Cash flow management of construction projects in Saudi Arabia

In the construction world, when money doesn’t move, when it’s needed the most, projects pause, operations slow down, and businesses fail. One of the main reasons why 82% of construction companies collapse is not because of having insufficient profits, but because of not managing their cash proficiently. That’s why intelligent cash flow management is mandatory to keep a construction business running strong, specifically in progressive countries like Saudi Arabia. KSA is working speedily towards its economic development with an aim to reshape infrastructure, real estate, and tourism, creating a construction sector that is better than many advanced countries. This construction boom shows immense opportunities, but at the same time, it puts huge financial pressure on construction companies.

The foundation of any strong construction firm is steady cash flow, and it is an important component for corporate survival and project success. Let’s comprehensively understand the importance of cashflow management in Saudi Arabia, legal and regulatory complexities, and how businesses can work towards better cashflow management.

The Importance of Cashflow in Saudi Construction

Cash flow is mainly the flow of cash that is coming in and going out of a construction business over a specific time span. The right management of cash flow depicts that a company is financially sound and stable to run projects. The KSA construction spread in KSA is due to core projects like NEOM, The Red Sea Project, ROSHN, and Diriyah Gate, which are mainly referred as the Giga projects, transforming the economic and urban structures of the Kingdom. As per a survey, contractors mainly stress over cash flow disputes and delays in payments in Saudi Arabia.

A Positive cash flow shows you have sufficient funds over your ongoing expenses, while a negative cash flow suggests the opposite. Having a balanced cash flow is mandatory for any construction company, as most of the time, many unexpected, missed payments, or postponed payments lead to damaging consequences. Proactive cashflow management in Saudi Arabia facilitates companies in forecasting their needs, detecting any gaps, and taking all precautionary steps that help the business thrive. One of the pivotal reasons why construction is a capital-demanding sector is that it needs finances for labor, materials, plant, and subcontractors that need to be paid before the owners release the payments.

Saudi Legal Framework that Impacts Cashflow

Government Procurement and Payment Regimes

The Government Tenders and Procurement (GTP) regulations are making efforts towards building more standardized and stable payment processes. They impact the government’s payment cycles and the rules for certifications, along with handling disputes and any other related queries. Government contractors must build cash plans based on these regulations and practical guidelines for approval.

Civil Code, interest, and enforcement

The Civil Transactions Code, which is effective from 2023, has shed light on remedy rules that include interest in case of late payment and execution approaches. However, like many other jurisdictions, Saudi Arabia does not acknowledge legally mandated claims over the land and assets of projects. This shifts the bargaining power a contractor holds over the employer regarding delayed payments.

Market reality: retentions, milestone invoicing, and certification

The Progress Payments, Milestone invoices, and retention practices are common in Saudi contracts. Retentions, which are generally a percentage holdback until the project is completed, and the phased certifications, impact the timing and reliability of cash inflows straight away. Having clear contract terms that define what counts as certified work and when it should be certified is one of the most critical steps to keep cash flow under control.

General Cash Flow Challenges in Saudi Projects

• Late in Certifications and Approvals: Many times, there are bottlenecks in the design reviews, inspections, or approvals from administration, which often delay the release of interim payments
• Late Payments by Owners and Sponsors: In bigger projects, payments oftentimes face delays due to the complex process of funding, which covers government entities, Public Investment Funds (PIF), and the contractor Prequalification process.
• Retention and Disputed Valuations: Any variance in the quality and quantity of work results in the holding of payments or partial settlements.
• Currency and Cross-Border Supplier Issues: Many international suppliers ask for prompt foreign exchange payments, yet the local payments are sometimes postponed or delayed, which leads to currency mismatches and elevates the tension in supply chains.
• Layered Subcontracting: The low-tier subcontractors receive their payment quite late, as the funds move slowly through multiple layers, which builds pressure on working capital.

Step-By-Step Cash-Flow Management Project

To manage your cash flow effortlessly, it is important to follow the steps given below that include every minor area from pre-contract budgeting to on-site controls and emergency funding.

