Q&A and answers on the construction contracts in Saudi Arabia

The primary sources of law in the Kingdom of Saudi Arabia that govern construction contracts are:

1. The Saudi Building Code. Royal Decree No. M / 43 dated 26/4/1438H
   Royal Decree No. M / 15 dated 19/1/1441H (Amendments of the law)
2. The Implementing Regulations of the Saudi Building Code. Issued by the Ministerial Decree No. (1213/GS/39) Dated 14/10/1439 H And the Ministerial Decree No. (56) Dated 03/03/1441 H (Amendment of the law) And the Ministerial Decree No. (00004) Dated 08/01/1443 H (Amendment of the law)
3. The Saudi Arabia Government Tenders and Procurement Law. Royal Decree No. M/ 128 dated 13/11/1440H
4. The Civil Transactions Law. Royal Decree No. M/191 dated 291444/11/

According to Articles 463-467 of The Civil Transactions Law contains several obligations of the contractor in the contract, as follows:

• If the employer requires the contractor to provide all or some of the materials, the contractor shall be responsible for fulfilling the agreed conditions and specifications, if any, otherwise he shall be obliged to ensure that they are adequate for the intended purpose according to custom.
• If the Employer has provided the materials, the Contractor is obliged to maintain them with the care of the usual person and to observe technical principles in his work and to return to the Employer what is left of them.
• The Contractor shall bear the expenses of the machinery and tools required to complete the work, unless otherwise agreed.
• If there are no conditions or no agreed period, the Contractor shall be obliged to complete the work in accordance with the terms of the contract and within the agreed period, and if there are no conditions or no period is agreed upon, he shall be obliged to complete it in accordance with the customary principles and within the reasonable period required by the nature of the work.
• If the contractor breaches the terms of the contract during the progress of the work, the employer may warn him to abide by them and correct the work within a reasonable period he specifies. If this period expires without correction, the employer may entrust another contractor to complete or correct the work at the expense of the first contractor or request the cancellation of the contract.
• Under the same article, the employer may also request the cancellation of the contract immediately if it is impossible to repair the defect or if the contractor delays in starting or completing the work in such a way that it is unlikely that he will be able to complete it within the agreed period.
• If the object is lost or damaged due to a cause beyond the contractor's control before it is delivered to the employer, the contractor shall not claim the agreed wage or the expenses incurred by him, unless the employer was in breach of his obligation to receive the work at the time of the loss or damage.
• If the materials are provided by the Employer and the object is lost or damaged before it is delivered due to a cause beyond the Contractor's control, the Employer shall not claim the Contractor for its value unless at the time of the loss or damage the Contractor was excused for his breach of delivery of the work and it is not proven that the object would have been lost or damaged if he had delivered without breach of his obligation.

According to Article 469 of the Civil Transactions Law, a contractor is entitled to their wages once they have completed the agreed-upon work and handed it over to the employer. If the work consists of multiple parts, the employer is obligated to pay the contractor's wages in proportion to the amount of work completed, after it has been inspected and accepted by the employer.

Regarding claims for an increase in wages due to increased material costs, a contractor is not entitled to make such a claim unless one of the following two conditions is met: (1) the error in material prices was caused by the employer, or (2) the contractor and employer had previously agreed to an increase in wages according to Article 471 of the Civil Transactions Law.

In Saudi Arabia, there are two common types of contracts in construction projects:

Lump Sum Contract is when the contractor agrees to perform the work for a fixed price, which includes all costs, profits, and risks. The contractor is responsible for planning, designing, and executing the project, and is only paid the agreed-upon lump sum, regardless of the actual cost and bears the risk of cost overruns or changes in project scope.

• Typically used for large, complex projects where the scope is well-defined.
• The employer has limited control over the contractor's actions and expenses.

Cost-Plus Contract is when the contractor is paid for all expenses incurred during the project, including labor, materials, equipment, and overheads. The contractor is also entitled to a profit margin (usually a percentage of the total cost). The client is responsible for paying the contractor's actual costs plus the agreed-upon profit margin and bears less risk than in a lump sum contract, as they are reimbursed for actual costs.

• Typically used for projects with uncertain or changing scope, or where the client wants to have more control over the contractor's actions.

