Construction Sector Growth

Indonesia’s construction sector remains a vital driver of national development, supported by consistent government investment and regulatory initiatives aimed at strengthening infrastructure resilience. Despite global economic uncertainties, Indonesia’s construction output is projected to expand at an average annual growth rate (AAGR) of 6% during 2025–2028, driven by sustained investment in commercial, industrial, infrastructure, energy and utilities, and institutional construction sectors (Research and Markets, 2025).

Government’s Strategic National Projects (PSN) programme

Another major pillar of construction growth stems from Indonesia’s ambitious PSN programme, designed to drive strategic development, job creation and community welfare. From 2016 to the end of 2024, 225 PSN projects have been completed cumulatively, with reported total investment reaching IDR1,990 trillion (Pranata and Mae, 2025).

Although the government has recently streamlined and reprioritised the PSN projects, this does not signify a rollback in infrastructure ambition. Rather than being entirely new, the current list of 77 PSN projects for the 2025–2029 period under President Prabowo Subianto’s administration includes a combination of ongoing and newly introduced initiatives. This demonstrates a strong commitment to continued infrastructure-led development. The list includes projects in toll road construction, water supply systems, airports, ports and renewable energy, among others (Laksono, 2025). This renewed PSN agenda offers fresh opportunities for EPC contractors and investors to participate in large-scale, government-prioritised infrastructure initiatives.

PLN’s 71 GW capacity expansion plan and Indonesia’s energy transition roadmap

One of PSN’s programmes is electricity infrastructure assigned to Indonesia’s state utility, PT PLN (Persero) (PLN). In support of Indonesia’s ambitious plan for energy transition, PLN 2025–2034 Electricity Supply Business Plan (RUPTL) outlines a plan to add 71 GW of new electricity capacity – 70% from renewable sources. This expansion will necessitate significant construction projects, including solar, hydro and geothermal plants, along with 48,000 circuit-km of transmission lines (Reuters, 2025).

In line with the mission above, the Ministry of Energy and Mineral Resources (MEMR) issued Regulation No 10 of 2025 on the Roadmap for the Energy Transition in the Electricity Sector (MEMR Reg 10/2025), which sets out the roadmap for Indonesia’s energy transition in the electricity sector. MEMR Regulation 10/2025 serves as an implementing regulation of Presidential Regulation No 112 of 2022 on the Acceleration of Renewable Energy Development for Power Supply. It outlines key strategies for implementing energy transition and sets out more detailed provisions on the early retirement for coal-fired power plants (CFPP), by providing a framework and roadmap for the implementation of energy transition in the electricity sector to support the achievement of the ambitious net zero target by 2060.

To meet this target, Indonesia will require an average annual addition of 9.6 GW, with a strategic shift toward renewable energy and with a projected total installed capacity of 443 GW by 2060. The 2060 generation mix is expected to comprise of: (i) 41.5% variable renewable energy (including solar, wind and tidal wave energies) equipped with 34 GW storage; (ii) 58.5% dispatchable non-variable renewable energy (for example, hydro, biomass, geothermal and nuclear); and (iii) a progressive reduction of fossil-based capacity, with CO₂ emissions expected to peak in 2037 at around 599 million tons and decline toward net zero by 2059.

The MEMR Regulation 10/2025 lays out key strategies including biomass co-firing, dedieselisation and gasification, retrofitting fossil-based plants with carbon capture, restricting new CFPP developments and accelerating variable renewable energy. It also promotes green hydrogen, nuclear power, as well as modernisation and expansion of the national grid, including smart grid initiatives.

This comprehensive regulatory framework signals strong and sustained demand for construction services, advanced technologies and engineering expertise. EPC contractors, in particular, will find a growing pipeline of opportunities in utility-scale renewable energy development, national transmission infrastructure, and low-carbon technology integration, cementing the energy transition as a central pillar of Indonesia’s infrastructure-led growth.

Residential development and green building momentum

In parallel, residential development is also expected to drive substantial construction growth. Under President Prabowo Subianto’s administration, the government has launched a programme to construct three million housing units annually to address the country’s longstanding housing backlog. This initiative is supported by Bank Indonesia through liquidity measures, including the allocation of IDR130 trillion (approximately USD8.2 billion) for housing development (Reuters, 2025).

The residential construction market is forecasted to grow by 6.4% annually in 2025, driven by demand for affordable, middle-income and sustainable housing (Research and Markets, 2025). With Indonesia’s urban population projected to increase by 65% between 2020 and 2050 (Purnomo et al., 2024), consumer preferences are increasingly shifting toward eco-friendly, energy-efficient housing solutions. This transformation is reshaping design principles and driving developers and contractors to integrate green technologies and sustainable construction practices. In this context, EPC contractors are well-positioned to benefit from large-scale residential projects, integrated housing developments and public-private housing initiatives. As both public and private sector investments expand, residential construction is set to become a core component of Indonesia’s broader infrastructure and development agenda.

