Cutting Costs and Managing Risk in Saudi Construction and Real Estate

In Saudi construction and real estate, costs and risks gather in a few places: material prices that move after you have priced the job, progress payments that arrive later than site spending, retentions and bank guarantees that tie up cash, delays that turn into penalties or claims, subcontractors who fail mid-project, and equipment and site overheads that keep running when work slows. The contractors and developers who come through a crisis in good shape know what their contracts say about price changes and delays, buy materials with a plan, submit and chase every progress claim on a fixed cycle, pass their contract terms down to subcontractors, tie site overheads to the program, and forecast cash for each project, not only for the company.

It is written for contractors, subcontractors, developers and property owners in the Kingdom. For the general approach to cash in a crisis, read our guide to cash flow management in a crisis; this article covers what is specific to projects.

Where the money and the risk sit on a Saudi project

For contractors

A contractor’s costs fall into a handful of lines, and each carries its own risk:

• Materials: steel, cement and ready-mix concrete, blocks, cables, pipes, finishing materials and imported mechanical and electrical equipment. These are the lines most exposed to price swings and shipping delays.
• Labor: wages, housing and transport for site workers, work permits and contracts on Qiwa, salary payments through Mudad, GOSI contributions including occupational hazard cover, and Saudization requirements under the Nitaqat program.
• Subcontractors: often the largest share of cost on building projects, and the place where one failure can stop the whole site.
• Equipment: owned or rented cranes, excavators, pumps and generators, plus fuel, operators and maintenance.
• Site overheads: site offices, supervision staff, utilities, security, temporary works, safety and permits. Most are time-related, so every extra month costs money.
• Finance and guarantees: bank guarantee fees, facility costs, insurance such as contractors’ all risks cover, and the cost of cash tied up in retentions and unpaid claims.

For developers and property owners

Developers carry land and financing costs from the first day, then design and permit costs through the Balady platform and the municipality, contractor and consultant fees, and sales and marketing. Their main risks are a slower sales pace, buyers or tenants asking for relief, higher finance costs and contractors who fall behind. Developers selling off-plan work under the rules of the Real Estate General Authority, where buyers’ payments go into a project escrow account and are released under the program’s rules, so plan the project’s cash around those releases. Landlords face vacancies, tenants asking to defer or reduce rent, and rising maintenance costs. Leases are documented on the Ejar platform, so put any agreed change in writing and check how it should be reflected in the registered contract.

Material prices and price-adjustment clauses

Materials are the cost line that moves fastest in a crisis. Shipping disruption, higher freight and insurance, and supplier delays feed into the price of imported steel, equipment and finishes within weeks; our article on the impact of regional crises on Saudi businesses explains those channels. What you can recover depends first on the contract you signed.

Know what kind of contract you signed

• Lump-sum contracts. Under the Civil Transactions Law, where a works contract is based on an agreed design for a lump-sum price, the contractor may not claim an increase because material prices, wages or other costs rose. The exception is narrow: if general exceptional circumstances that could not be foreseen collapse the contract’s financial balance, a court may restore it, including by extending the time or changing the price, or may end the contract.
• Unit-price contracts. If it becomes clear that the agreed design needs quantities clearly above the estimate, the law requires the contractor to inform the owner immediately, stating the expected increase in price. A contractor who stays silent loses the right to claim the excess. If the excess is serious, the owner may withdraw and stop the work without delay, paying for the work done.
• Government contracts. The Government Tenders and Procurement Law allows contract prices to change only in limited cases: changes in the prices of main materials or services as its implementing regulations define them, changes in customs tariffs, fees or taxes, and physical difficulties during execution that could not have been foreseen. The regulations set the conditions and the procedure.
• Private contracts with an adjustment clause. The clause governs, so read its wording, its base date and its notice requirements closely.

Writing a price-adjustment clause

For new tenders and subcontracts, a fair adjustment clause protects both sides better than a large contingency hidden in the price. A workable clause:

1. Names the materials it covers, usually the few that make up most of the cost.
2. Fixes a base date and base prices, normally the tender date.
3. Uses a named, published reference, such as the construction cost index that GASTAT publishes, or agreed supplier price lists, rather than invoices alone.
4. Sets a threshold below which each side absorbs the change, and works in both directions.
5. States how and when adjustments are claimed and what evidence is attached.
6. Excludes increases caused by the contractor’s own delay.

