These five contract errors cost construction and contracting companies millions of riyals every year. Here is how to avoid them.
5 contract mistakes cost construction companies millions in Saudi Arabia: vague scope of work, undocumented amendments, missing arbitration clauses, inadequate penalty provisions, and signing without legal review. This article details each mistake with practical solutions based on hundreds of contract reviews performed in Riyadh.
The single most common source of construction disputes in Saudi Arabia is an ambiguous or incomplete scope of work. Many contracts simply state "construction of a commercial building" or "supply of finishing materials" without attaching detailed technical specifications, BOQ (Bill of Quantities), or approved drawings.
Under the Saudi Civil Transactions Law, if the scope of work is ambiguous, the contractor bears the burden of proving what was agreed upon — a difficult task without written documentation. This ambiguity leads to disputes over variation orders, additional costs, and project delays.
Solution: Attach detailed technical specifications, BOQ, and approved architectural drawings as annexes to the contract. Ensure each item is described with measurable standards and reference to Saudi Building Code (SBC) requirements where applicable.
Payment disputes account for the majority of cases filed before the Commercial Courts in Saudi Arabia. Many contracts use vague phrases such as "payment shall be made upon completion of milestones" without defining what constitutes a milestone or the exact payment amount tied to each stage.
Under Article 172 of the Saudi Civil Transactions Law, a payment obligation must be defined and certain. An ambiguous payment schedule gives the payer grounds to delay payment or withhold amounts arbitrarily, leaving the contractor in a weak legal position.
Solution: Include a detailed payment schedule linked to specific, measurable deliverables with clear deadlines. For example: "SAR 200,000 upon completion of foundation works, confirmed by the engineer's report." Include a late payment penalty clause in accordance with the Saudi Commercial Court's standard practice.
A growing number of disputes arise when contractors proceed with work without ensuring that all regulatory approvals from the relevant municipality and civil defense authorities have been obtained. Some contracts fail to allocate responsibility for obtaining permits, leading to work stoppages and financial losses.
Under the Saudi Municipal and Village Affairs regulations, the project owner is primarily responsible for obtaining building permits. However, in practice, many contracts shift this responsibility to the contractor without providing the necessary documentation — a recipe for disputes.
Solution: Clearly allocate responsibility for each permit and approval in the contract. Include a clause requiring the responsible party to provide proof of approval before work on the relevant phase begins. Reference the specific municipality requirements applicable to the project location in Riyadh, Jeddah, Dammam, or other jurisdictions.
In the Saudi construction industry, change orders are inevitable. Yet many contracts contain no formal mechanism for handling variations. When project owners request additional work without a written change order, disputes over additional compensation are almost guaranteed.
Without a variation clause, the contractor may perform extra work in good faith but later find that the owner refuses to pay, arguing that the extra work was within the original scope. The Saudi Commercial Court of Appeal has consistently held that oral variation orders are difficult to prove and that written documentation is essential.
Solution: Include a clear variation order clause requiring (a) written notice of any change, (b) a cost estimate before work begins, (c) signed approval from both parties, and (d) a timeframe for responding to variation requests. A standard 7-day notice period is common in Saudi construction contracts.
Many contracts for projects performed entirely within Saudi Arabia inexplicably choose a foreign governing law or dispute resolution forum. This creates significant practical difficulties: enforcing a foreign arbitral award or judgment in Saudi courts is time-consuming and expensive, and foreign governing laws may contradict Saudi public policy.
Under Saudi law, Article 11 of the Civil Transactions Law provides that contracts concerning immovable property located in Saudi Arabia — including construction projects — are subject to Saudi law as a matter of public policy, regardless of what the contract states. Choosing a foreign forum may render that clause unenforceable.
Solution: For construction projects in Saudi Arabia, always choose Saudi law as the governing law and select a local dispute resolution forum such as the Commercial Court in Riyadh or the Saudi Center for Commercial Arbitration (SCCA). This ensures enforceability, reduces costs, and avoids procedural delays.
A practical guide explaining the most common legal mistakes for SMEs
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