# Construction Accounting in Saudi Arabia: Progress Billing, Retention and Project Costs, Step by Step *A practical finance guide for Saudi contractors running several projects at once, at different values and different stages* > **In short:** How Saudi contractors handle progress billing, retention, project costing and percentage-of-completion — worked examples plus ZATCA e-invoicing rules. - **URL:** https://www.snad.io/en/blog/muhasabat-muqawalat-saudi-faatura-marhliyya - **Arabic original:** https://www.snad.io/blog/muhasabat-muqawalat-saudi-faatura-marhliyya - **Category:** Industry — Construction & Technical Services - **Tags:** construction accounting, progress billing, retention, project costs, construction, project management, accounting - **Published:** 2026-05-24 - **Updated:** 2026-08-02 - **Publisher:** Snad (snad.io) A Saudi contractor is running six projects at the same time, ranging in value from SAR 800,000 to SAR 4 million. At the end of every month he asks his accountant one question: "How much did we make?" The accountant shrugs: "I can't say precisely. Some of the projects haven't been handed over yet." That blind spot is the norm at most Saudi construction firms, and the reason is simple: construction accounting is not ordinary accounting. It is a discipline of its own, combining progress billing, retention, project costing, the percentage-of-completion method, subcontractor management, and compliance with the Zakat, Tax and Customs Authority (ZATCA). This guide gives you a complete framework for professional construction accounting — one that reveals the profitability of every project month by month, prevents nasty surprises at handover, and keeps your tax position correct from the very first payment certificate. ## Why construction accounting is different from ordinary accounting An ordinary trading company knows its revenue and expenses day by day. A construction company faces a fundamentally different challenge: a project runs for 8–24 months, payments arrive in stages, costs are spread across long periods, and true profit is not known until the very end. That difference creates a set of accounting problems you will not meet anywhere else: **1. When is revenue recognised?** On contract signature? When work starts? At the handover of each stage? At final handover? The answer determines your income statement and your zakat and tax calculations. The Saudi standard (aligned with IFRS 15) requires the percentage-of-completion method for long-term contracts. **2. When are costs recognised?** Materials for a 12-month project may all be bought in one go. Do you expense the lot in month one? No. They are allocated according to actual consumption on the project. **3. How do you track profitability project by project?** A contractor with 8 concurrent projects needs the profit of each one separately, not just a company-wide total. A single loss-making project can quietly eat the profits of seven good ones. **4. How do you manage a complicated cash cycle?** Costs go out today, the invoice is issued a month later, it is collected 60 days after issue, and retention (5–10%) is held back for a year. That long chain creates enormous liquidity gaps. **5. How do you handle subcontractors?** 90% of Saudi construction firms work with subcontractors. Multi-party financial obligations, different payment terms, interlocking tax responsibilities — all of it needs a purpose-built accounting system. ## Direct and indirect project costs Every cost on a project falls into one of three categories: **Direct costs — typically 60–75% of project value** - **Direct materials**: steel, concrete, blocks, cement, insulation. Bought for a specific project and charged to it. - **Direct labour**: site workers. Their hours are booked against the project. - **Subcontractors**: subcontract packages (HVAC, electrical, plumbing, sanitary works). Charged to the project. - **Equipment hired for the project**: excavators, cranes. The hire period is charged to the project. **Indirect costs (overhead) — 8–15%** - Depreciation of the company's fixed equipment (offices, trucks, tools). - Salaries of technical management (supervising engineers who serve several projects). - Project insurance, site security, worker transport, worker accommodation. - Site utilities (electricity, water, internet in the site office). These are allocated across projects on a defined basis (share of revenue, labour hours, project size). **General and administrative costs (G&A) — 8–12%** - Senior management, accounting, HR, marketing, head-office rent. - In most systems these are not charged directly to projects; they go to the company's overall income statement. **Expected profit — 10–18%** The margin planned into the contract. You get it from the difference between the contract price and total expected costs. **A worked example** A villa project with a contract value of SAR 2,400,000. Expected costs: - Direct: SAR 1,680,000 (70%) - Indirect: SAR 240,000 (10%) - G&A: SAR 192,000 (8%) - Expected