Saudi Arabia: Q&A: Legal Considerations For Construction In Saudi Arabia

Last Updated: 13 August 2018
Article by Asaem Ajeeb and Dario Najm

1. Is a local partner required in any part of the construction process?

A local partner is not required in any part of the construction process.

As a matter of fact, article 8 of the Saudi Foreign Investment Law (SFIL) provides that a foreign firm (wholly owned by foreign investor(s)) licensed under the SFIL may acquire necessary real estate as needed for operating the licensed activity, or for housing all or some of its staff, subject to the provisions governing real estate ownership for non-Saudis.

Section 2 of article 1 of the Real Estate Ownership for Non-Saudi Law (REONSL) issued by the Royal Decree No. M/15 dated 17/4/1421H (July 19, 2000G) provides the following:

"If the license includes buying buildings or lands to construct buildings on sell or lease them, the minimum total cost of the project should not be less than thirty million Riyals..."

2. How do preferences to nationals apply to those employed on a construction project at specific levels?

In the Kingdom of Saudi Arabia, the Ministry of Labor and Social Development has developed and implemented a manual named "Nitaqat", lastly amended in September 2017. The manual was put into effect to encourage all private sector's employers (local and international) in the Kingdom to hire Saudi nationals.

Aiming to incentivize employers to hire Saudi nationals, Nitaqat first categorizes all companies working within the Kingdom according to the number of Saudis they employ. The four classifications (from most compliant to least compliant) Platinum, Green (low, medium and high), Yellow, and Red, are separated by thresholds measured by percentage of Saudis employed. These thresholds differ between employers based on activity (industry) and size (number of employees).

It should be noted that the employer should always be ranked within the "Low Green" category, which means employing the minimum number of Saudis accepted under Nitaqat.

As per the Nitaqat manual, within the construction sector, a minimum of 10% (ten) of the workers must be Saudis for medium, big and giant companies and a minimum of 12% (twelve) for small companies.

3. Do preferences to nationals have an impact on the tendering process?

Saudi Government Tenders and Procurement Law (SGTPL) issued by the Royal Decree No. M/58 dated 4 Ramadan 1427H (September 27, 2006G) provided in its article 3 the following:

"Without prejudice to provisions of Foreign Investment Law, all individuals, establishments and companies interested in dealing with the government and are qualified for such dealings shall be given equal opportunities and shall be treated on equal footing".

However, article 5 of the same law stated that priority shall be given to national manufactured goods, products and services and to those treated as such.

Nationals are given priority throughout the tendering process whenever there is no difference between their offers and the foreigners' offers.

Such priority is given to them as an encouragement to invest inside the country.

4. Is a local owner or partner in ownership required of the land and/or final property?

No local owner or partner in ownership of the land and/or final property is required whenever the foreign entity abides by the SFI and the REONSL's rules and regulations.

5. Are specific qualifications/accreditation needed for those designing or building in the jurisdiction?

Any person designing and/or building in the Kingdom of Saudi Arabia must abide by the Saudi Building Code which is a set of legal, administrative and technical regulations and requirements that specify the minimum standards of construction for building in order to ensure public safety and health.

6. What are the key differences (if any) when building in freezones or secondary jurisdictions?

In the Kingdom of Saudi Arabia, there are no free-zones or secondary jurisdictions.

7. Are there any Islamic law considerations for property ownership which need to be taken into account by those involved in construction projects?

No property can be owned by non-Saudis (including GCC nationals) in Mecca and Madina (article 5 of the REONSL). Non-Saudis can only gain ownership, usufruct or other rights in the aforementioned cities by inheritance only.

8. What are the main differences in building regulations between those in other major international jurisdictions?

No main differences in building regulations between those existing in the Kingdom of Saudi Arabia and those in other major international jurisdictions since the Saudi Building Code has been drafted after being acquainted with international codes from the United States of America, Canada, Australia, European codes and Arab codes and finally the International Building Code (IBC) which has been published by the International Code Council (ICC).

9. How do termination of employment obligations differ for those employed as principles or sub-contractors?

There are no differences between the termination of employment obligations for those employed as principles and those as sub-contractors.

