Construction contracts in Saudi Arabia under the Civil Transactions Law and the Government Tenders and Procurement Law: essential clauses, payments and progress claims, delay penalties, variations, the ten-year liability, and methods for resolving construction disputes.
The value of awarded construction contracts in Saudi Arabia increased by approximately 82% in the first half of 2026, reaching nearly USD 32 billion, according to data from the Saudi Contractors Authority platform. As the sector expands, disputes are also becoming more common, including delayed handovers, overdue progress payments, additional work without written instructions, and disagreements over defects. Many of these disputes are resolved by the wording of the construction contract itself—or become much harder to resolve when adequate contractual provisions are missing.
This guide explains the legal framework governing construction contracts in Saudi Arabia, the clauses every contract should include, payment and guarantee arrangements, delay penalties and extensions of time, variations and additional work, subcontracting, ten-year liability, and the available methods for resolving construction disputes.
What Is a Construction Contract, and Which Laws Govern It?
A construction contract is an agreement under which a contractor undertakes to complete work, such as building, finishing, or delivering an infrastructure project, in exchange for payment by the employer. The main legal frameworks governing construction contracts in Saudi Arabia include:
- The Civil Transactions Law: In force since December 16, 2023, it contains specific provisions governing construction contracts, including the obligations of contractors and employers, subcontracting, price changes, and contract termination, alongside general rules on contracts, compensation, and exceptional circumstances.
- The Government Tenders and Procurement Law and its Implementing Regulations: These apply to contracts with government entities and contain mandatory provisions on penalties, variations, and guarantees.
- The Saudi Building Code and its regulations: These include provisions relating to the ten-year liability of contractors and supervising designers.
- Standard-form contracts such as FIDIC contracts, which are widely used in major projects and are often amended to protect the employer's interests.
For an overview of the updated general rules governing contracts, read our article on the Civil Transactions Law and Its Impact on Contracts.
Essential Clauses in a Construction Contract
- Scope of work: A precise description of the work, supported by drawings, specifications, and bills of quantities, clearly identifying what is included and excluded.
- Pricing structure: A lump-sum price, unit rates based on quantities executed, or a cost-plus arrangement. Each structure allocates the risk of quantity increases differently.
- Execution period: The commencement date, project schedule, and key milestones.
- Payments and progress claims: The advance payment, frequency of progress claims, approval and payment deadlines, and retention amounts.
- Guarantees: Advance payment guarantees, performance guarantees, and the maintenance period.
- Delay penalties: The maximum applicable penalty and the circumstances in which an extension of time may be granted.
- Additional work and variation orders: The procedures for pricing, approving, and implementing changes.
- Insurance: Contractors' all-risks insurance and third-party liability coverage.
- Taking-over and final acceptance: The applicable procedures and requirements.
- Termination and suspension: The grounds for termination or suspension and their consequences.
- Dispute resolution: Negotiation, followed by an expert or mediator, and then arbitration or the competent court, as applicable.
Payments, Progress Claims, and Guarantees
Cash flow is one of the main factors that can cause construction projects to fail. The contract should therefore clearly address the following matters:
| Item | What the Contract Should Specify |
|---|---|
| Advance payment | The percentage, bank guarantee requirements, and method of recovery through progress payments |
| Progress claims | Submission frequency, the approving party, approval and payment deadlines, and the consequences of exceeding them |
| Retention amounts | The percentage withheld from each progress payment and the release date following acceptance |
| Performance guarantee | The amount, validity period, and circumstances in which it may be called |
| Late payment | The contractor's right to claim compensation or suspend work after giving notice |
Calling a bank guarantee is not an unrestricted right. The Civil Transactions Law imposes obligations relating to good faith and prohibits the abusive exercise of rights. The Law also allows a party to withhold performance of its obligation when the other party fails to perform a corresponding obligation. However, any suspension of work should comply with the contract and follow the required notice procedure to avoid placing the contractor in breach.
Delay Penalties and Extensions of Time
Delay Penalties in Private Contracts
A delay penalty in a private construction contract is a liquidated damages clause. The Civil Transactions Law permits such clauses, but a court may reduce the agreed amount if it is excessive or if a substantial part of the obligation has been performed. The penalty is also not payable if the contractor proves that the employer suffered no loss. Setting a clearly defined maximum penalty, expressed as a percentage of the contract value, can make the clause clearer and easier to apply.
Delay Penalties in Government Contracts
For contracts with government entities, the Government Tenders and Procurement Law establishes a maximum limit for delay penalties and provides for exemptions in certain circumstances, including delays attributable to the government entity or circumstances beyond the contractor's control. A new Government Tenders and Procurement Law was issued by Royal Decree No. M/76 and published in September 2026. It is scheduled to take effect 120 days after publication. Accordingly, each government tender should be assessed under the version of the law applicable to it.
When Is a Contractor Entitled to an Extension of Time?
- The employer delays handing over the site, drawings, or approvals.
- Variation orders or additional work extend the execution period.
- Late progress payments disrupt the performance of the works.
- Force majeure or circumstances beyond the parties' control affect performance.
The critical requirement: Most contracts, including FIDIC-based contracts, require a written notice of claim within a specified period after the relevant event occurs. A contractor who fails to give notice on time may lose the right to an extension even when the delay was caused by the employer.
Additional Work, Variation Orders, and Price Changes
One of the most common construction disputes arises when a contractor carries out additional work following a verbal request from the engineer or owner, only for payment to be refused later. The contract should therefore specify:
- That any change may be approved only through a written variation order issued by a person authorized by name or position.