profit: SAR 288,000 (12%) This analysis should be built before the contract is signed, then tracked monthly against actuals. ## The percentage-of-completion method This is the method applied in Saudi Arabia under the IFRS 15 framework. The idea: revenue and profit are recognised in proportion to the actual progress of the project, not only on handover. **Calculating the percentage of completion** Percentage of completion = costs incurred to date ÷ total expected project costs Example: a project with expected costs of SAR 1,680,000. By the end of the first quarter, SAR 420,000 has been incurred. Percentage of completion = 420,000 ÷ 1,680,000 = **25%**. **Calculating revenue recognised in the period** Revenue recognised = contract value × percentage of completion − revenue recognised previously Quarter one: 2,400,000 × 25% − 0 = **SAR 600,000 of revenue** **Calculating recognised profit** Profit = revenue recognised − costs incurred = 600,000 − 420,000 = **SAR 180,000 of profit** **In quarter two** Additional costs of SAR 504,000 are incurred, bringing the cumulative total to SAR 924,000. The new percentage of completion = 924,000 ÷ 1,680,000 = 55%. Revenue recognised in quarter two = 2,400,000 × 55% − 600,000 = SAR 720,000. **When is the alternative (completed contract) method used?** For short projects (under 6 months) or small ones (under SAR 100,000). All revenue and profit are recognised at handover. It is simpler, but it does not reflect the economic reality of long projects. **A serious risk: expected costs change** If it becomes clear halfway through that total cost will rise from SAR 1,680,000 to SAR 1,920,000, you must recalculate the percentage and adjust the revenue already recognised. That adjustment can turn a quarter that appeared profitable into an accounting loss. ## Progress billing (payment certificates): how to calculate and issue them A payment certificate (progress billing) is the invoice issued to the client at each stage of the project, based on what has actually been completed. **The standard structure of a payment certificate** 1. **Header**: project name, contract number, client name, certificate number (first, second and so on), issue date, period covered. 2. **Work items**: every item described in the contract (excavation, concrete, steelwork and so on) with its completion percentage and value. 3. **Total before tax** 4. **Previous certificate (if any)**: what has been billed so far 5. **Amount due on this certificate** 6. **Retention deducted** (usually 5–10%) 7. **Net value after retention** 8. **VAT at 15%** 9. **Final amount payable** **Worked example — first payment certificate** A villa project of SAR 2,400,000. Work completed: - Excavation and foundations: 100% of an item worth SAR 280,000 = SAR 280,000 - Concrete structure: 40% of SAR 640,000 = SAR 256,000 - Preliminary works: 100% of SAR 84,000 = SAR 84,000 Total work completed = SAR 620,000 Retention at 5% = SAR 31,000 Net value after retention = SAR 589,000 VAT at 15% = SAR 88,350 Total payable = **SAR 677,350** **Second payment certificate (later)** Cumulative work completed = SAR 1,150,000 Less previous certificate = SAR 620,000 Amount due on this certificate = SAR 530,000 Retention at 5% = SAR 26,500 Net = SAR 503,500 VAT at 15% = SAR 75,525 Total payable = **SAR 579,025** **Conditions that come with every certificate** - It must be signed off by the project consultant or the client's supervising engineer. - It is normally settled within 30–45 days of the signature date. - The client is entitled to deduct any penalties set out in the contract (delay, specification breaches). - Retention stays held until the end of the warranty period (usually one year after project handover). ## Retention: managing it from start to finish Retention is an amount the client withholds from every payment certificate as security for the quality of the work during the warranty period. The usual rate is 5–10% (10% on government work, 5–7% in the private sector). **In accounting terms, retention is not a discount — it is a deferred receivable** The common mistake is to book retention as a deduction from revenue. The correct treatment is to record it as a long-dated receivable that will be collected later. The journal entry for the first payment certificate: - Debit: Trade receivables SAR 589,000 (the net before tax) - Debit: Retention receivable (long-term) SAR 31,000 - Credit: Project revenue SAR 620,000 When the certificate is collected, trade receivables fall and cash rises. The retention stays in the retention receivable account. **Retention is released in two stages** Stage one — project handover (50% of retention) On signature of the final acceptance certificate, half the retention is released. The entry: - Debit: Trade receivables (the released portion) - Credit: Retention receivable Stage two — end of the warranty period (the remaining 50%) Usually one year from the handover date, conditional on there being no defects left to remedy. **What retention does to your