10. What are the main differences in health and safety rules between those working in construction in this jurisdiction and internationally?

The Kingdom of Saudi Arabia gives enough attention to the health and safety of those working in construction inside the Kingdom.

In this matter, the Kingdom obliges all construction site owners to abide by the international standards for health and safety of their workers, notably the US and the EU standards.

11. Are there specific health and safety rules for those working in the construction industry during the summer?

The Kingdom of Saudi Arabia cares about the safety of workers in the construction industry, notably during summer season. In this regard, a Ministerial Decree No. 3337 of 1435/07/15 provided that "No worker shall work under the sun light from 12pm until 3pm during the summer season (15 June -15 September)".

12. Are there specific health and safety rules for those working in the construction industry during Ramadan?

There are no specific health and safety rules for those working in the construction industry during Ramadan. But according to the Saudi Labor Law, all workers shall not work for more than six hours per day during Ramadan.

13. What are the specific planning/registration/site establishment/building reg rules required before starting a construction project?

Before starting any construction project within the Kingdom, all relevant documents must be submitted to the municipality where the construction site is located for approval and the issuance of the appropriate permits.

14. What are the specific rules for sign off at the end of a construction project?

Since there is no construction law in the Kingdom of Saudi Arabia, hence no specific rules and regulations covering any part of the construction process, all construction agreements in the private sector are subject to the parties' consent, as long as such agreements do not contradict with the Sharia'.

On another hand, article 40 of the SGTPL provides that the last claim of payment, which shall not be less than 10% (ten percent) for public work contracts and 5% (five percent) for other contracts, shall be paid after the initial handover of works or delivery of procurements.

15. What are the specific rules if a contractor decides to abandon a project without completion?

As mentioned in our answer to question 14 above, and since there is no construction law in the Kingdom yet, there are no specific rules governing the abandon of a project without completion within the private sector. Such situation must be governed by the agreement signed between both parties.

As within the public sector, notably when dealing with the government based on public procurement and tenders, article 53 of the SGTPL covers the rules governing the abandon of a project without completion. Such article provides the following:

"A government authority may withdraw the work from a contractor and rescind the contract or execute it at his expense without prejudice to the right of the government authority to claim compensation for damage sustained as a result, in any of the following cases: [...] (b) If a contractor delays commencement of the work, procrastinates in its execution or is in breach of any of the terms of the contract and fails to rectify the situation within fifteen days from the date of notifying him in writing to do so. [...]"

16. What is the most common contract standard form contract used in this jurisdiction – and are there any differences for specific types of construction project?

There is no common contract standard form used in the Kingdom of Saudi Arabia.

In the public sector, especially in the public procurement and tendering process, the Ministry of Finance prepares the contract forms in accordance with the provisions of the Saudi Government Tenders and Public Procurement Law and must bring them before the Council of Ministers for approval.

17. Who bears the costs when material prices increase – and what factors impact this?

Article 43 of the SGTPL provides that in the event of an increase or decrease of customs tariff, fees, taxes or officially priced materials or services – after the bid submission date – the value of the contract shall be proportionally increased or decreased, as the case may be. Payment of the difference resulting from increase is subject to the following:

(a) The contracting party shall prove payment of custom tariffs, fees, taxes, officially priced materials or services on the basis of categories affected by the increase due to delivery of materials for the contract works.

(b) Amendment of custom tariffs, fees, taxes, or officially priced materials or services is not introduced after the expiration of the specified contract execution period, or the difference was incurred by the contractor as a result of delay in the execution of the contract unless he proves that such delay is for reasons beyond his control.

18. Are there any jurisdictional differences which impact who bears the costs of time delays?

As per article 48 of the SGTPL, if a contractor delays the execution of the contract beyond the specified time, he shall be subject to a delay penalty not exceeding 6% (six percent) of the value of supply contracts and 10% (ten percent) of the value of other contracts.

On another hand, article 51 of the same law provides that a contract shall be extended, and the penalty shall be waived by agreement of the contracting government authority and the Ministry of Finance, if the delay is due to unforeseen circumstances or for reasons beyond the contractor's control, provided that the period of delay is proportional to these reasons.