A.     Pre-award: design cash-sensible bids

• Transform your schedule of rates and resource loading into a month-by-month cash structure that shows the timing of payments and expenses.
• Include Contingency funds for a sudden payment lag of around 60-120 days to reverse funds and for price expansion.
• Be determined in setting clear milestones, timelines for certifications, mechanisms for dispute resolution, and interim payment frequencies in the contract. Stay away from cryptic terms like “certificate due on approval” v
• Check payment history and run credit to develop a higher working capital where reverse risk is higher.

B.     Contracting: bake-in protection and predictability

• Define the formats for submission, needed substantiation, and the review periods that are fixed.
• Emphasize payment security, like guarantees from the parent company, performance bonds with cash components, and ask for advanced payments for high-risk owners.
• Make sure that the contracts show interest for overdue amounts and practical fixes. Although for the enforcement it needs legal steps, contractual rights are the foundation for claims.
• Limit the retention score and lower the retention release timeline, which needs release to be certified in a fixed duration after the finalization of the project.

C.     Project start & mobilization: build a cash control engine

• Keep a rolling 13-week cash predicted at the project level that is updated weekly and rolled up to the company level. It must show the inflows, like expected certificates, and outflows, like payroll, subcontracts, and suppliers
• Build a waterfall policy for payments to prioritize paying important suppliers first, and publish it internally so the teams know the focused areas
• Reach an agreement on payment terms with critical suppliers and utilize the supplier prequalification to ensure resilience
• Use one or two accounts to centralize collection, use a direct debit account or a faster local transfer arrangement to speed up inwards funds

D.     During execution: controls that prevent surprises

• The promptly you work for certification and submission of the invoices accurately, the earlier you get paid. Keep your standard maintained on packages, so you don’t get any delay or rejection in approvals.
• Keep a tracker for all the approvals with mentioned timelines, so in case of any delay, always follow up and escalate to the client’s commercial team
• Always keep the paperwork managed by changing the price variations right away. Oftentimes, unpriced changes result in complexities later.

E.     If Payments Slow Down: Emergency Actions

• Build a small team to keep a check on overpayments and to send official notices as a reminder
• Forecast any issues early to keep them resolved and the cash flowing without any disruptions
• Think about invoice factoring, supply chain finance, or short-term bank loans that are linked to certified receivables. Utilize them professionally to keep the cash flow managed.
• If anything fails, apply guarantees or take legal action, stay guarded from timeframes and procedures that fall under Saudi Law.

Proposed Strategies for Operations

• Appoint a commercial lead for certifications and a cash controller who owns the 13-week model
• Create a small but competitive team to produce decisions and communications for the client
• Build Standard Operating Procedures (SOPs) for invoicing and change orders
• Book a weekly cash meeting with the project head, finance, and procurement to review the deviations and countermeasures
• Plan Escalation matrix for stalled approvals and disapproved certificated
• Integrate ERP with Project Controls to make sure that ERP generates expected receipts automatically and posts certified amounts
• A dashboard with KPIs, approved vs paid, retention outstanding, and predicted liquidity must be covered for the senior management to keep it checked.

Strengthening Cash Flow Foundations in Saudi Construction with SS&CO

In the rapidly revolutionizing sector of construction in KSA, SSCOKSA, being one of the leading accounting firms in Riyadh, assists contractors and developers in evolving the cash flow complexities into financial stability. With the professional oversight and industry-centric mindset, we make sure that your project never stops progressing due to a lack of funds

Why are we trusted by our clients? Because we:

• Plan for cash flows with the right forecast that is in line with the given timelines of projects and payment milestones.
• Work on certifications, billing, and elevate the collection process to minimize any delays
• Make sure that your payment terms, retention clauses and certification timelines are mentioned in clear and enforceable terms
• Keep a track of actual vs projected cost to prevent overruns and to boost financial predictability
• Assist clients in utilizing the short-term financing, supply chain finance and invoice factoring without disturbing the profits

We keep your cash flow managed so it turns into your assets rather than keeping you tense. Get in touch to start today.