Key differences between Lump Sum and Cost-Plus Contracts:

1. Price: Lump Sum is a fixed price, while Cost-Plus is based on actual costs plus profit.
2. Risk: Lump Sum contractors bear more risk due to potential cost overruns or changes in project scope, while Cost-Plus contractors have more flexibility in their expenses.
3. Control: Clients have less control over Lump Sum contractors' actions and expenses, while Cost-Plus contracts allow for more involvement in decision-making.
4. Scope: Lump Sum contracts are often used for well-defined projects, while Cost-Plus contracts are suitable for projects with changing or uncertain scope.

According to The Saudi government Tenders and Procurement Law Article 74:

"Contracts may be extended and fines may be waived in the following cases:

• If the contractor is assigned additional work. In such case, the extension period shall take into consideration the volume and nature of such work and the date of assignment.
• If the project's annual appropriations are insufficient to complete the work within the specified time.
• If the delay is attributable to the government agency or to exigent circumstances.
• If the delay is attributable to reasons beyond the contractor's control.
• If the government agency orders suspension of the work, or part thereof, for reasons not attributable to the contractor.

In Saudi Arabia, Article 107 of the Civil Transactions Law states that "If a contracting party in a bilateral contract fails to perform his obligation, the other contracting party may, after notifying the breaching party, demand implementation or termination of the contract, and may claim compensation in either case, if applicable. The court may dismiss the petition for termination if the unperformed part is insignificant compared to the obligation. " Similarly, Article 114 states that "If, in bilateral contracts, the corresponding obligations are due, a contracting party may refuse to perform his obligations if the other contracting party fails to perform his corresponding obligation. "

Contractors in Saudi Arabia typically include provisions in their contracts that address non-payment by employers, including specific clauses on payment terms, late payment penalties, and interest rates.

The typical processes and procedures that contractors follow when there are changes or modifications to the initial scope of work during a construction project are as follows:

1. Notification: The contractor notifies the employer in writing of the proposed changes or modifications, stating the nature and scope of the changes, and any relevant details.
2. Assessment and Evaluation: The contractor assesses and evaluates the impact of the changes on the project timeline, budget, and resources. The contractor may request additional information or clarification from the client to fully understand the changes.
3. Consultation: The contractor consults with relevant stakeholders, including engineers, architects, and other subcontractors, to determine the feasibility and practicality of the proposed changes.
4. Proposal for Change: The contractor submits a written proposal to the client outlining the changes required, including: 
   • Description of the changes
   • Impact on project schedule and timeline
   • Estimated additional cost or reduction in cost
   • Resource allocation requirements
   • Any other relevant information
5. Client's Response: The client reviews and responds to the contractor's proposal, either accepting, rejecting, or requesting revisions.
6. Agreement: If the proposal is accepted, both parties sign a written agreement outlining the changes, including any amendments to the original contract.
7. Amendment to Contract: The original contract is updated to reflect the agreed-upon changes.
8. Implementation: The contractor implements the agreed-upon changes, which may involve revising project plans, scheduling, and resource allocation.
9. Verification: The client verifies that the changes have been implemented correctly and in accordance with the agreed-upon terms.

According to Saudi Civil Transactions Law, the standard protocols and best practices that construction contractors in Saudi Arabia follow to identify, document, and resolve any defects or deficiencies that arise during the execution of a project are as follows:

1. Inspection and Testing: Contractors typically conduct regular inspections and testing to identify defects or deficiencies during the execution of the project. This includes checking the work against the approved shop drawings, specifications, and quality control plans.
2. Defect Reporting: Any defects or deficiencies discovered during inspection and testing are reported to the client in writing, along with photographs or videos as evidence.
3. Notification and Rectification: The contractor is required to notify the client of any defects or deficiencies and propose a plan for rectification. The client may then issue a notice to the contractor to correct the defect within a reasonable period.
4. Rectification: The contractor is responsible for rectifying the defects or deficiencies according to the agreed-upon plan and timeline.
5. Verification: After rectification, the contractor conducts a verification process to ensure that the defects or deficiencies have been properly addressed.
6. Final Inspection: A final inspection is conducted by the client or their representative to verify that all defects or deficiencies have been rectified and the work meets the required standards.
7. Documentation: All defects or deficiencies, including those reported, rectified, and verified, are documented in writing, along with supporting evidence such as photographs, videos, and test reports.

In cases where defects or deficiencies are found, the contractor may be liable for rectification costs, depending on the circumstances. If the defects or deficiencies are not attributable to the contractor, they may not be liable for rectification costs.

Additionally, contractors in Saudi Arabia are expected to comply with Article 467 of the Saudi Civil Transactions Law, which states that if a thing is destroyed or damaged prior to delivery due to a reason not attributable to the contractor, they may not demand payment of the agreed-upon fee or reimbursement of expenses incurred.

