Bonds, guarantees and advances all shift risk between owner and contractor, and each of them has a price that ends up inside your construction cost.
A construction contract usually involves several financial instruments: an advance payment to help the contractor mobilise, a performance bond protecting you if they fail, retention, and sometimes a retention bond replacing cash. Each transfers risk, each is priced by whoever issues it, and the cost reaches you through the tender price whether or not you see it separately.
What this number does and does not include
This covers the commercial cost and effect of the guarantees and advances commonly used on private construction contracts in Saudi Arabia. It does not cover insurance cover for the works, nor the legal enforceability of any specific instrument, which is a question for a licensed adviser and the issuing bank.
Advance payment to the contractor
Cash provided before work is earned, so the contractor can mobilise, order long lead materials and establish the site without funding it themselves.
- Pushes it up: A large advance with slow recovery, weak security, and no link to mobilisation deliverables.
- Brings it down: A smaller advance recovered proportionally from each valuation and secured by a guarantee.
- How to control it: Tie release to the mobilisation submittals, take a guarantee for the full amount, and set the recovery rate so the advance is fully repaid well before the final valuations.
Advance payment guarantee
A bank instrument that lets you recover the advance if the contractor fails before repaying it through the works.
- Pushes it up: Long validity periods, a weak issuer, and wording that requires proving default before any payment.
- Brings it down: A reducing guarantee that falls as the advance is recovered, from an issuer you can actually call on.
- How to control it: Check the expiry date against your programme, and require extension if the works run long, because an expired guarantee is simply a piece of paper.
Performance bond
Security for your loss if the contractor fails to perform, expressed as a percentage of the contract sum.
- Pushes it up: A high percentage, a long validity, and a contractor with a tight banking relationship who must post collateral for it.
- Brings it down: A percentage proportionate to the realistic cost of completing with another contractor.
- How to control it: Decide the percentage from what replacing the contractor would actually cost you, and confirm whether the bond is payable on demand or only against proof.
Retention held in cash
Money withheld from each payment and released in stages, giving the contractor a reason to complete and to return for defects.
- Pushes it up: A high percentage on a contractor with limited working capital, which raises their price or their risk of trouble.
- Brings it down: A moderate percentage with clearly defined release events that the contractor can plan around.
- How to control it: Keep the release events tied to evidence rather than to dates, and report the running balance every month.
Retention bond as a substitute
An instrument replacing cash retention, so the contractor keeps the working capital and you keep the security.
- Pushes it up: Wording that limits what you can call on it for, and a validity shorter than your defects liability period.
- Brings it down: A bond that covers the same grounds as cash retention for at least as long.
- How to control it: Compare the bond wording with what cash retention would have allowed you to do, and refuse any narrowing of grounds.
Parent company or director guarantees
A promise from a related party to stand behind the contractor obligations, used where the contracting entity is thin.
- Pushes it up: A guarantor with no substance, or one in another jurisdiction where enforcement is impractical.
- Brings it down: A guarantor with real assets in the same jurisdiction as the project.
- How to control it: Ask who the guarantor actually is and what they own before treating the guarantee as protection, and take advice on enforceability.
The price of all of it inside the tender
Every instrument you require has a cost to the contractor, and it appears in their price whether or not it is itemised.
- Pushes it up: Requiring maximum security from every bidder regardless of the project risk.
- Brings it down: Matching the security package to the real exposure and to the contractor financial standing.
- How to control it: Ask bidders to price the security package separately so you can see what each requirement costs and drop the ones not worth buying.
Costs that never appear on the first page
- Contractors with limited bank facilities excluding themselves from your tender, narrowing the field to larger and more expensive firms.
- Guarantees expiring during an extended programme, leaving you unsecured at the moment of highest risk.
- Management time spent renewing and tracking instruments that nobody owns internally.
- The advance being spent on another project, which you only discover when mobilisation stalls.
- Calling on a bond triggering a dispute that costs more than the bond is worth.
Keeping the budget honest
Buy security against the loss you would actually suffer, not against every theoretical risk. Work out what completing the building with a replacement contractor would cost, and size the performance bond and retention to that number. Then check every expiry date against your programme, because most owners discover their security has lapsed at exactly the moment they need it.
- At tender, when you decide the security package and can see what it costs.
- At the first advance recovery, confirming the reduction is being applied to each valuation.
- Whenever the completion date moves, to extend any instrument that would otherwise expire.
- Before the first retention release, checking what security remains for the defects period.
Domira designs, builds and manages projects across Saudi Arabia for owners who are based abroad: land appraisal, feasibility, design, construction, handover and asset management under one accountable contract. Send us the plot or the brief and Domira will put the numbers in front of you before you commit.
Frequently Asked Questions
What is a performance bond and how much should it cover on a building contract?
A performance bond is a bank or insurer undertaking to pay you up to a stated amount if the contractor fails to perform. The right size is driven by what completing the work with someone else would realistically cost above the remaining contract money, including remobilisation and the premium another contractor charges to take over mid project. Sizing it that way is more useful than adopting a percentage because it is customary.
Is an advance payment to a construction contractor normal or risky?
It is normal, and the risk depends entirely on the structure. An advance released against mobilisation deliverables, secured by a guarantee and recovered proportionally from every valuation is a reasonable commercial arrangement that lowers the price you pay. The same amount handed over on signature, unsecured and recovered vaguely at the end, is the most exposed money in the project.
What should an owner check on a construction guarantee before accepting it?
The identity and standing of the issuer, the amount, the expiry date against your programme, whether it is payable on demand or requires proof of default, the governing law and where a demand must be presented. Also check whose name appears as beneficiary, since an instrument naming the wrong entity is unusable. A licensed adviser should review the wording before you rely on it.
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