Buying smarter

• Order long-lead and imported items as soon as designs are approved, with delivery dates agreed in writing.
• Agree frame prices with two or three suppliers for the main materials.
• Get approved alternative products cleared by the consultant early, so a substitute does not become a new delay.
• Propose value engineering only with the owner’s written approval.
• On government projects, check the local content requirements before you change a source.

Progress payments, retentions and guarantees

On most Saudi projects the contractor spends first and is paid later. The time between doing the work and receiving the progress payment decides whether a project funds itself or drains the company.

The Civil Transactions Law’s default is that the owner pays on handover, unless agreed otherwise; where the work has several parts or is priced per unit, the owner pays for completed work after inspecting and accepting it, provided that part is distinct or significant. Most contracts replace this with a monthly or milestone claim cycle, so the payment terms deserve as much attention as the price.

Shorten the time from work to cash

1. Fix a claim calendar for each project and submit on the same day every period, complete and with all supporting measurements.
2. Agree measurements jointly with the consultant on site before the claim is prepared, so the certificate is not held up by disputes over quantities.
3. Track every claim through each stage: submitted, certified by the consultant, approved by the owner, invoiced, paid. Chase at each step.
4. Issue each invoice in line with ZATCA’s e-invoicing requirements, so a rejected invoice does not restart the clock.
5. On government projects, follow the claim process on the Etimad platform and prepare the documents the entity needs in advance.
6. Keep variations separate, so unapproved variation work does not hold back payment for the original scope.

Retentions and bank guarantees

Many contracts hold back part of each payment as retention until handover or the end of the defects liability period, and require bank guarantees for the advance payment and for performance. Each ties up cash or bank capacity. Keep a register of every retention and guarantee with its release condition and expiry, apply for release the day the condition is met, ask whether a bank guarantee can replace cash retention, and ask for the advance payment guarantee to be reduced as the advance is recovered, where the contract allows.

Delays, extensions and claims

A delay costs a contractor twice: through delay penalties or pre-agreed compensation on one side, and through time-related site costs on the other. Whether you can recover either depends on the cause and on your notices.

Typical causes on Saudi projects include late site access, late permits and approvals, design changes and late drawings, late payment, material shortages and shipping delays, utility connections and weather. Labor time also shrinks in predictable ways, such as the midday ban on outdoor work in direct sun that the Ministry of Human Resources and Social Development applies each summer and the shorter working hours of Muslim workers in Ramadan. These belong in your program from the start; they are not surprises.

For government contracts, the Government Tenders and Procurement Law lists cases in which the contract is extended and the delay penalty waived, including additional work, insufficient annual funding for the project, delay caused by the government entity or by emergency circumstances, delay for reasons beyond the contractor’s control, and a stop-work order for reasons not attributable to the contractor. The implementing regulations set the procedure. In private contracts, the extension-of-time clause governs.

How to protect your position

• Send notice of every delay event in writing, within the time the contract sets, even when the relationship is good.
• Keep a daily site diary: workforce, equipment, weather, deliveries, instructions received and work done.
• Photograph progress regularly and keep dated records of late drawings, approvals and payments.
• Update the program every month and show the effect of each event on the completion date.
• Price claims properly: time-related overheads, idle equipment, extra financing and price rises during the extended period.
• Negotiate early. An extension agreed now is often worth more than a large claim at the end of the project.

Subcontractors and suppliers

Under the Civil Transactions Law, a contractor may subcontract all or part of the work unless the law, the contract or the nature of the work says otherwise, or the contractor was chosen for who he is, and the contractor stays responsible to the owner. A subcontractor cannot claim for himself from the owner what the main contractor is owed unless the main contractor has assigned that right to him. On government contracts, subcontracting needs the entity’s written approval, the main contractor stays jointly liable with the subcontractor, and the entity may pay subcontractors directly under the conditions in the implementing regulations.

A subcontractor that runs out of cash becomes your delay, so manage the chain actively:

• Back-to-back terms: pass down the notice periods, price-adjustment rules, retention and defects terms you accepted from the owner, so you are not caught between two different contracts.
• Prequalification: before you award, check financial health, current workload, classification where required, and compliance on Qiwa, GOSI and Saudization.
• Payment discipline: agree clear payment terms and keep to them. Reliable subcontractors paid on time protect your program.
• Early warning: watch for thinning crews, late material deliveries and sudden requests for advances, which often come before a failure.
• A fallback: for critical packages, know who could take over and what it would cost.

