Saudi Arabia pushes to end construction payment issues

Abaca via Reuters Connect

• Disputes in a third of projects
• Payment delays a big concern
• Government contract terms ‘outdated’

The construction industry in Saudi Arabia is still plagued by payment delays but the kingdom has made significant efforts to improve workflow among developers, contractors and subcontractors to resolve what is a global problem.

Cash flow and payment problems trigger claims or disputes in more than a third of all projects in the kingdom.

This is higher than the rate of the UAE and Qatar, according to the sixth annual Crux Insight Report from the consultancy HKA.

But the report, fron October 2023, said that Saudi Arabia was improving regulation surrounding dispute resolution and was providing foreign investors and contractors with “more legal certainty” by codifying local laws and through “experimentation in forms of contracts”.

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Othman Mohammad Alghannam, a senior engineer with the Saudi Contractors Authority (SCA), told AGBI on the sidelines of the Big 5 construction conference in Riyadh that payment delays were a major concern.

However Alghannam said his quasi-governmental agency has worked to “digitise and standardise” contracts governing relationships all along the supply chain. 

Alghannam said that to help solve the problem with delays in payments, the association launched a “guaranteed account, where the money is with a third party”.

He said once the project “gets to 10 percent, 20 percent approved, the money will be transferred automatically to the contractor to hopefully decrease payment issues.”

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In July 2020, the SCA announced a slew of binding new forms aimed at ensuring on-time payments, and laying the groundwork for resolving claims.

Fabio Rossi, export area manager with Caleffi, which manufactures components for heating, air conditioning and plumbing systems, said the payment bottlenecks were not a Saudi-specific issue but a feature of the construction industry around the world.

“In terms of regulations, there is a sort of protection, in that if you are a bad payer, you can be added to a list at the government level, to encourage avoidance of excessive delays,” Rossi said, referring to improved practices in Saudi Arabia.

HKA’s report last October said that most disputes arose from changes made by developers to the scope of projects. The report said such disputes over changes were more common in Qatar and the UAE rather than Saudi Arabia.

Design issues, late approvals and problems with site access are among the other top causes of conflicts, the report said.

Jason Morris, managing director of KEO International Consultants’ project and construction management division, said the terms of government contracts were often out of step with those current in the industry and the needs of the Saudi market.

However, private developers increasingly understand that in Saudi Arabia’s highly competitive market they have to provide “far more flexible and more innovative” contract conditions, he said. 

Organisations linked to the sovereign Private Investment Fund tend to use standard terms and contracts, though are generally reliable once the relationship is established, Morris said, but getting that first payment “can be a challenge.” 

“The time between tendering and getting under contract is also often fairly extreme, even for the scale of what they’re building,” Morris said. 

“Change is very, very hard to administer. Getting an approval for a change, it goes from board meeting to board meeting… so you can work at risk for quite a long time.”