Construction Disputes Trends in Indonesia

Construction disputes in Indonesia are governed under Law No 2 of 2017 on Construction Services (Construction Services Law), which encourages alternative dispute resolution (ADR) mechanisms, due to its expertise, flexibility, confidentiality and efficiency. This includes mediation, conciliation and arbitration. Additionally, Government Regulation No 22 of 2020 on Implementing Regulation of the Construction Services Law as amended by Government Regulation No 14 of 2021 (GR 22/2020) requires all construction contracts to be governed by Indonesian law, regardless of the parties’ nationality or chosen dispute resolution forum.

How has the Indonesian government addressed construction disputes in recent years?

Over recent years, the Indonesian government has taken active steps to address construction disputes through ADR. In practice, many parties still prefer the Indonesian National Arbitration Body (BANI) among other available dispute forums due to its greater reputation, credibility and track record in resolving construction disputes. However, due to the growing complexity of infrastructure projects, there is one emerging mechanism in the form of Dispute Adjudication Board (DAB), a panel of independent professionals appointed at the outset of a project to provide non-binding recommendations or binding decisions on disputes as they arise. Commonly used in international construction contracts, DAB helps maintain project timelines by resolving issues on-site, without the delays of arbitration or litigation.

Construction dispute resolution trends in Indonesia

In Indonesia, construction disputes are primarily resolved through ADR – beginning with negotiation and, if unsuccessful, arbitration – due to its efficiency, confidentiality and preservation of business relationships. Construction disputants generally prefer local arbitral institutions like BANI for their familiarity with Indonesian legal practice and the regulatory environment, while international arbitral institutions such as the Singapore International Arbitration Centre (SIAC) or the International Chamber of Commerce are typically selected for projects involving international funding, foreign parties and large disputed values, due to their global recognition and experience in handling complex, high-stake cases. This comparison between the choice of forum of domestic and international construction disputes also applies for the selection of the seat.

On another hand, mediation is often favoured over litigation for long-term construction contracts, as it helps maintain working relationships and offers a faster, lower-cost and confidential resolution. Its growing legal recognition, under Article 5 paragraph (2) of Construction Services Law and GR 22/2020, has been supported by institutions like the National Mediation Centre (PMN), which has successfully resolved numerous disputes through this mechanism. In contrast to those, court litigation is typically avoided in construction disputes which stems from the limited judicial experience in handling complex construction matters, the duration and the public nature of the court proceedings, which can compromise confidentiality.

Construction dispute resolution through dispute adjudication boards under Indonesian law: a regulatory overview

Article 88 of Construction Services Law recognises DAB as one of the dispute resolution mechanisms beside mediation, arbitration and conciliation. DAB functions as standing panels established to monitor the performance of construction contracts, with the objective of pre-empting or resolving disputes in a timely and efficient manner. In Indonesia, the use of a DAB is governed under Minister of Public Works and Housing Regulation No 11 of 2021 on Procedure and Technical Guidelines for Construction Dispute Adjudication Board (Regulation 11/2021).

What sets the DAB apart is the discretion granted to the parties to jointly appoint its members and that the DAB is established at the outset of the construction contract. This early formation is a key feature, as it enables the DAB to be continuously involved throughout the course of the project. DAB’s continuous involvement throughout the implementation of the construction project allows it to gain a comprehensive understanding of the project. As a result, any dispute that arises can be evaluated within the full context of the project’s implementation, ensuring a more informed and effective resolution.

Moreover, as regulated under Article 26 of Regulation 11/2021, DAB members are professionals with substantial technical expertise and practical experience in the construction industry. This technical proficiency gives the DAB a distinct advantage in resolving complex construction disputes effectively and with industry-specific insight. Generally, provision of DAB is a matter of an agreement between the parties to incorporate a DAB clause into their contract and hence not embodied in laws and/or regulations.

However, in Indonesia, Regulation 11/2021 stipulates two conditions in which disputants are obliged to choose and incorporate a DAB clause as the dispute resolution mechanism under their contract, which are:

• a contract involving construction services where the central or local government funds the project with domestic loans or domestic grants; and
• a contract involving construction services where the service is financed through foreign loans or foreign grants, unless the loan or foreign grant agreement provides another choice of dispute resolution mechanism or prohibits the use of a DAB.

