A project can be profitable and its advance payment may cover part of the mobilisation cost, yet the contractor can still face a funding shortfall at the start of delivery. The pressure often sits across three guarantees: the bid bond remains outstanding, the performance guarantee has been issued, and the advance payment guarantee begins to consume cash and credit capacity.
Assessing whether your business can carry a UAE project requires more than reviewing the contract margin. The guarantee face value is not the same as frozen cash. Before bidding, answer two questions: when could the guarantee obligations overlap, and how much cash collateral and bank facility capacity would be tied up during that period?
Project completion, guarantee expiry, discharge of the bank’s liability, return of security, release of cash and restoration of facility capacity may occur on different dates. Treat the exposure as closed only when the bank’s records show that the cash and credit are available again.
Why can a profitable contract still cause a funding shortfall?
A bank guarantee creates pressure across at least four separate measures.
The face value is the maximum amount for which the bank is liable under the guarantee wording. Cash collateral is one form of security that the bank may require from the applicant. Credit utilisation depends on the written facility terms and cannot be inferred from the cash collateral ratio. Fees are calculated using the agreed charging basis, rate and liability period, and may rise if the guarantee is amended or extended.
Article 415 of the UAE Commercial Transactions Law permits a bank to require security in the form of cash, commercial paper, securities, goods, or an assignment of the applicant’s rights against the beneficiary. It does not set one cash coverage ratio for every project. Another company’s collateral ratio therefore cannot be copied into your project budget. This is subject to the latest official publication. (Source: UAE Commercial Transactions Law, October 2026)
Fees and funding capacity also belong in different parts of the calculation. Fees are project costs. Cash collateral reduces the funds available for operations, while credit utilisation restricts the capacity to issue another guarantee or obtain other financing. A project can show a positive accounting profit while exhausting cash or facility headroom first.
Which documents determine guarantee liability and funding use?
Each guarantee needs to be reviewed against three layers of documents. The project contract alone does not provide the full answer.
The underlying contract defines the project obligation
Tender documents and contracts may specify the type of guarantee, its amount or calculation basis, the submission milestone, and any reduction, replacement or release requirements. They explain why the guarantee is required, but do not by themselves determine when the bank’s obligation to the beneficiary ends.
The guarantee wording defines the bank’s undertaking
Article 414 of the UAE Commercial Transactions Law defines a letter of guarantee as a payment undertaking made by a bank to a beneficiary at the customer’s request, bounded by the term stated in the guarantee. Article 417 further provides that a bank generally cannot refuse payment by relying on its relationship with the applicant or the applicant’s relationship with the beneficiary, subject to a legally enforceable attachment order or court judgment. These provisions are subject to the latest official publication. (Source: UAE Commercial Transactions Law, October 2026)
For the project company, the practical consequence is direct: completion of the underlying contract does not automatically prove that the bank’s liability has ended. The payment conditions, expiry date, deadline for a demand and any extension mechanism must be checked in the guarantee itself.
The bank documents determine how much capacity the company commits
The facility agreement, guarantee application and security documents determine the cash coverage, facility utilisation, charging method, and the process for returning security and restoring credit capacity. Obtain these terms from the bank in writing rather than budgeting from an indicative verbal quote or market practice.
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Will the three guarantees overlap? Check each one against the project timeline
Bid, performance and advance payment guarantees do not necessarily remain outstanding at the same time. Whether the bid bond ends before the performance guarantee is issued, and whether the advance payment guarantee overlaps with the performance guarantee or reduces as the advance is recovered, depends on the tender documents, contract, guarantee wording and actual issuance arrangements.
For each guarantee, record the issue date, face value, expiry date, deadline for payment demands, extension mechanism, reduction conditions, replacement conditions and security return process. Then add up the face value of all obligations that remain outstanding in each month or at each major project milestone. This reveals where the overlap occurs without assuming that all three face values should be added for their entire terms.
Article 418(1) of the UAE Commercial Transactions Law provides that the bank’s liability to the beneficiary is discharged if no demand for payment is received during the guarantee’s validity period, unless an extension was expressly agreed before expiry. Article 418(2) provides that, when the guarantee expires without the bank paying the guaranteed amount, the bank must return the securities or security provided by the applicant unless otherwise agreed. These provisions are subject to the latest official publication. (Source: UAE Commercial Transactions Law, October 2026)
Funding availability still requires a separate check after the liability ends. Continue tracking the bank account release, return of security and restoration of the facility limit. Returning the original guarantee may be required by the wording or the bank’s operating process, but the presence or absence of the original document does not, by itself, prove that the bank’s liability continues or has ended.
How do the peaks work on an AED 10,000,000 project?
The figures below illustrate the calculation method only. They are not standard market ratios, bank quotations or actual client terms. All amounts are in UAE dirhams (AED).
Assume a contract value of AED 10,000,000. The bid bond is 2%, with a face value of AED 200,000. The performance guarantee is 10%, with a face value of AED 1,000,000. The advance payment guarantee is 20%, with a face value of AED 2,000,000.
Now assume cash coverage ratios of 100%, 30% and 20% respectively, with facility utilisation equal to the face value of each guarantee. The resulting cash collateral amounts are AED 200,000, AED 300,000 and AED 400,000.
If the bid bond and performance guarantee overlap, cash utilisation is AED 500,000 and credit utilisation is AED 1,200,000. If the performance and advance payment guarantees overlap, the cash peak rises to AED 700,000 and the credit peak reaches AED 3,000,000. The decision point is the project stage at which the peak occurs, not the sum of all three face values across their full terms.
Fees can be modelled as face value × annual rate × months ÷ 12. Assume annual rates of 1.0%, 1.2% and 1.2%, with expected liability periods of 2, 14 and 8 months. The estimated fees are approximately AED 333, AED 14,000 and AED 16,000, for a total of approximately AED 30,333. Amendment, extension and other charges are not included.
Project expenditure must then be added to the cash-flow calculation. Suppose the company receives an advance of AED 2,000,000, incurs AED 2,400,000 of mobilisation expenditure and provides AED 700,000 of cash collateral. The funding gap at that stage is AED 1,100,000. If the company also requires an AED 1,500,000 liquidity buffer, it should confirm at least AED 2,600,000 of available cash and committed financing capacity before bidding.
Every assumption in this model must be replaced with the actual contract and bank terms. A change in the cash coverage ratio, fee rate, liability period, collection date or number of overlap months changes both the peak and the release timeline. If the available capacity falls short, revise the advance payment arrangement, security structure, guarantee issuance timing or project schedule before bidding—not after mobilisation spending has begun.
What evidence is required before closing a guarantee exposure?
The project guarantee register should continue to track the project milestone, guarantee type, face value, issue date, validity period, extension mechanism, cash collateral, credit utilisation, fee rate, cumulative fees, reduction conditions, conditions for discharge of the bank’s liability, and evidence that security has been returned or the facility limit restored. Assign an owner and a review date to each exposure.
Before closing an item, confirm four statuses separately: the legal liability has ended, the bank has processed the return of security, the cash has been released, and the facility capacity has been restored. If any status lacks supporting bank records, do not count the corresponding cash or credit as available.
Before submitting the bid, have the project, finance, legal and funding teams review the contract, guarantee wording and written facility terms together. We can help your business map guarantee obligations against the project timeline and test the resulting cash and credit peaks. Schedule a 30-minute complimentary assessment
Project profit answers whether the contract is worth pursuing. Peak cash and credit exposure determines whether the business can deliver it. A sound bid decision requires both answers.
Last updated: October 2026. This content is for informational purposes only and does not constitute legal or tax advice. For professional consultation, please contact the MIRISE team.