Contractors should also be aware of the Saudi Civil Transactions Law:

Article 477

If the contractor commences execution of the work but fails to complete it for a reason not attributable to him, he shall be paid for the completed work and for any expenses he incurs for the uncompleted work to the extent of the benefit accrued to the client.

Article 467

1. If a thing is destroyed or damaged prior to its delivery to the client due to a reason not attributable to the contractor, the contractor may not demand payment of the agreed-upon fee or reimbursement of the expenses incurred, unless the client was in breach of his obligation to take delivery of the work at the time of destruction or damage.
2. If the materials are provided by the client and the thing is destroyed or damaged prior to its delivery due to a reason not attributable to the contractor, the client may not demand from the contractor payment of the value of such materials, unless the contractor prior to the destruction or damage was notified that he was in breach of his obligation to deliver the work and it is not established that the thing would have been destroyed or damaged had he delivered it without breaching his obligation.

Article 466

1. If a contractor breaches the terms of the contract during the course of the work, the client may notify the contractor to comply with the terms and correct the work within a reasonable period set by the client. If such period lapses without correction, the client may assign another contractor to complete or correct the work at the expense of the original contractor, in accordance with the provisions of Article 167 of this Law or may demand termination of the contract.
2. The client may demand the immediate termination of the contract if the defect cannot be corrected or if there is a delay in the commencement or progress of the work whereby the work cannot be completed within the agreed-upon period.

Based on article 55 from Law of Evidence " Proof by digital evidence shall have the same legal effect as proof by writing as set out in this Law". 

The execution of a construction contract can be done remotely, but it requires specific procedures and documentation to ensure the validity and enforceability of the contract. Here are the steps to execute a construction contract remotely in Saudi Arabia:

1. Electronic Signature: The contract must be signed electronically using a digital signature, which is recognized as a valid form of signature under Saudi law. This can be done using electronic signature tools such as DocuSign, Adobe Sign, or other approved platforms.
2. Digital Platform: The contract should be executed on a digital platform that is approved by the Saudi Arabian Ministry of Commerce and Investment (MCI) or the Saudi Arabian Monetary Authority (SAMA). This ensures that the platform meets the necessary security and authentication requirements.
3. Verification of Identity: The parties involved in the contract must verify each other's identities through electronic means, such as through a digital identification system or a secure online verification process.
4. Authentication of Documents: All documents related to the contract must be authenticated using digital certificates or digital signatures to ensure their authenticity and integrity.
5. Notarization: The electronic signature and other documents must be notarized by a Saudi Arabian notary public or a licensed attorney who has been authorized to perform remote notarizations.
6. Registration: The contract must be registered with the relevant authorities, such as the MCI or SAMA, to ensure its validity and enforceability.
7. Witnesses: In some cases, witnesses may be required to attest to the execution of the contract remotely. This can be done through video conferencing or other electronic means.

It is essential to note that remote execution of a construction contract in Saudi Arabia may require additional documentation and procedures compared to traditional methods. It is recommended to consult with legal experts and industry professionals to ensure compliance with Saudi laws and regulations.

Some benefits of remote execution of construction contracts in Saudi Arabia include:

• Increased efficiency: Remote execution can speed up the process of signing and executing contracts, reducing delays and costs.
• Convenience: Remote execution allows parties to sign contracts from anywhere, at any time, without the need for physical presence.
• Security: Electronic signatures and digital platforms provide an additional layer of security and authentication for contracts.

However, it is crucial to ensure that all parties involved understand the remote execution process and agree on the terms and conditions before executing the contract remotely.

Construction contracts can be executed in a foreign currency, but there are certain requirements and considerations to be aware of.

Contractors who wish to continue work on official holidays must provide compensation to their workers in accordance with the Saudi Labor Law, Article 107. This article specifies the following conditions:

1. The employer shall pay the worker for overtime working hours an additional amount equal to the hourly wage plus 50% of his basic wage.
2. If the firm is operated on the basis of weekly working hours, the hours in excess of the hours taken as the criterion shall be deemed overtime hours.
3. All working hours performed during holidays and Eids shall be deemed overtime hours."