It is worth noting that there is currently no publicly available data on how commonly DABs are used in Indonesia. This is because DABs are based on private agreements between the parties and are therefore not subject to mandatory reporting or public disclosure. Moreover, when disputes are successfully resolved through DAB, they do not proceed to arbitration or litigation, leaving no official record from which to assess the effectiveness of the mechanism.

The dispute resolution process is estimated to take two to two-and-a-half months. Once a DAB renders its decision, the disputants are granted a statutory period of 28 calendar days within which they may file a written objection, pursuant to Articles 22 and 23 of Regulation 11/2021. The legal consequences of objection or the lack thereof are as follows.

• No objection filed – if no objection is submitted within the 28-day window, the DAB decision attains final and binding status, obligating the parties to comply.
• Partial objection – where an objection is made only in respect of certain aspects of the DAB’s decision, the unchallenged portions become final and binding.
• Full objection – if the entire decision is contested, the parties may pursue further recourse through court litigation or alternative dispute resolution mechanisms, in accordance with the governing contract.

Under Article 22 paragraph (3) of Regulation 11/2021, in the absence of any objection to the DAB’s decision, both parties are required to promptly implement it. This provision implies that, once the decision is undisputed, it must be executed without the need for further recourse or procedural steps, unless otherwise stipulated in the contract.

However, despite this obligation to comply, Regulation 11/2021 remains silent on the crucial issue of enforcement of DAB’s decision. While the regulation establishes the binding nature of DAB decisions, it does not provide a mechanism for their direct enforcement through the Indonesian court system or administrative channels, as opposed to a BANI’s arbitral award that has to be registered by BANI to the relevant district court within 30 calendar days after the award is rendered to the parties. As a result, even when a DAB decision is final and binding due to the absence of objection, the lack of a statutory enforcement framework creates a legal and practical gap, particularly when one party refuses to comply voluntarily. This gap may ultimately undermine the intended effectiveness of the DAB process.

To mitigate such risk, it is advisable for parties to expressly address enforcement in their contracts. Contractual provisions should:

• stipulate that failure to comply with a final and binding DAB decision constitutes a breach of contract; and
• stipulate that in the event both parties have agreed to the DAB decision, they thereby waive the possibility of the relevant dispute being brought to the court or arbitration.

Most common causes of construction disputes in Indonesia

Construction disputes in Indonesia often stem from incomplete design information, poor site investigations, delayed client responses, unrealistic deadlines and late payments. Many also arise from vague dispute resolution clauses, such as unclear forum selection, the absence of a multi-tiered mechanism, or referencing non-existent forums. Choosing foreign governing law over Indonesian law can further complicate compliance with local requirements. Miscommunication, unclear contracts and poor risk allocation increase the likelihood of conflict. External factors like COVID-19, rising material costs, and shifting regulations have triggered delays and force majeure claims. Legal challenges also frequently result from land acquisition issues and unclear site ownership. These recurring problems point to the urgent need for clearer contracts, better planning and stronger co-ordination among project parties.

Construction cases in Indonesia

Several notable construction dispute cases in Indonesia illustrate the range of issues commonly found in the sector. The 2007 Supreme Court case between PT Citra Katon Dwidayalestari and PT Mustika Princess Hotel underscores the challenges of resolving construction disputes in general courts rather than through arbitration. Although the employer alleged substandard work, the court ultimately ruled in favour of the contractor, finding insufficient evidence of a significant breach to withhold payment. Lacking an arbitration clause, the courts applied the Civil Code instead of the Construction Services Law. This case highlights the importance of arbitration, particularly through familiar bodies like BANI, in ensuring disputes are resolved with appropriate industry expertise and legal standards.

In addition, a prominent Indonesian construction dispute in Indonesia involved PT Hutama Karya (HK) and PT Krakatau Bandar Samudra (KBSA) over the construction of the Citayur Dock and dredging work at Cigading Port, Banten. HK claimed it encountered unexpected hard coral and compact soil layers during dredging, arguing these conditions were beyond its contractual responsibilities and warranted additional compensation. In arbitration, the tribunal ruled in favor of KBSA, emphasising that the soil test results had been included in the tender documents and that HK, under a fixed lump sum payment scheme, was responsible for checking the site conditions. HK filed for annulment of the award arguing that the tribunal had ignored key evidence and misinterpreted contractual provisions, particularly those related to risk allocation and soil condition. The Serang District Court and the Supreme Court rejected HK’s petition, affirming that courts cannot reassess the merits of arbitration, thereby upholding the binding nature of arbitration and the importance of proper risk assessment in construction contracts.

