Subcontractor Progress Billing & Management in Saudi Mega Projects via ERP

Why Subcontractor Management Needs a System

On most building projects in Saudi Arabia the main contractor does not self-perform everything. Electrical, HVAC, insulation, facades and finishes usually go to specialist subcontractors. Each one has a contract with quantities and unit rates, monthly interim payment certificates, an advance payment to recover, retention released after handover, bank guarantees with expiry dates, and variation orders that keep arriving throughout the job.

With ten or twenty subcontractors on one project and several projects running at once, tracking all of this in separate spreadsheets becomes a constant source of error: a deduction applied twice, an advance never fully recovered, a guarantee that lapses unnoticed, and a final account dispute because each side keeps its own version of the numbers.

This guide follows the subcontract from prequalification to final account, works through a complete interim payment certificate (IPC) with numbers, covers the relevant Saudi regulatory and tax points, and sets out what an ERP system should do at each stage.

The Subcontract Lifecycle

Prequalification: Before Anything Is Signed

Good subcontract management starts with selection. A short checklist:

• Legal standing: valid commercial registration, VAT registration certificate where applicable, zakat certificate and GOSI compliance. The Saudi Contractors Authority, established on 7 September 2015 by Ministerial Decision No. 510, makes membership a prerequisite for bidding on government tenders, which matters if the project is public.
• Technical capability: similar projects, available equipment, qualified staff.
• Financial capacity: can they fund two or three months of work before the first payment? A subcontractor that runs out of cash mid-project stops the job.
• Internal track record: if they have worked for you before, how did they score on schedule, quality and safety?

When this data lives in the system, with a performance rating added after every project, future award decisions rest on a documented record rather than impressions.

Contracts in the System: Items Before Totals

A common mistake is to record a subcontract as a single lump sum. That is enough to issue a payment but not enough to manage a project. The subcontract should be recorded with its BOQ: each item with unit, quantity and rate, linked to the project budget line and to the matching item in the main contract with the owner, where one exists.

Those links answer important questions later. How much of the HVAC budget is left? Are we paying the subcontractor more for an item than we bill the owner for the same item? What does the new variation do to project margin? See Tranquil's project budgeting capability.

The Monthly IPC: A Worked Example

Take an HVAC subcontract on an office building in Riyadh. Figures are hypothetical, and the percentages are common examples that vary by contract.

• Contract value: SAR 2,000,000 before VAT.
• Advance payment of 10% (SAR 200,000), recovered at the same percentage from each IPC.
• Retention of 5% of each IPC, half released at provisional handover and half at final handover.
• An approved variation of SAR 80,000 for additional units on the top floor.
• Materials issued by the main contractor from its own store, deducted from the subcontractor's entitlement.

IPC No. 4

After this IPC, cumulative advance recovered is SAR 94,000 (10% of 940,000), leaving SAR 106,000 to recover. Cumulative retention is SAR 47,000. These running balances are exactly what the parties argue about at the end of a project, so the system must hold them per subcontract and show them on every certificate.

Tax notes

VAT is 15%, and under the regulations the time of supply is the earliest of supply, issue of the tax invoice or receipt of payment. The advance the subcontractor received was therefore taxed when it was received, and VAT should not be charged again when it is recovered through IPCs. How retention and materials issued by the main contractor are treated depends on contract wording and invoicing: materials may be a separate supply with their own invoice or a deduction from the work value. Agree these points with your tax adviser at the start of the project, then have the system apply them consistently to every IPC.

For government contracts, since 1 November 2021 the time of supply is the earlier of the payment order date or receipt of payment. If a subcontractor is non-resident and provides services, withholding tax may apply at rates that depend on the service type; check before payment.

A VAT-registered subcontractor issues an e-invoice through ZATCA's Fatoorah system. The system should match that invoice to the approved net IPC before payment, so you never pay an amount unsupported by a valid tax invoice that allows input VAT recovery.

Variation Orders

Variations are normal, but undocumented ones are the main source of disputes. A suggested flow:

1. Change request from site with description and estimated quantities.
2. Technical review by the project manager.
3. Agreed pricing with the subcontractor and stated time impact.
4. Financial approval according to value-based authority limits.
5. Contract amended in the system with new items, which then appear in future IPCs.

The golden rule: no work is measured in an IPC until its variation is approved. If the change originated with the owner, link it to the main contract variation so the company does not absorb cost it never bills.

Bank Guarantees

Subcontractor guarantees protect the main contractor, and letting one expire is a direct loss. The usual types:

• Advance payment guarantee: covers the unrecovered advance and can be reduced as recovery progresses.
• Performance guarantee: a contract-defined percentage, held until handover or the end of the defects period.
• Retention guarantee: in some contracts part of cash retention is replaced by a bank guarantee.

For each guarantee the system should hold bank, number, amount, expiry and linked subcontract, with alerts early enough to request extension, and a report comparing the unrecovered advance balance against the guarantee in force.