A construction contract can be terminated due to changes in the project's scope under certain circumstances. Here are some possible scenarios:

1. Change in Project Scope: If the client requests a significant change to the project scope, and the contractor is unable to agree on the change or cannot complete the revised scope within the original contract timeline and budget, the contract may be terminated.
2. Force Majeure: If a force majeure event (e.g., war, natural disaster, or unforeseen circumstances) makes it impossible for the contractor to continue working on the project, the contract may be terminated.
3. Material Breach: If one party materially breaches the contract (e.g., fails to pay, defaults on performance, or fails to comply with regulatory requirements), the other party may terminate the contract.
4. Default: If the contractor fails to perform their obligations under the contract, including delays, lack of progress, or poor-quality work, and the client issues a formal notice of default, the client may terminate the contract.
5. Dispute Resolution: If a dispute arises between the parties and they are unable to resolve it through negotiations or mediation, either party may terminate the contract.
6. Client's Loss of Confidence: If the client loses confidence in the contractor's ability to complete the project or fails to meet their expectations, they may terminate the contract.

Before terminating a construction contract in Saudi Arabia due to changes in scope or other reasons, it is essential for both parties to:

1. Notify each other in writing: Provide written notice of termination, stating the reasons for termination and any outstanding payment obligations.
2. Agree on termination terms: Determine any outstanding payment obligations, including any penalties or damages.
3. Settle outstanding claims: Resolve any disputes or outstanding claims between the parties.
4. Release security deposits: Release any security deposits held by either party.

In addition to these steps, contractors should also:

1. Review their contracts carefully: Ensure that termination provisions are clearly outlined and understood.
2. Communicate effectively: Keep lines of communication open with clients and stakeholders throughout the project.
3. Document everything: Keep detailed records of all communications, meetings, and agreements.

It is crucial for contractors to understand Saudi Arabian laws and regulations regarding construction contracts, including termination clauses and dispute resolution mechanisms. Consulting with legal experts can help ensure that contractors navigate these complexities effectively and protect their interests in case of termination.

If the contract does not include specific terms or a specific period for completion, Article 465 states that "the contractor shall complete the work in accordance with the terms of the contract and within the agreed-upon period. If the contract does not include specific terms or a specific period for completion, the contractor shall complete the work in accordance with the prevailing standards and within a reasonable period as required by the nature of the work."

According to the Civil Transaction Law in Saudi Arabia (Article 467), the contractor's entitlement to claim wages and expenses for a damaged or destroyed item depends on the circumstances.

Scenario 1: Item destroyed or damaged before delivery to the employer, due to a reason not attributable to the contractor

In this case, the contractor is not entitled to demand payment of the agreed-upon fee or reimbursement of expenses incurred for the item, unless the employer was in breach of their obligation to take delivery of the work at the time of destruction or damage. This means that if the employer was supposed to accept the item, but failed to do so, the contractor can still claim payment for the item.

Scenario 2: Item provided by the employer, destroyed or damaged before delivery, due to a reason not attributable to the contractor

In this case, the employer cannot demand payment from the contractor for the value of the materials, unless:

1. The contractor was notified prior to the destruction or damage that they were in breach of their obligation to deliver the work.
2. It is not established that the item would have been destroyed or damaged had it been delivered without breach of obligation.

This means that if the employer provided materials and they were destroyed or damaged before delivery, and the contractor was not notified of their breach of obligation, and it is clear that the damage would have occurred regardless of whether the contractor delivered the work or not, then the employer cannot claim reimbursement from the contractor.

In summary:

• If an item is destroyed or damaged before delivery to the employer due to a reason not attributable to the contractor, and the employer was in breach of their obligation to take delivery of the work, the contractor may still claim payment for that item.
• If an item is provided by the employer and destroyed or damaged before delivery due to a reason not attributable to the contractor, and certain conditions are met (notification and no alternative scenario), then the employer cannot claim reimbursement from the contractor.

It is essential for contractors and employers in Saudi Arabia to understand these provisions and negotiate contract terms accordingly to ensure clarity and minimize potential disputes.

According to the Implementing Regulation of Saudi Building Code (Article 22). " The license holder or his representative shall notify the inspector when the work is ready for inspection according to the construction stages, and shall provide all the documents, drawings and the necessary supplies for the required inspection and testing works." the license holder or their representative is responsible for notifying the building inspector to conduct the required inspections and tests. This means that it is the contractor's responsibility to notify the inspector when the work is ready for inspection, at each stage of construction, and provide all necessary documents, drawings, and information required for the inspections and tests.

