Financing

Types of financing

What types of financing are used for construction projects in your jurisdiction? Which are the most common? Are there any restrictions on available financing methods?

Project financing is very common in the United Arab Emirates. Project financing whereby a bank pays the contractor its entitlements until completion is particularly widespread. Larger projects tend to resort to the issuance of bonds; another common alternative is Islamic financing (eg, Istisna, Ijara and Musharaka). There are no restrictions on available financing methods, except where the financing involves an off-plan property project or the bank’s security or risk is varied.

Security

What forms of security are used in construction project financing?

Mortgages are the most common, along with the assignment of rental incomes or shares in projects owned by special purpose vehicles.

Payment

Methods and timing

What are the typical methods and timing of payment for construction work? Are there any restrictions on ‘pay when paid’ and ‘pay if paid’ provisions? Do any other rules, restrictions or procedures apply?

Payments are generally claimed by the contractor for the works in progress through monthly applications which the engineer or architect will review within an agreed period in the contract (usually 10 days). The engineer or architect may approve part or all of the application and issue a certificate for the employer to pay within a contractually agreed period (usually 15 days). Subcontractors follow the same method, with the exception that the main contractor gives approval instead of the engineer. Contractors insert ‘pay when paid’ clauses in most of their dealings; these have been enforced and accepted by the courts.  

Non-payment

How can the contractor secure itself against non-payment by the employer? Under what circumstances can the contractor suspend work for non-payment?

Contractors usually rely on suspension clauses for non-payment; such a clause is included in FIDIC contracts. The contractor is entitled to suspend works if the employer has not made payments towards any moneys that have been approved by the engineer in any application. Suspension is a contractual right, but if such clauses have not been agreed, the law protects the contractor where industry customs require progress payments.

How can subcontractors secure themselves against non-payment by the contractor? Under what circumstances can subcontractors suspend work for non-payment?

Subcontractors usually demand similar terms to the above.

On what grounds can payments be withheld?

Generally acceptable reasons for withholding payments by the employer include the absence of a valid performance bond and the works not being certified or approved by the engineer.