Daily Site Records as the Basis for IPCs

An IPC is only as accurate as the data behind it. When the site engineer records daily each subcontractor's headcount, equipment, work completed by location and quantity, and obstacles such as late materials or clashes with another trade, checking the month-end claim becomes a simple comparison between what is claimed and what was recorded.

The same records support extension-of-time claims. If a subcontractor says the site was not ready, the daily log confirms or refutes it. If the owner caused the delay, the log supports the main contractor's own claim. Tranquil's contracting pages include daily activity management and material management.

On government projects, note that a new Government Tenders and Procurement Law was published on 4 September 2026 and takes effect on 2 January 2027, replacing the 2019 law and strengthening the role of the Local Content and Government Procurement Authority. Any new requirements on local content or subcontracting in public contracts will need documented data about subcontractors and the value of their work, which the system already holds when contracts and IPCs are recorded in it.

Site Compliance and Safety

The main contractor runs the site, and any breach by a subcontractor's workforce affects the whole project. One practical example: work under direct sun is banned from 12:00 to 15:00 between 15 June and 15 September each year. Scheduling outdoor work in that window, such as roofing and facades, must account for everyone on site, not just the main contractor's own crews.

It also helps for the system to hold each subcontractor's required documents and expiry dates, such as commercial registration, insurance certificates and zakat certificate, with alerts before expiry and the option to hold IPC approval if a document the contract requires has lapsed.

Materials Issued to Subcontractors

In many contracts the main contractor supplies materials such as rebar, cable or pipe and the subcontractor installs them. Without tracking, nobody knows whether consumption matches the work measured. A system that records issues from store to subcontractor against the project, then compares them with theoretical quantities for measured work, reveals waste or loss early.

Rating Subcontractor Performance

A useful rating is built from data collected during the project, not an impression written at the end. A suggested model, with weights adjustable by project type:

Hypothetically, a subcontractor scoring 80 on schedule, 90 quality, 70 safety, 60 claim accuracy and 85 responsiveness gets 24 + 22.5 + 14 + 9 + 8.5 = 78 out of 100. The detail says something specific: technically sound, claims need close checking, and the safety record deserves a meeting before the next award.

Cash Planning for Subcontractor Payments

Many main contractors try to pay subcontractors after collecting from the owner, or at least to balance the two. That balance is often managed by instinct. With approved but unpaid IPCs and due dates in the system, alongside owner certificates submitted and expected collection dates, a monthly project cash forecast becomes possible.

Hypothetically, next month's approved subcontractor payments total SAR 1.2 million while expected owner receipts are only SAR 900,000 because one certificate is stuck in approval. The SAR 300,000 gap shows up a month in advance, leaving time to arrange short-term funding, agree a payment schedule with some subcontractors, or chase the owner's approval. It also helps to know which subcontractors are on the critical path, since delaying their payments can stall work that delays the whole project.

Defects Period and Final Account

After provisional handover, the defects period defined in the contract begins. Defects are logged, assigned to the responsible subcontractor and given a deadline. If a defect is not fixed, it can be remedied at the subcontractor's cost and deducted from retention under the contract terms.

The final account is the last reconciliation: original value, every variation, every IPC, every deduction, advance recovered, and retention released and outstanding. When all of these sit in the system linked to their documents, the final account is a report you print and review, not a separate project that takes months.

Common Mistakes

• Certifying without documented measurement: every quantity should rest on a measurement record or engineer approval.
• Extra work on verbal instruction: it ends as a final account claim nobody can prove or disprove.
• Ignoring cumulative balances: calculating each IPC in isolation loses track of advance and retention.
• Releasing retention before snags close: afterwards it is hard to make the subcontractor return.
• Keeping subcontract data outside project cost: project cost looks understated until late invoices arrive.

For the full picture, including work in progress tracking, see Tranquil's contracting solutions.

Frequently Asked Questions

What is the difference between cumulative and periodic IPCs?

A cumulative IPC values all work since the start of the contract and deducts what was previously certified, so earlier measurement errors self-correct. A periodic IPC values only the period's work, and its errors accumulate unnoticed. Cumulative is safer.

Must the advance be recovered at a fixed percentage of every IPC?

That is most common, but the contract may set a different schedule, such as starting recovery after a certain progress level. What matters is that the system applies the contractual rule the same way on every certificate.

What if a subcontractor is late issuing its e-invoice?

Approve the IPC technically and release payment only when the matching tax invoice arrives. Input VAT recovery needs a valid tax invoice, so paying without one puts the VAT at risk.

Can subcontractor IPCs be linked to owner certificates?

Yes, and it is one of the main benefits. Linking subcontract items to main contract items shows margin per item and supports cash planning when subcontractor payments depend on owner collections.

Where should we start?

Take stock of live subcontracts and load them with their BOQs and current cumulative balances: certified to date, advance recovered and retention held. From then on, issue new IPCs directly from the system.

To discuss project and subcontractor management in your company, contact the Tranquil team.