In a construction project in Saudi Arabia, the license holder (usually the contractor) or their representative (e.g., a project manager or engineer) is responsible for coordinating with the building inspector to ensure that all necessary inspections and tests are conducted throughout the construction process. This includes inspections at various stages of construction, such as:

1. Foundation work
2. Structural frame installation
3. Plumbing and electrical installations
4. Finishing works (e.g., drywall, painting, flooring)
5. Final inspection and occupancy permit

By notifying the building inspector and providing all required documentation, the license holder ensures that the inspector can conduct thorough inspections and tests to verify that the work meets the requirements of the Saudi Building Code and other relevant regulations.

It is essential for contractors and project stakeholders in Saudi Arabia to understand their responsibilities regarding inspections and testing to ensure compliance with regulatory requirements and to maintain a safe and quality-built construction project.

According to the Saudi Building Code application law (Article 29), in a construction project in Saudi Arabia, the designer supervising the implementation of the building and the executor (contractor)are jointly responsible for compensating the owner if there is a complete or partial demolition of the existing buildings.

This joint responsibility applies to:

1. Total or partial demolition of the buildings or facilities they have built
2. Every hidden defect that threatens the durability and safety of the building

This means that both the designer and contractor are liable for any damage or loss caused by defects in their work, even if the defect or demolition resulted from a fault in the land itself or the employer's consent to erect defective buildings and facilities.

In addition, if the designer's work is limited to developing the design only, without supervising implementation, they will still be responsible for design defects.

The article also states that any condition intended to exempt the contractor or supervising designer from this warranty or limit it shall be invalid. This means that contractors and designers cannot include clauses in their contracts that attempt to limit or exclude their liability for defects or damages.

In summary, in a construction project in Saudi Arabia, both the designer and contractor are jointly responsible for compensating the owner if there is a complete or partial demolition of existing buildings due to defects in their work.

According to the Civil Transaction Law Article 468 in Saudi Arabia, if a contractor completes their work and makes it available to the employer, the employer is obligated to take possession of the completed work. If the employer fails to take delivery of the work without a legitimate reason, and the work is destroyed or damaged while in the contractor's possession for reasons not attributable to the contractor's transgression or negligence, the contractor is not obligated to compensate the employer.

This means that if the contractor has completed their work and made it available to the employer, but the employer does not take possession of it, and something happens to the work (e.g., damage or destruction), the contractor is not liable for compensation. The contractor is not responsible for any losses or damages caused by the employer's failure to take possession of the completed work.

In other words, if the employer fails to fulfill their obligation to accept delivery of the completed work, they cannot claim compensation from the contractor for any subsequent losses or damages that may occur.

It's essential for contractors and employers in Saudi Arabia to understand their responsibilities and obligations under this article, as it can have significant implications for their rights and liabilities in case of disputes or issues related to project delivery.

According to the Civil Transaction Law Article 474 in Saudi Arabia, a subcontractor is not permitted to directly demand or claim anything from the employer (client) if that something is something the main contractor is entitled to under the contract. In other words, a subcontractor cannot bypass the main contractor and demand payment or compensation directly from the employer. Instead, they must go through the main contractor to make any claims or demands.

A subcontractor may only demand payment or compensation from the employer if they are referred to do so by the main contractor. This is to maintain the contractual hierarchy and ensure that payments and compensation are made through the correct channels. It also helps to prevent disputes and confusion between the subcontractor and the employer.

According to the Saudi Civil Transaction Law Articles 475-478, a construction contract may expire or come to an end under the following circumstances or conditions:

Article 475: A contract for service shall terminate upon completion of the agreed-upon work.

Article 476: Either contracting party may demand termination of the contract for service in the event of an exigent matter that affects his obligation in the performance of the contract in such case, the terminating party shall compensate the other party for any harm sustained.

Article 477: If the contractor commences execution of the work but fails to complete it for a reason not attributable to him, he shall be paid for the completed work and for any expenses he incurs for the uncompleted work to the extent of the benefit accrued to the client.

Article 478: A contract for service shall terminate under the following conditions:

1. Upon the contractor's death, if it is stipulated that the contractor executes the work himself or if the person of the contractor was a decisive factor in the conclusion of the contract.
2. If the stipulation stated in paragraph (1) is not included in the contract and the contractor's person was not a decisive factor in the conclusion of the contract, the client may demand termination if the heirs do not possess sufficient capabilities to execute the work.
3. The heirs shall, in cases provided for in paragraphs (1) and (2), be paid for the completed work and for any expenses incurred for the uncompleted work to the extent of the benefit accrued to the client.

These articles outline specific circumstances that can lead to a construction contract terminating, including completion of work, exigent matters affecting performance, failure to complete work, and contractor's death.