An illustrative SAR example of the cash a new contracting company in Saudi Arabia needs for its first project, with advance payments, retention and payment lags.
A new contracting company in Saudi Arabia needs working capital because it pays workers, suppliers and subcontractors monthly but is paid after certification, minus retention. Advance payments help, but they are recovered from later invoices and usually need a bank guarantee. The worked example below uses illustrative assumptions to show how deep the funding gap can go on a first project.
The situation
A newly formed foreign-owned contractor wins its first private project in Saudi Arabia. It wants to know the peak cash it must fund and how much of its margin is tied up until the end.
Assumptions (illustrative)
- Contract value: SAR 30,000,000 over 15 months, billed evenly at SAR 2,000,000 per month, assumed.
- Contractor costs: SAR 1,800,000 per month, paid in the month incurred, assumed.
- Advance payment: 10 per cent of contract value, received at start and recovered at 10 per cent of each invoice, assumed.
- Retention: 10 per cent of each invoice, released after completion, assumed.
- Payment of each invoice: two months after the month of work, assumed.
Step 1: Advance payment and recovery
SAR 30,000,000 multiplied by 10 per cent equals SAR 3,000,000 received at start, recovered at SAR 200,000 per invoice over 15 invoices.
The advance is not extra money; it is early money, and it usually requires an advance payment guarantee.
Step 2: Net cash per invoice
SAR 2,000,000 minus SAR 200,000 retention minus SAR 200,000 advance recovery equals SAR 1,600,000.
Each monthly invoice brings in less than the monthly costs of SAR 1,800,000.
Step 3: Position after month two
SAR 3,000,000 advance minus 2 months of costs at SAR 1,800,000, which is SAR 3,600,000, gives minus SAR 600,000.
Even with the advance, the company is funding the project before the first payment arrives.
Step 4: Peak funding at month 15
From month 3 to month 15, each month adds SAR 1,600,000 in and SAR 1,800,000 out, so 13 months at minus SAR 200,000 is minus SAR 2,600,000. Added to minus SAR 600,000, the gap reaches minus SAR 3,200,000.
The funding need grows through the whole project and peaks at completion.
Step 5: After the last payments
Invoices for months 14 and 15 are paid in months 16 and 17, adding 2 multiplied by SAR 1,600,000, which is SAR 3,200,000, and bringing the position to zero.
The company only gets its cash back after the works are finished.
Step 6: Where the margin sits
Contract value SAR 30,000,000 minus costs of 15 multiplied by SAR 1,800,000, which is SAR 27,000,000, equals SAR 3,000,000, the same as the retention held.
In this example the entire margin is held as retention until release, so any dispute at handover puts all the profit at risk.
What changes the answer
- Payment delays beyond two months deepen the gap by SAR 1,600,000 for each extra month of lag.
- Lower advance payments raise the early funding need.
- Variations that are performed but not yet approved add unpaid cost.
- Performance and advance payment guarantees need bank facilities, which new companies must arrange early.
- Higher cost overruns turn the retention margin into a loss.
What the numbers tell you
- Arrange bank facilities for guarantees and working capital before bidding.
- Negotiate payment terms and retention release conditions as hard as the price.
- Fund the peak gap, not just the first months.
- Manage handover carefully, because retention holds the margin.
- Price the cost of financing into the bid.
Limits of this example
Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.
Domira works with foreign investors on the property side of entering Saudi Arabia: finding land or premises, due diligence, design, construction and asset management. For licensing, tax and legal steps, work with a licensed adviser; we coordinate with yours so the property decision fits the structure you choose.
Frequently Asked Questions
How much working capital does a new contractor need in Saudi Arabia?
It depends on contract size, payment terms, advance payments, retention and your cost profile. The method is to model monthly costs against certified payments after their lag, including advance recovery and retention, and find the peak gap. Add a buffer for delays and disputed variations, and arrange guarantee facilities with a Saudi bank early.
What is retention in Saudi construction contracts?
Retention is a percentage withheld from each payment to the contractor and released after completion or at the end of the defects period, as the contract sets. It protects the client against defects and incomplete work. For the contractor, it ties up cash and often much of the margin until release.
Do Saudi clients pay advance payments to contractors?
Many construction contracts include an advance payment at the start, recovered from later invoices and secured by an advance payment guarantee from a bank acceptable to the client. Terms vary by client and contract. A new contractor should confirm it can obtain the guarantee before relying on the advance in its cash plan.
Why do Saudi banks hesitate to give guarantees to a new contracting company?
A new company has no local track record, limited balance sheet and no history with the bank, so guarantee lines are often small at first or require cash margin, parent support or collateral. Start the banking relationship before bidding, share the pipeline of expected contracts and discuss what support from the parent would unlock larger facilities.
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