Equipment and site overheads

The Civil Transactions Law puts the cost of the machines and tools needed to finish the work on the contractor, unless agreed otherwise, so equipment is your cost to manage. Three decisions matter most:

• Own or rent. Own what you use steadily across projects and rent what one project needs for a few months. Buying for a single contract rarely pays unless the work is long and certain.
• Utilization. Track hours worked against hours on site for each major item every week. Idle cranes and generators on a slow site are a cost you can often cut by returning rented plant or moving it between projects.
• Running costs. Fuel, operators and maintenance add up quickly. Log fuel by machine and plan maintenance so breakdowns do not hit at critical moments.

Site overheads are mostly time-related: supervision staff, site offices, utilities, security, worker accommodation and transport. When a project slows, they keep running. Review them monthly against the program, share facilities between nearby sites, and size the supervision team to the actual work front rather than the original plan. If the slowdown is the owner’s responsibility, record these costs carefully, because they are the core of a prolongation claim.

Force majeure and exceptional circumstances in construction contracts

Regional disruption, closed shipping routes or government decisions can affect a project in two different legal ways. If they make part of the work impossible for a cause beyond the contractor’s control, the rules on impossibility apply. If the work stays possible but costs rise sharply, the question is whether the conditions for exceptional circumstances are met. Our guide to force majeure and exceptional circumstances under Saudi law explains both rules from the official text. For construction, four points stand out:

• In a lump-sum contract, as explained above, cost rises alone do not entitle the contractor to more money; only general exceptional circumstances that collapse the contract’s balance open the door to a court adjusting time or price.
• Either party may ask to end a works contract because of an unexpected excuse relating to its performance, but must compensate the other party for the harm caused.
• A contractor who starts the work and then cannot finish it for a cause beyond his control is entitled to the value of the work done and to what he spent on the unfinished part, to the extent it benefited the owner.
• On government projects, delay due to emergency circumstances or to reasons beyond the contractor’s control is among the cases the procurement law lists for extension and penalty waiver.

In every case, keep working where you can, notify in writing, document the effect on cost and time, and have a lawyer review your specific contract before you stop work or treat the contract as ended.

Cash flow on projects

Construction companies rarely fail because a project loses money on paper. They fail because cash runs out while certificates, retentions and claims are still unpaid. A company-wide forecast hides this, so build one for each project.

A project cash forecast

1. Start from the program: when each part of the work will be done.
2. Turn it into expected certificates, then into expected receipts using the payment delay you actually see from that client, not the one in the contract.
3. Map the outflows: subcontractor and supplier payments on their real terms, payroll, equipment and overheads.
4. Add retention deductions, advance payment recovery and guarantee costs.
5. Update it monthly with actual figures and explain the differences.

Ways to protect cash on a project

• Negotiate an advance payment where the contract allows, backed by a guarantee.
• Align supplier and subcontractor payment dates with your claim cycle.
• Do not use one project’s advance to cover another project’s losses without a clear plan to repay it; this is how one problem spreads across a portfolio.
• Arrange bank facilities before you need them, while your figures still look healthy.
• Hold a short weekly cash meeting on large projects: receipts expected, payments due, decisions needed.

Innovant’s cash flow and treasury service helps contractors and developers set up project-level forecasts and a weekly cash routine.

A project risk register and common mistakes

Risk management in construction project management is simple to describe and hard to keep up: name the risks, give each one an owner, act before they happen and review them regularly. A register only works if the project team uses it in its monthly meeting. For each project, record:

• The risk, written as a cause and an effect, for example “late approval of shop drawings delays the structure”.
• How likely it is and how much it would cost in time and money, on a simple scale.
• Who owns it, the planned response and when it is due.
• Which contract clause allocates it, and whether notice is required.
• Whether insurance covers it.

Common risks to start with are material price rises, shipping delays for imported equipment, late payment, subcontractor failure, late permits or utility connections, design changes, labor shortages, summer heat and rain, safety incidents and disputes over variations. An outside risk assessment can help you build the first version and test it against your contracts. You can also see how we work with clients in the real estate and construction sector.

Common mistakes

• Pricing a lump-sum tender with no allowance for material risk, then hoping to recover rises later.
• Missing notice deadlines for delays, variations or extra quantities.
• Letting unapproved variations hold up payment for the main work.
• Signing subcontracts on different terms from the main contract.
• Keeping rented equipment and full site overheads on a site that has slowed.
• Forgetting retentions and guarantees until they expire or are never claimed.
• Managing cash for the company as a whole rather than project by project.

Frequently asked questions

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