- How additional work will be priced: using existing contract rates, mutually agreed rates, or market rates.
- The effect of the variation on the execution period.
- The maximum percentage of variations the contractor is required to undertake.
As for increases in material prices, a contractor generally has no automatic right to increase the contract price unless the contract includes a price-adjustment mechanism. However, the Civil Transactions Law allows a court, where general exceptional circumstances that could not reasonably have been foreseen make performance excessively onerous, to adjust the obligation to a reasonable level. The parties cannot contractually exclude this rule. It is preferable for both parties to agree on a clear formula for adjusting the prices of key materials rather than relying on a court's assessment.
Subcontracting and Ten-Year Liability
Subcontracting
A contractor may assign all or part of the work to a subcontractor unless prohibited by the contract, applicable law, or the nature of the work. The main contractor remains liable to the employer. For government contracts, written approval from the relevant entity is required. Employers should consider requiring prior approval for key subcontractors.
Ten-Year Liability
Under the regulations associated with the Saudi Building Code, the contractor and supervising designer are jointly and severally liable to the owner for 10 years from the date the occupancy certificate is issued. This liability covers the total or partial collapse of a building and hidden defects that threaten its structural integrity or safety. It is a mandatory form of liability that cannot be circumvented through contractual clauses. Contractors should therefore account for this exposure in their insurance arrangements and in their contracts with subcontractors and suppliers.
How Are Construction Disputes Resolved?
| Method | When It May Be Appropriate |
|---|---|
| Negotiation and amicable settlement | Limited technical or financial disputes where the project is still ongoing |
| Technical expert or dispute board | Major projects and contracts based on FIDIC forms |
| Arbitration | Large, technically complex disputes or disputes involving foreign parties |
| Commercial Court | Disputes between traders and companies where no arbitration agreement applies |
| Board of Grievances | Disputes arising from contracts with government entities |
Construction and engineering disputes account for a significant proportion of cases registered with the Saudi Center for Commercial Arbitration. In any dispute, the party with a well-documented record is often better positioned: meeting minutes, correspondence, timely notices, site diaries, and photographs showing progress are all valuable evidence.
For more information about arbitration procedures, read our guide to Commercial Arbitration in Saudi Arabia. For court proceedings, see our guide to Filing a Claim Before the Commercial Court.
Common Mistakes in Construction Contracts and When to Consult a Lawyer
- A short-form contract that states only the price and duration without specifications or bills of quantities.
- Carrying out additional work on verbal instructions without a written variation order.
- Failing to submit notices of claim on time, potentially losing the right to an extension or compensation.
- A delay penalty with no maximum limit or an excessive penalty that may be reduced by the court.
- No price-adjustment mechanism for long-term projects.
- Signing an amended FIDIC contract without reviewing amendments that transfer risks to the contractor.
- Failing to align subcontract agreements with the main contract, leaving the contractor liable for obligations that cannot be passed on to subcontractors.
- To draft or review a construction contract before signing, or to manage project claims, explore our Construction and Contracting Services.
- If arbitration proceedings have begun, request our Commercial Arbitration Hearing Representation service. For court proceedings, see our Commercial Court Representation service.
- For material supply agreements, read our guide to Supply Contracts in Saudi Arabia.
- To assess your legal position before taking action, book an In-Office Legal Consultation.
Frequently Asked Questions
Can a court reduce a delay penalty in a construction contract?
Yes. A delay penalty in a private contract is a liquidated damages clause. The Civil Transactions Law allows the court to reduce it if it is excessive or part of the obligation has been performed. The penalty is not payable if the contractor proves that the employer suffered no loss.
Is a contractor entitled to payment for additional work carried out on verbal instructions?
The contractor may be entitled to payment if the request and the work performed can be proven, but doing so can be difficult. Contracts commonly require a written variation order. Therefore, do not carry out additional work before receiving written approval from an authorized person.
How long does the contractor's ten-year liability last in Saudi Arabia?
It lasts for 10 years from the date the occupancy certificate is issued under the Saudi Building Code regulations. The contractor and supervising designer are jointly and severally liable for total or partial collapse and hidden defects that threaten the building's structural integrity or safety.
Can a contractor claim a price increase when material prices rise?
Generally, not unless the contract includes a price-adjustment mechanism. However, if unforeseen general exceptional circumstances make performance excessively onerous, the court may adjust the obligation to a reasonable level under the Civil Transactions Law.
Where should a construction dispute claim be filed?
The appropriate forum depends on the contract and the nature of the dispute: an arbitral tribunal where a valid arbitration agreement applies, the Commercial Court for relevant disputes between traders and companies, or the Board of Grievances for disputes involving government contracts.
Your project deserves more than a two-page contract
We draft construction contracts, review amended FIDIC agreements, and manage claims, notices, and disputes before arbitral tribunals and courts—for employers and contractors alike.
info@novalegal.sa | Sahabah Road, Ishbiliyah District, Riyadh
Conclusion: A Construction Contract Is the Project's Legal Roadmap
A well-drafted construction contract precisely defines the scope of work, regulates payments, progress claims, and guarantees, establishes a reasonable delay penalty and clear extension-of-time provisions, requires written variation orders, and selects an appropriate dispute resolution mechanism. The party that documents every step and issues notices on time is often in a stronger position when a dispute arises.
The Nova Legal team in Riyadh provides services to employers, contractors, and subcontractors through its Construction and Contracting Services, from contract drafting to dispute resolution. Address: Sahabah Road, Ishbiliyah District, Riyadh – Building 2/2, Al Hamra City, Second Floor, Office 202.
