The Contractor Funding For
Performing of Contracts and
Financing of Working Capital
The contractor funding in the construction sector in Saudi Arabia is not described by its needs for financing in different forms, but also feature the short-term financing importance among these needs.
This sector lacks for liquidity semi-permanent, and this issue gets more complicated when projects become more and get larger.Therefore, the contractors continuously need different funding sources. Because funding is a vital issue for the contractor in all the work phases, whether he has a small business or has become a major contractor with multi-activities.
The need for the contractor funding remains a matter of urgency for several things such as (performing of contracts, debt's settling, equipment maintenance, buying of materials, facing any emergency loss).
The financial needs differ from one sector to another, because each business has its own special features that determine the quality of the proper funding. Therefore, by looking into the contractor's nature of work, we can find out his financial needs.
Definition of the contracting business:
It is the commitment to build a specific project within a certain period of time by using of equipments, materials and workers. Performing work should be according to the specifications in the contract. The contract that is signed by the project owner will be for a specific amount of money, which is eligible for payment depending on the work progress within specific dates.
If the work was performed according to the contract schedules, then the necessary funding for its amount and type can walk along performing of work until the contractor receives the bill value. In this case and besides his own sources, he can use the available fund to finance a new cycle until he completes the project.
Usually, the contractor's funding needs are multiple, and vary depending on the nature of the performed work. For example, the mining contractor needs huge funding for equipments, while the sewer contractor needs a bigger funding for working capital.
Contractor funding (General Needs):
It is provided by the bidder (contractor) who wants to enter a bid. Its value ranges between 1%- 3% of the tender amount (this percentage varies according to the rules of each country). The guarantee will be replaced later by a performance bond in case the contractor won the bid, otherwise it will be returned to the bidder.
The winner of the tender will provide it to the project owner as a confirmation of his seriousness to perform the work. It also serves as a compensation for the project owner for any damages that may occur in case the contractor fails to fulfill his commitment for any unacceptable reasons. The value of this guarantee ranges between 5%- 10% of the contract amount (this percentage varies according to the rules of each country).
As usual, the contractor provides such a guarantee after being notified of awarding the tender, and before signing the contract. The guarantor undertakes under this guarantee to pay the project owner the full value of the bond at the first request.
Advance Payment Bond:
The contractor provides it to the project owner in case the later approves to grant an advance payment to the contractor. The value of the advance payment sometimes ranges between 10% - 20% of the contract amount (this percentage varies according to the system of each country).
Its advantage is to provide the contractor with the necessary cash to meet the expenses of the preparation period. The value of this guarantee decreases with work progress. The project owner will deduct a percentage from each bill.
This guarantee is rarely used in compare with the former ones. Its role is to enable the contractor to receive the retention amount that was held by the project owner from his monthly bills.
The contractor provides this guarantee to the project owner after he hands over the project (the primary hand over). The value of this guarantee often equal 5% from the amount of the performed work (this percentage varies according to the rules of each country).
The role of this guarantee is to ensure the contractor commitment to perform any maintenance work on request, but only within the maintenance period (for example, one year). Note: When the contractor provides this guarantee to the project owner, he can withdraw the performance bond.
2) The contractor funding of the Working Capital:
It means funding the constant operations (until the contractor completes his business cycle). Also, it can be defined as the period between spending on work and collecting the value of work, such as paying the salaries, buying the material and settling of the dues.
3) Funding the working capital is determined by the following:
A) Work period.
B) Volume of work.
C) Project's period.
D) Bills amount and dates of payment.
E) Procedures taken until receiving the payment.
F) Quantity of the used material.
G) To what extent the contractor relies on the equipment in performance stages.
H) To what extent the contractor relies on labor force.
3) The contractor funding of Equipment: Equipments are an important tool to the contractor, besides the labor forces.
Therefore, if the contractor wants to remain at a competitive condition, he must look after his equipment, and replaces what has become technically out-of-date and of big maintenance cost.The financial needs, depends on (the quality of the bought equipment, specialty, expected life, the buying conditions, banks and suppliers credit facilities).
4) The contractor funding of (local and imported) materials:
The size of this funding depends on the A) Expected amount of material planned to be used and dates of such use. B) Materials sources. C) Prices and methods of payment. D) Stability of resources. E) Payment terms by the project owner.
Note: As far as the use of the materials, spreads for long periods and dates, the more stability is expected for their prices. Therefore, fewer funding is needed, and vice versa is correct.
The contractor has many available sources to finance these needs, including:
B) Commercial and specialized banks.
C) Commercial suppliers.
D) Project's owners.
E) Letter of credits.
F) Company transformation into a shareholding entity.
G) Issuing corporate bonds.
H) Issuing preferred shares.
I) Equipment rental companies.
Project Financing Available - 100% Monetization Financing for your Project. All Industries Considered.
Guarantor must have Credit Rating BBB or better.
Return from Contractor Funding Page to Capital Management Page
Return from Contractor Funding Page to Sewer Contractor Management Guide Page