period of time with a fixed total price and that all of the risks that may occur in the process of completion of works are fully borne by the contractor as long as the drawings and specifications remain unchanged. Meanwhile Turnkey is classified as a payment method under which the payment occurs when the physical works are completely done (100%).
Article 51 of PR 54/2010 classifies both Turnkey contract and Lump sum contract as types of contract on the basis of the payment method. That article also stipulates that the Lump sum contract is a contract on procurement of goods and/or services regarding the completion of the entire project within certain/particular time limit, with the following provisions:

  1. Total price is certain and fixed and there is no possibility of price adjustment;
  2. All of the risks are fully borne by the contractor;
  3. Payment is based on the resulting product / output stage in accordance with the contents
    of the contract;
  4. The nature of the project is oriented towards output (output based);
  5. The total bid/offer price is binding; and
  6. Variation order is not allowed.

Meanwhile, the same article defines Turnkey contract as a contract of procurement of goods/construction projects/other services for the completion of entire project within a specified time limit with the following provisions:

  1. Total price is certain and fixed until the entire project is completed; and
  2. The payment is made on the basis of the mutual assessment indicating that the project has been carried out in accordance with predefined performance criteria.The PR 54/2010 only applies to the procurement for goods and/or services by governmental institutions, namely activities to obtain goods and/or services by Ministries/institutions/work units of regional apparatus/other institutions using the State Revenue and Expenditure Budget (APBN) and/or Regional Revenue and Expenditure Budget (APBD).

D. TURNKEY AND LUMP SUM CONTRACT ACCORDING TO FIDIC

According to FIDIC, Lump Sum Contract means the form of Contract under which the tenderer offers lump sum price(s) for providing the works, thereby taking the risk that the physical quantities of the works may differ from those which he calculated in order to finalise his tender sum. Meanwhile Turnkey means the procurement procedure under which the Contractor or supplier designs and provides Works, which are ready for operation by the Employer (at the “turn of the key”), and which may incorporate all the necessary fixtures, fittings and equipment.

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