Reshaping construction compliance: How mandatory inherent defects insurance continues to transform Saudi Arabia’s building industry

The Kingdom of Saudi Arabia’s (“KSA”) construction industry is undergoing a transformative shift with  a change in the way in which mandatory inherent defects insurance (“IDI”) must be procured from 6 October 2024.

Enforced by the Saudi Arabian Monetary Authority (“SAMA”), contractors are required to secure IDI, on governmental residential projects, for inherent defects from the Ministry of Municipal, Rural Affairs and Housing (“Ministry”). The policy aligns with KSA’s overall vision of focusing on sustainable development and enhanced construction standards, offering building owners greater protection.

Prior to 6 October 2024, the Ministry did not require IDI to be secured prior to the applying for building permits. However a recent announcement from the Ministry changed this.

In this regard, the Ministry has announced and confirmed the enforcement of mandatory insurance coverage for inherent defects. Effective from 6 October 2024, IDI must be secured before a building permit is issued for all residential buildings. For building permits granted between 1 July 2021 and 5 October 2024 (“the Period”) where IDI was not required at the permit issuance stage, the IDI must be in place when the construction supervision phases begin in terms of the building contract. Therefore, at the completion of a project, the Ministry must verify that a valid IDI policy is in place before issuing an occupancy certificate (“Certificate”), certifying a building’s compliance with the applicable building codes, safety regulations and construction standards. Effectively, the Ministry can withhold issuing a Certificate for building permits issued during the Period if the IDI is not in place.

This provides food for thought for the industry. The effect of withholding a Certificate means that at the completion of a project, the building cannot not be occupied or used for its intended purpose. As a result, this will create delays regarding project handover, impacting timelines, for leasing, sales or occupancy. In this case, owners are bound to suffer financial losses due to the inability to generate revenue.

In addition, withholding the Certificate will have financial implications on the overall construction project. In most cases, in terms of the underlying construction contract, the final payment or portion of the total contract value is withheld until the Certificate is issued. Consequently, final payments and retention amounts will be delayed, resulting in cash flow problems for the contractor and potentially impacting their ability to cover project costs or pay subcontractors and suppliers.

The application of the above requirements remains unclear, and as the industry adjusts to these new mandates, more details and clarifications are expected to emerge. We will explore these developments in more depth and provide further insights into the evolving landscape of KSA’s construction regulations.