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Indonesia’s entry in January 2025 into the BRICS multinational bloc has cemented its reputation as one of the world’s foremost developing economies and a key member of the Global South. With a population of 280 million and a land area larger than Germany, France and Spain combined, Indonesia offers enormous potential for construction and infrastructure development.

Construction is the fourth-largest sector in Indonesia’s economy and is rapidly expanding. In 2024, its construction market was valued at US$280bn, and it is forecast to reach US$300bn this year, buoyed by newly accessible financing channels such as via the BRICs-led New Development Bank, increased economic and technological exchanges with other BRICs powers such as China and the UAE, and the country’s steady march towards energy transition.

Major projects

Recent public and private investments highlight a bold and ambitious agenda for transformation in Indonesia:

• · Nusantara – the new capital city: Nusantara, Indonesia’s new capital city in East Kalimantan, is at the heart of a government-led relocation strategy aimed at alleviating congestion in Jakarta. In January 2025, the government allocated US$3bn for the second phase of construction in 2025-29. Continued public investment in Nusantara is anticipated to draw substantial further private sector investment, which could drive total project costs to US$29bn.
• · Energy and industrial projects: The Abadi LNG project, worth US$20bn, aims to unlock reserves in the Arafura Sea’s Abadi gas condensate field. Estimated recoverable reserves are 1.7 billion barrels of oil-equivalent in LNG. Indonesia is also developing new energy projects as part of its energy transition strategy. A series of solar projects upcoming in East Java, West Java, West Sumatra, Kalimantan and the Riau Islands will complement South East Asia’s largest solar installation in Cirata, Java.

Evolving regulatory and contracting landscape

Indonesia’s legal framework continues to evolve, balancing local customs with international best practices. Indonesia is a civil law jurisdiction, and construction law is regulated under Law Number 2 of 2017 on Construction Services, as amended by Government Regulation in Lieu of Law Number 2 of 2022 (Construction Law) and Government Regulation Number 22 of 2020 on Implementing Regulation of Law Number 2 of 2017 on Construction Services, as amended by Government Regulation Number 14 of 2021 (GR 22/2020 / GR 14/2021).

Under the Construction Law, construction contracts must be governed by Indonesian law, and foreign companies may only participate in work through joint ventures with Indonesian partners. UK contractors should familiarise themselves with some differences between Indonesian law and English law. For instance, Indonesian law places a good faith requirement on parties and also requires them to conduct themselves in accordance not only with what is expressly stipulated but also with propriety and customs, which could result in differences in interpretation of contractual rights and obligations compared with English law. Indonesian law also permits the variance of delay damages clauses to reflect damages for losses actually suffered, and there are mandatory aspects of law that parties cannot contract out of, such as for decennial liability.

Although there is no general requirement for any particular form of contract, FIDIC standard forms (as translated into Indonesian) are commonly used for major projects involving international parties, while state-funded projects would apply standard forms provided by the Government Goods/Services Procurement Policy Agency (LKPP).

There are minimum content requirements for construction contracts in Indonesia. For instance, they must include:

• · Terms detailing scope of work and the system for calculation of work performed
• · Parties’ selection documents (showing the contractor’s proposal, applicable duties and requirements, including work specifications, requirements, drawings, output/quantity and price lists, such as a priced bill of quantities, schedule of rates or lump sum quotation)
• · Provisions regarding liability for breach and termination of contract
• · Provisions for liability for building failure
• · Provisions regarding construction worker utilisation
• · A force majeure clause, and other statutorily specified matters.

Contracts must also be in the Indonesian language, or bilingual.

Environmental approval is also required before construction can commence (with different requirements depending on the scale of potential environmental impact) to ensure projects align with both economic and environmental objectives. All project participants must also adhere to the applicable standards of safety, security, health and sustainability during the works.

For international parties participating in Indonesian projects, arbitration tends to be the preferred form of dispute resolution. International Chamber of Commerce (ICC) or Singapore International Arbitration Centre (SIAC) arbitration are common options picked for major projects, while local arbitration references to the Indonesian National Board of Arbitration (BANI) and the Indonesian Construction Arbitration and Alternative Dispute Resolution Board (BADAPSKI) are also regularly seen for construction disputes in Indonesia.

Opportunities and challenges for UK companies

The market presents a dynamic landscape of opportunities. With historical precedence for participation in Indonesian projects, UK companies can leverage their expertise in engineering, digital construction technologies, and sustainable infrastructure design across multiple sectors.

There are many encouraging indicators. For example, the Indonesian government’s push for enhanced private sector participation, including through improving regulatory frameworks and new financing mechanisms, opens doors for UK companies to explore joint ventures with Indonesian partners, particularly on energy, infrastructure and urban regeneration projects.

Indonesia’s ambitions to transition its energy mix and its aspirations to become one of the largest digital economies in South East Asia by 2030 create opportunities for UK companies with longstanding development experience and advanced specialisms in sustainable construction technologies.

While Indonesia has seen overall growth and future projections are promising, there are challenges. For example, while the government is looking to boost the labour market, the country still faces a shortage of skilled workers. As Indonesia requires collaboration with local partners on construction projects, UK companies may need to consider investing in local workforce development, including through, for example, collaborative training programmes and technology transfers.

Despite regulatory reform and expansive plans for future development, bureaucratic hurdles and policy unpredictability remain concerns for overseas stakeholders. These issues could be disruptive for operations and profitability, and UK companies should therefore adopt robust risk management strategies and work closely with legal advisers to predict, navigate and mitigate potential challenges. Geopolitical risks and macroeconomic pressures are also key considerations, including potential supply chain disruptions and foreign exchange volatility.

Strategic recommendations

As President Prabowo Subianto’s administration pushes forward with transformative initiatives, the Indonesian construction market presents a fertile ground for overseas investment and collaboration. The convergence of strong government support and increased private investment will garner the interest of many. It is important that any strategic entry into Indonesia is underpinned by a detailed evaluation of the market, its participants, local legal frameworks, and relevant politics so as to best mitigate risks and maximise returns.

Yu-Jin Tay is global co-head of international arbitration, and Charles Tay and Sang Joon Park are senior associates, at Mayer Brown