With regard to construction cases, the authors have dealt with a case concerning a construction project in which the employer withheld payment due to delays and alleged deficiencies in the contractor’s work, including failure to meet agreed specifications. In response, the contractor may assert its right to payment and impose penalties for late payment. At the heart of the case is the principle of exceptio non adimpleti contractus, where one party refuses to perform its obligations on the grounds that the other party has failed to fulfil theirs.

Additionally, it is noted that there are disputes arising from procurement processes. In one case before the Jayapura State Administrative Court (No 23/G/2020/PTUN.JPR), PT Cipta Konstruksi Persada challenged the decision of Procurement Working Group 71 SDA, which had declared a rival bidder as the winner of the Wanggar Dam Stage II tender in Nabire, Papua. The plaintiff argued that the tender result, uploaded through the SPSE e-procurement platform on 17 April 2020, was a written and final administrative decision with direct legal consequences. The plaintiff considered the decision unlawful and harmful, invoking provisions under Law No 51/2009 and Law No 30/2014. However, the court emphasised that based on Presidential Regulation No 16/2018 and LKPP Regulation No 9/2018, any party dissatisfied with a tender decision must first exhaust the administrative remedies of filing an objection and, if unsatisfied with the response, a further appeal to the Commitment-Making Official. The court found that while the plaintiff filed an objection on 23 April 2020, within the allowed timeframe, it failed to submit a proper appeal objection within five working days after receiving the response, opting instead to file complaints with the Ministry’s Inspectorate General and the Provincial Prosecutor’s Office – entities not authorised under procurement dispute regulations. Therefore, the panel of judges concluded that the plaintiff did not follow the legally prescribed procedures for challenging the tender result. As a result of this procedural error, the court deemed the claim formally defective and dismissed the case for failure to exhaust the proper legal remedy.

Another construction dispute in Indonesia is the case between PT Citra Katon Dwidayalestari (PTCD) and PT Mustika Princess Hotel (PTMPH), which reached the Supreme Court and was decided on 16 November 2007. PTCD, acting as the contractor, filed a claim for unpaid services rendered under a construction contract, while PTMPH countered by alleging that the work provided was below standard and caused losses. Both the South Jakarta District and Jakarta High Courts sided with PTMPH, granting its counterclaim and ordering PTCD to pay damages. However, on cassation, the Supreme Court overturned the lower court decisions and ruled in favour of PTCD, ordering PTMPH to fulfil its payment obligations. This case is particularly relevant because dispute resolution was conducted through the general courts instead of arbitration – despite arbitration being the more common mechanism in construction contracts – due to the absence of an arbitration clause. Moreover, the court’s reasoning was not based on the Construction Services Law, but on Article 1238 of the Indonesian Civil Code regarding breach of contract, as the construction agreement predated the enactment of the Construction Services Law. The Supreme Court found that PTMPH remained contractually bound to pay, as it failed to sufficiently prove that PTCD’s performance constituted a substantial breach that would nullify payment obligations (Ayutantrie, 2009).

Legal guidelines to avoid construction disputes

To avoid construction disputes, there are at least six key legal guidelines that can be implemented by related parties.

• Document ownership and rights clearly – put a deal in writing through formal contracts, as oral agreements or informal deals can lead to uncertainty and ownership disputes.
• Define payment schedules and remedies – set a clear payment timetable with detailed amounts and due dates. Additionally, specify the consequences for late payment. For instance, interest and suspension of work. Such clear payment terms help avoid cash flow disputes.
• Use written change orders (amendments) – every change in the scope of work must be recorded as a signed contract amendment or a change order, including any adjustment in the cost or deadline, as unwritten changes may cause confusion and disputes.
• Clarify performance obligations and scope of work – spell out each party’s work responsibilities, quality standards and timelines in detail. This may prevent any potential disagreements about incomplete work or defects.
• Incorporate dispute resolution clauses – incorporate a dispute resolution clause specifying the mechanism such as mediation, arbitration, or litigation – as well as the institution that will administer it. Avoid dualism or ambiguity by explicitly naming the forum (for example, BANI, SIAC, or South Jakarta District Court). For arbitration, specify the administering institution, language, seat, number of arbitrator(s) and governing law. This clarity prevents jurisdictional disputes and ensures that the clause is enforceable. Many arbitration awards are later challenged due to vague or conflicting references. Align the dispute resolution clause with Indonesian legal norms to prevent annulment.
• Ensure transparency in tenders and awards – if project bidding or tendering is involved, parties must follow fair evaluation procedures and document decisions. Project owners should adhere strictly to tender rules to avoid legal challenges, and contractors should ensure compliance and promptly protest any irregularities through official channels.

By implementing these practices, contractors, project owners, investors and other related parties can establish clearer construction project contracts, manage expectations, and reduce the risk of costly construction disputes.