liquidity** A firm with 15 active projects worth SAR 25 million in total has SAR 1,250,000 to SAR 2,500,000 locked up. That money is not available to run the business. Plan your cash flow treating retention as an asset you cannot touch. **Track retention in a separate register** Keep a "retention register" for every project: the amount withheld, the expected handover date, the date the first half is released, the warranty end date, and the date the second half is released. That register is what reminds you of the money you are owed. ## Subcontractors and managing their financial contracts The main contractor engages subcontractors to deliver specialist packages: HVAC, electrical, plumbing, joinery, finishes. **What the subcontract covers** - The value of the subcontract - The delivery period within the main project - Payment terms: usually mirroring your own terms with the client (certificates paid once you collect your own certificate) - Retention: normally the same rate the client applies to you, or slightly lower (often 5–7%) - Guarantees - Termination terms **In accounting terms — recording subcontractor cost** When the subcontractor's invoice is received: - Debit: Project cost — subcontractors - Credit: Subcontractor payables When the subcontractor is paid: - Debit: Subcontractor payables - Credit: Cash / bank **Retention on subcontractors mirrors retention on you** Keep a retention register for your subcontractors too. Their retention stays withheld until you have collected from your client, then you release it to them at the same rate. **E-invoicing for subcontractors** From the start of 2024, subcontractor invoices must be issued electronically through the Fatoora platform (Zakat, Tax and Customs Authority). Confirm before you sign that the subcontractor is integrated with the platform. **A serious risk: you carry the quality guarantee** As main contractor you are answerable to the client for your subcontractors' work. If an electrical defect appears in the house a year later, the client comes after you, not the electrician. That is precisely what the retention you hold on him is for. **A double tax position** Every subcontractor invoice carries 15% VAT. As the buyer, you recover that tax as input VAT when calculating what you owe the Zakat, Tax and Customs Authority. ## E-invoicing and ZATCA requirements for contractors Saudi construction firms have been bound by the e-invoicing rules under Phase Two (Integration) since 2023. Some requirements apply specifically to them: **1. Tax invoices for business buyers** When you issue a payment certificate to a government entity or a company, the document type must be a **tax invoice**. Do not use a **simplified tax invoice** for the government sector. **2. Include the contract number and project reference** A professional recommendation: put the contract number and project code in the reference field so the client's side can reconcile easily. **3. VAT is calculated on the amount before retention** This is a fine point. The 15% is calculated on the amount before retention — that is, on the full value of work completed. Retention does not reduce the value of the tax invoice; it only delays collection. **4. Required electronic sign-offs** Some government entities require the transmitted invoice plus supporting documents (the consultant's completion certificate, the bill of quantities). These must be attached through the Fatoora platform or supplied alongside it. **5. Adjusting certificates (credit and debit notes)** If the client approves additional items (a variation order), you issue an electronic debit note. If items are deducted (delay penalty, quality deduction), you issue a credit note. **6. Monthly or quarterly VAT returns** This depends on your revenue. Large construction firms file monthly (above SAR 40 million a year); smaller ones file quarterly. **7. Zakat on work in progress** Work completed but not yet invoiced counts as a current asset (work in progress) and enters the zakat base. This catches many contractors out on their first returns — make sure WIP is included correctly. ## How Snad manages construction project accounting Snad includes a dedicated module for construction project management that integrates with accounting, the Zakat, Tax and Customs Authority, and HR: - **A hierarchical project structure**: main project, sub-projects, stages and line items. Costs can be allocated at any level. - **Payment certificates generated automatically**: from the progress data recorded on site (completion percentage per item), the system builds the certificate correctly, including the previous certificate, retention and VAT. - **A full retention register**: for each project it shows the retention withheld, the expected release date, and an alert before it falls due. - **Percentage-of-completion accounting, automatically**: as actual costs are recorded, the system calculates the completion percentage and prepares the revenue to be recognised in the monthly entry. - **Subcontractor management**: