Legal Aspects of Saudi Government Tender and Procurement Procedures

Background

The launch of Saudi Arabia’s Vision 2030 has brought a surge of new, high-profile projects into the spotlight within the business world. With many international construction companies entering the Saudi market to participate in projects across diverse industries, it is crucial for foreign companies to understand the legal framework and rules governing Saudi government tender and procurement procedures.

While Aramco tenders are specific to the oil and gas industry, the tendering procedures differ from those governing government tenders. This article will therefore focus on highlighting the tendering procedures and required documents for participating in government tenders and procurement.

The Government Tenders and Procurement law, Royal Decree No. (M/128) published on 1 August 2019 (Hereinafter referred to as “the Tender Law”) set in place to govern the governmental projects, that include purchasing goods, services, and works, offered to the public. The Saudi Ministry of Finance (“MOF”) is in charge of overseeing the tender and procurement procedure.

Methods of Contracting

At the beginning of each fiscal year, government authorities will submit their plans and projects to the MOF for approval. Saudi MOF offers different methods of contracting:

Limited tenders: these are made for certain contractors, suppliers, or service providers exclusive in the Saudi Market, contracts under 50000 SAR, urgent work, non-profit execution, and consultation services.
Two-step tenders: these are made for certain specialized in nature projects. The first stage would be a pre-construction agreement, which would include design ideas and pricing of the project. The second stage would be the construction agreement. It is important to highlight that it is not necessarily that the same tenderer contractor signs both contracts.
Direct procurement: this is made if there is a sole source provider with no alternatives, the contract value is under SAR 100,000, It is necessary to protect national security interests, and the provider is a non-profit entity.
Framework agreements: these are made between one or more governmental authorities, contractors, suppliers, or service providers.
Reverse electronic bidding: This is made so that a bidding process is done over a specific period. The contractors, suppliers, or service providers can submit their offers and lower the submitted offer until the bidding period ends. The government authorities then will choose and award the lowest bid submitted to them.
Industry nationalization and qualification: This is made to prioritize domestic manufacturing and technology industries within the framework of local content and Governmental Procurement.
Competitions: this is made to initiate a competition between the contractors’ intellectual property, which includes developing designs, plans, maquettes, or other works of art and intellect. It is important to highlight that according to Article 59 of the Executive Regulations of the Government Tenders and Procurement Law Issued by Royal Decree No. M/128 dated 16 July 2019, “The intellectual property of the content of successful bids shall be the property of the Government Authority.”

Type of government tenders

There are two main types of government tenders in Saudi Arabia – domestic tenders that are limited to Saudi-registered companies, and international tenders that are open to international firms.

For domestic tenders, the standard required documents typically include:

Commercial registration
Zakat and tax certificates
General Organization for Social Insurance (GOSI) certificate
Chamber of Commerce membership
Saudization compliance certificates (available to download in the company’s Qiwa portal)

These documents help validate the legal status and qualifications of Saudi-based companies seeking to participate in government procurement opportunities limited to the domestic market.

Construction Contractual Obligations

The obligations set in all contracts related to construction and renovation are based on the Saudi Building Codes (Hereinafter referred to as “the SBC”). Whereas, the SBC aims to achieve safety and public health through the durability and stability of buildings and facilities. The SBC are updated every three years, as they are the minimum legal requirements for construction. In other words, the designs, plans, maquettes, and construction work plan, should follow the SBC.

It is important to emphasize, that all tender agreements related to construction would ask the contractor to follow the SBC. The procedure would include permits and approvals from relevant parties. The relevant parties are the Ministry of Municipal and Rural Affairs and Housing, Ministry of Energy, General Directorate of Civil Defense, Saudi Standards, Metrology and Quality Organization (SASO).

To get the building permits, the relevant parties, shall review the designs and technical documentation to ensure it meets with the SBC. The designs and plans for all construction projects is based on the approved SBC.

After obtaining the building permits contractors must obtain a construction permit. Construction permits are set in place for engineers to follow up and supervise the project during implementation. This will contribute to the quality of work, and meeting the standards.

At the completion of the project stage, the contractor shall get a certificate of completion from the relevant parties. The fulfillment of all requirements of SBC and regulations is one of the preconditions for the contractors to obtain the project completion certificate.

It is important to note that the contractors must follow the guidelines of warranties set in SBC after the completion of the project which are set in place to ensure the sustainability, and effectiveness of the projects.

Tendering Process

The tendering process is done via an online portal https://portal.etimad.sa/en-us overseen by the Ministry of Finance. This portal plays a great role for both the governmental authorities and participants. The president of the governmental authority will form the governmental authority committee, which will be in charge of soliciting bids, conducting evaluations, and announcing the outcome and award via the portal. Whereas the participants shall submit all the documents needed, and submit their proposal via the portal.

Financial Guarantee

Participants are generally required to provide financial guarantees in order to get the tender award. According to the Tender Law, an initial guarantee of 1% to 2% of the value of the proposal shall be submitted with the proposal unless it is direct purchase, competition, intra-governmental contracts, contracting with a non-governmental organization or society, or a non-profit entity, and contracting with local small- and medium-sized enterprises. The initial guarantee is refundable if the participant rescinded before the submission deadline.

In addition, a final guarantee in the amount of 5% of the contract value must be submitted within 15 days of the award notification date. If the bidder did not provide the final guarantee within the specific time mentioned the government authority shall proceed to negotiate with the next best bidder and the initial guarantee shall not be returned to the bidder.

Joint ventures can submit their offers and proposals jointly. One of the most important documents required to submit is the solidarity agreement. This agreement shall:

outline the roles and obligations of each party
appoint a leader for the project
the representative before the government authority
the liabilities regarding the performance of work.

The agreement shall be signed and authenticated by all parties and cannot be changed without prior approval from MOF.

Penalties for breaching the contract

According to the Tender Law, contractors who fail to execute a contract by the set date are subject to the following penalties:

– For supply contracts, a fine not exceeding 6% of the contract value

– For other types of contracts, a fine not exceeding 20% of the contract value

For continuing service contracts, contractors who fail to fulfill their contractual obligations are subject to a fine not exceeding 20% of the contract value, in addition to deducting the value of any non-executed works.

However, these fines can be waived in certain circumstances, such as:

The contractor receives additional work
The contractor faces funding shortages
There are unforeseen delays beyond the contractor’s control
The government suspends part or all of the work

Beyond just financial penalties, the government authority also has the right to:

Assign all or part of the work to a third party at the breaching contractor’s expense
Liquidate the performance guarantee
Claim compensation for any losses incurred
Terminate the contract

Remedies and Dispute Resolution

If the government authority breaches the contract, the contractor can seek to suspend performance or terminate the contract before expiry through the administrative court. The contract may also include an arbitration clause for settling disputes, but this requires prior approval from the Ministry of Finance.

Conclusion:

It is important to be informed regarding the laws, regulations, and standards that are set in place to ensure positive outcomes. The completion of one awarded tender is the start of gaining projects around Saudi Arabia, as it will set you as a successful contributor in the Saudi market.