Keeping every figure cumulative is what keeps retention and advances under control over a project that runs for years. This guide explains each line of a certificate, a worked example, how VAT applies to retention and advances in the UAE and Saudi Arabia, and the errors that cause disputes.
What is a subcontractor payment certificate?
The main contractor's formal confirmation of what a subcontractor has earned and will be paid for a period, usually a month. The subcontractor submits an application for payment with measured quantities; the main contractor's quantity surveyor checks it against the site and certifies an amount, which may be lower.
The certificate is the document that drives everything after it: the subcontractor's tax invoice, the payment, the retention held, the advance still to recover. In the Gulf, many subcontracts follow the structure of the FIDIC forms used for the main contract, with the payment terms passed down to subcontractors.
A certificate typically shows:
- Work done to date, measured against the bill of quantities
- Approved variation orders to date
- Materials delivered to site but not yet installed, if the subcontract allows it
- Retention held to date
- Advance payment recovered to date
- Contra-charges: costs the main contractor paid on the subcontractor's behalf
- Amounts certified in previous certificates
- The amount due this period, before and after VAT
How do retention, advances and contra-charges work?
Each is a deduction with its own rules, set in the subcontract. Track each one cumulatively, so the balance is always known.
| Item | What it is | Typical terms | How it ends |
|---|---|---|---|
| Retention | A share of each certificate held back as security for defects | 5% to 10% of gross value, often up to a cap such as 5% of the subcontract value | Usually half released at completion, half after the defects liability period |
| Advance payment | Money paid upfront for mobilisation or materials, against a bank guarantee | 10% to 20% of the subcontract value | Recovered by deducting a set percentage from each certificate until repaid; the guarantee reduces as it is recovered |
| Contra-charges | Costs the main contractor incurred for the subcontractor: water, power, scaffolding, damage, rework | As agreed or notified | Deducted from the next certificate, with supporting documents |
| Variation orders | Approved changes to scope or quantities | Valued at bill rates or agreed rates | Added once approved; pending ones are tracked separately |
Two rules prevent most arguments. Only approved variation orders go on a certificate; claims still under discussion are listed separately. And contra-charges are notified when they arise, with evidence, not saved up for the final account.
How do you calculate a payment certificate? A worked example
An MEP subcontractor on a Dubai tower has a subcontract worth AED 4,000,000. The terms: 10% retention, up to a cap of 5% of the subcontract value (AED 200,000); an advance payment of AED 400,000, recovered at 12.5% of gross value per certificate, so it is fully recovered once 80% of the subcontract value has been certified. This is certificate number 4. Figures are illustrative.
| AED | Cumulative to date | Previous certificates | This certificate |
|---|---|---|---|
| Work done | 1,600,000 | 1,200,000 | 400,000 |
| Approved variation orders | 120,000 | 80,000 | 40,000 |
| Materials on site | 80,000 | 50,000 | 30,000 |
| Gross value | 1,800,000 | 1,330,000 | 470,000 |
| Less retention at 10% | (180,000) | (133,000) | (47,000) |
| Less advance recovery at 12.5% | (225,000) | (166,250) | (58,750) |
| Net value before contra-charges | 1,395,000 | 1,030,750 | 364,250 |
| Less contra-charges | (25,000) | (15,000) | (10,000) |
| Amount certified | 1,370,000 | 1,015,750 | 354,250 |
The running balances after this certificate:
- Retention held: AED 180,000. Only AED 20,000 more can be deducted before the cap; the next certificate must stop there.
- Advance still to recover: AED 175,000 of AED 400,000.
- Contra-charges: AED 10,000 this month for temporary power, notified with meter readings.
Because every line is cumulative, an error in an earlier certificate corrects itself here: retention and recovery are recalculated on the total, and only the difference is paid.
How is VAT charged on retention and advances?
Differently in the UAE and Saudi Arabia, so the same certificate can produce different VAT figures in each country.
| UAE (5%) | Saudi Arabia (15%) | |
|---|---|---|
| Advance payment | VAT due when the advance is received or invoiced, whichever is first | VAT due when the down payment is received |
| Each certificate | VAT on the amount invoiced for the period; the FTA's guidance treats retention as taxable later | VAT on the amount invoiced by the subcontractor, including the retained portion |
| Retention | Under the FTA's Real Estate guide as updated in 2018: VAT due at the earliest of payment, a tax invoice for the retention, or 12 months after the work is certified complete; check the current guide | Already taxed as part of the invoiced amount |
| Retention kept permanently for defects | No VAT; a credit note or bad-debt relief may apply | Adjust through a credit note |
| Progress certificate itself | Not a tax invoice; the subcontractor issues one | Not a tax invoice; ZATCA's contracting guideline says so expressly |
In the worked example, the UAE taxable amount for this period is the increase in value net of retention and advance recovery, AED 364,250. The advance was taxed when it was paid, so the recovered part is not taxed again. The subcontractor's tax invoice is AED 364,250 plus 5% VAT of AED 18,212.50, a total of AED 382,462.50. The AED 10,000 contra-charge is usually a separate supply from the main contractor, invoiced with its own VAT of AED 500. The payment due is therefore AED 382,462.50 less AED 10,500: AED 371,962.50.
In Saudi Arabia, VAT follows the amount the subcontractor invoices, retention included. Agree the treatment with your tax adviser, because subcontracts and invoicing practice vary.
Which certificate errors cause disputes?
Most come from working with this month's figures instead of cumulative ones, or from spreadsheets that drift from the subcontract terms.
| Error | Effect | Prevention |
|---|---|---|
| Retention calculated on this month only | Retention held drifts from the agreed percentage | Calculate on cumulative gross value |
| Retention cap ignored | Too much retention held | Set the cap in the system; stop deducting once reached |
| Advance recovered beyond the amount paid | Subcontractor underpaid | Cap recovery at the advance balance |
| Advance not recovered before completion | Main contractor carries the balance | Check the recovery rate will clear the advance before the last certificate |
| Pending variations included | Overpayment and later disputes | Only approved variation orders on the certificate |
| Contra-charges without notice | Disputed deductions | Notify each one with evidence when it arises |
| Previous certificates retyped | Totals don't agree | Carry forward from the last approved certificate |
Checklist before approving a certificate
What does HYP see on construction projects?
At contractors with dozens of subcontracts, the certificates themselves are rarely the problem. The problem is the running balances behind them: retention held per subcontractor, advance still to recover, and which variation orders are approved. Kept in separate spreadsheets, they drift apart over a two-year project and are only reconciled, painfully, at the final account.
The contractors who close final accounts quickly keep every subcontract, variation order and certificate in one system. Each certificate is calculated from the cumulative figures, the subcontractor's invoice is checked against it, and retention release dates are tracked against completion and the end of the defects period.
Certified amounts are also commitments against the project budget. Our guide to construction project cost control explains how budget, committed and actual cost fit together. See how HYP handles subcontracts, certificates and retention on our Construction & Engineering page.
Sources
- UAE Federal Decree-Law No. 8 of 2017 on VAT (Articles 25 and 26, date of supply), Ministry of Justice consolidated text
- BDO: changes to the FTA Real Estate Guide, retention (October 2018)
- ZATCA: VAT Guideline for the Contracting Sector, May 2026
- Galadari: retention in UAE construction contracts, July 2024