a file per subcontractor covering contracts, invoices, payments and retention held, with alerts on due dates. - **Profitability reporting per project**: a separate income statement for every project, actual costs against budget, and achieved margin against planned margin. - **Integration with the Fatoora platform (ZATCA)**: certificates are transmitted electronically in the approved XML format, with the QR code and digital signature. - **Variance alerts**: a project whose actual cost has passed 90% of budget while completion is still at 70% triggers an immediate alert to the project manager. The 30-day free trial is long enough to run a full project from the opening budget through to the third payment certificate, and to see what the system does for the accuracy of your accounts. ## A practical checklist for your construction firm Six rules for professional construction accounting: 1. **Build a detailed cost budget before you sign any contract**: direct costs, indirect costs, G&A and expected profit. That budget is your profitability benchmark for the rest of the job. 2. **Use percentage-of-completion for long-term projects**: do not wait for final handover to find out what you made. Recognising revenue progressively gives you a true picture every month. 3. **Keep the retention register separate from ordinary receivables**: retention is money you will not see in the short term. Mixing it with normal receivables hides your real liquidity. 4. **Review actual cost against budget monthly, project by project**: 10% over budget is a warning. 20% means replanning immediately. 5. **Keep a complete record for every subcontractor**: contracts, invoices, payments, retentions, guarantees. A legal dispute with a subcontractor two years from now will live or die on that record. 6. **Automate payment certificates and e-invoicing**: preparing a certificate by hand takes 4–8 hours; with a purpose-built accounting system it takes 20–40 minutes. The time you save goes into managing projects instead of paperwork. A mid-sized Saudi construction firm that adopts professional project accounting typically lifts its net margin by 3–5 percentage points in the first year, uncovers 1–2 loss-making projects that had been draining it silently, and speeds up collection of its payment certificates by 15–20 days simply through better organisation. ## Frequently asked questions ### What is the accounting difference between a main contractor and a subcontractor? The main contractor carries full responsibility to the client for the project and signs the head contract. In accounting terms, its revenue is the entire contract value and its costs include the subcontractors. A subcontractor contracts only with the main contractor; its revenue is a portion of the project value and its costs cover its own labour and materials. ### When should I use the completed contract method instead of percentage-of-completion? For short projects (under 6 months) or small ones (usually under SAR 100,000), you can use the completed contract method, recognising revenue and profit only at handover. For larger and longer projects, the Saudi standard requires the percentage-of-completion method. ### What do I do if it becomes clear mid-project that costs will exceed the contract value? That is what is known as an expected loss-making contract. The accounting standard obliges you to recognise the entire expected loss immediately in the current period, even though it has not yet materialised — the principle of prudence. You then negotiate a variation order with the client or absorb the loss. ### Can a sole-trader contractor apply this kind of accounting? Yes, in a simplified form. At minimum: a cost budget per project, basic progress invoices, and a retention register. Applying full percentage-of-completion may not be necessary for individuals unless their revenue exceeds SAR 1 million a year. ### Is retention subject to VAT immediately, or only when it is released? VAT is calculated and paid when the tax invoice for the full payment certificate is issued, regardless of retention. Retention delays the collection of cash, not the tax liability. This is a point many contractors get wrong. ### How do I handle delay penalties on a payment certificate? A delay penalty is recorded as a separate credit note, deducted from the amount due from the client. In accounting terms, revenue falls by the value of the penalty and the VAT due falls by 15% of it. Do not net the penalty off as a line item inside the original certificate. --- ## About the publisher **Snad (سند)** — a private Saudi software company based in Riyadh, founded 2025. Legal form: Sole proprietorship. Commercial registration: 7038154642 VAT number: 310959226500003 Only official domain: snad.io > Snad is a private commercial business-management platform. It is not a > government body, not a bank, and not a government services portal, and it > is not affiliated with any government entity. Any site or app with a > similar name is unrelated to Snad.