19. What are the key legislative factors to be aware of in public procurement of construction or infrastructure contracts?

The key legislative factors to be aware of in public procurement of construction or infrastructure contracts are the following:

  1. Saudi Government Tenders and Procurement Law;
  2. Labor Law; and
  3. Building Code.

20. How do damages between principle contractor and subcontractor negligence work – where subcontractors are negligent?

The SGTPL has clearly mentioned that the contractor shall remain jointly liable with the assignee or subcontractor for execution of the contract since the contractor shall execute the work himself and may not assign the contract fully or partially or delegate a third party to execute it without the prior written permission of the contracting authority (article 71).

21. Can contractors get damages when contracts are cancelled – does this differ where the client is a private or public-sector body?

Section (b) of article 25 of the SGTPL provides the following:

"The value of the tender documents shall be refunded to bidders if the responsibility of cancellation lies with the government authority."

If the cancellation is based upon a reasonable reason that the contractor has breached the contract and the law, the contractors would be responsible upon that cancelation. He might not get any compensation due to his failure of doing the obligations.

As for the private sector, and as mentioned before, since there are no laws, rules or regulations governing the construction contracts in specific, and no laws governing contracts in general, the parties go back to the provisions of the agreements signed between them. And if the agreement does not include any provision regarding their disagreement, they go back to the customs usually applicable within the commercial transactions.

22. Are there specific matters to be aware of when opting for arbitration in construction contracts?

Saudi law does not mention arbitration as a choice in public procurement of construction contracts.

In the private sector, the parties to an agreement are free to choose arbitration as a dispute resolution vehicle, taking into account that any part of such arbitration must not contradicts the Sharia' laws.

23. Are there any specialist construction dispute resolution bodies – what powers do they have?

No special construction dispute resolution bodies exist in the Kingdom of Saudi Arabia. Parties to a construction contract can submit their claim to a local court or agree on arbitration.

It should be mentioned that the SGTP has provided that a committee of advisors comprising at least three members from the Ministry of Finance and other relevant government authorities shall be formed by The Minister of Finance, after coordination with said authorities.

Such committee shall include among its members a legal advisor and a technical expert. It shall be headed by a legal advisor whose rank is not lower than "Grade Thirteen" or its equivalent. The committee shall be re-formed every three years and its membership may only be renewed once. This committee shall review compensation claims submitted by contractors and suppliers as well as reports of deceit, fraud and manipulation, in addition to decisions of withdrawal of works. It shall also review claims submitted by government authorities to the Minister of Finance requesting to boycott a contractor who executed a project in a defective manner or in violation of the terms and specifications of the project.

This committee shall hear statements of grievant contractors and suppliers and those accused of violations, their defenses and views of the government authority either in person or in writing. The committee may seek the assistance of technical specialists and shall issue its decision, with all its members attending, unanimously or by majority. The dissenting opinion, if any, and the argument of each party shall be stated in the minutes of the committee (article 78).

24. Are there any specific rules on bribery those working in the construction industry need to be aware of?

According to article 53 of the SGTP, a government authority may withdraw the work from a contractor and rescind the contract or execute it at his expense without prejudice to the right of the government authority to claim compensation for damage sustained as a result, in any of the following cases: (a) If it is proven that a contractor attempts by himself or through others, directly or indirectly, to bribe an employee of an authority subject to the provisions of such Law or has procured the contract by way of bribery, [...].

25. Do currency controls lead to any difficulties for those undertaking development work – can these be overcome?

In the Kingdom of Saudi Arabia, the local currency is somehow stable against all other currency, notably the United States Dollars and the Euro. The parties may agree to deal with a currency other than the Saudi Riyals. Such thing should be clearly stated within the contract.

The SGTP has provided in its article 37 that the value of the contracts shall be paid in Saudi riyals and may be paid in any other currency after coordination with the Ministry of Finance. The tender terms shall specify the currency in which the bid shall be submitted, provided that the value of the contract is not paid in more than one currency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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