Improving cash flow in the Abu Dhabi construction industry

In a new circular issued by the Executive Council on 26 March 2019, the Abu Dhabi government has demonstrated its recognition and understanding of the payment issues that construction contractors and suppliers regularly face in the UAE.

Prompt Payments

While a copy of the circular is not yet public and we await further details, sources say that the circular requires government departments and state owned companies:

• to issue payments for undisputed invoices to construction contractors and suppliers within 30 days; and
• to amend their construction and supplier contracts to require these payments to be passed on to subcontractors within 30 days of the receipt.

This directive shows the government's proactive approach to tackling the cash flow problems that contractors and subcontractors face in the UAE construction industry.

Better Cash Flow

In particular, the government has sought to tackle the issue of money getting 'stuck' in the supply chain, either from contractors refusing to pass down payments to subcontractors or from relying on conditional payment or 'pay when paid' provisions when they have not received payments from further up the chain.

Facilitating the movement of cash along the supply chain should help contractors complete projects in a timely manner and invest in new projects, with less time spent on chasing  payment and managing cash flow.

What's next?

That said, there are still some uncertainties that may hinder the success of this welcome initiative. In particular:

• It is not clear which companies will be considered state-owned companies. It is known that certain developers have government links, but the question of whether the definition will be limited to immediate shareholders or will trace back to ultimate ownership remains; and
• It is possible that the circular will relate to only approved invoices, whilst, for many contractors, the biggest problem remains the approval and agreement of variations and costs arising from delay. It is unclear to what extent the circular will tackle this issue.

Nevertheless, while we await publication of the circular to the public, the circular is a positive step for the Abu Dhabi construction industry.