The introduction of Federal Decree-Law No. 25 of 2025 (the New Civil Code) introduces important refinements to the legal framework governing UAE construction contract payment provisions. While the core principles of construction law remain intact, the New Civil Code introduces targeted changes that directly affect payment structures, pricing risk, and the allocation of financial responsibility between employers, contractors, and consultants.

These developments are particularly significant in an industry characterized by long project timelines, fixed pricing models, and exposure to cost volatility. Understanding UAE construction contract payment requirements under the New Civil Code is essential for contractors, developers, and project stakeholders as these provisions fundamentally alter payment timing, progress payment obligations, and hardship relief mechanisms.

For contractors, developers, and project stakeholders, these reforms have immediate practical implications. Payment provisions, pricing structures, and risk allocation mechanisms must now be carefully reviewed to ensure alignment with the revised legal framework and to mitigate exposure in this regulated environment.

This article examines the key changes relating to payment, pricing, and financial risk in construction contracts, and assesses their impact on industry participants in the UAE.

Remuneration (Payment) Provisions: Enhanced UAE Construction Contract Payment Protections

Employer Obligations:

The New Civil Code narrows the scope for discretion over payment. The Old Civil Code specified that the employer must pay the contractor upon taking delivery of the work, unless otherwise agreed or practiced by custom (Article 885 Old Civil Code). Whilst the new law preserves this stipulation, it no longer makes mention of delaying payment due to customary practices, thus cementing that payment may only be delayed by mutual explicit agreement (Article 826).

Elimination of Custom-Based Payment Delays:

For contractors, this is a positive development under UAE construction contract payment rules, as it limits an employer’s ability to rely on informal industry norms to justify late payment and reinforces the importance of clear, express payment terms in any construction contract.

As such, it is imperative for employers to be aware of this change in order to check previous contract agreements, ensure timely payment in compliance with the law. They must also ensure that any contracts drafted in the future include explicit payment timelines in order to avoid potential legal ramifications.

Key Changes:

• Payment can only be delayed by express written agreement
• No reliance on customary industry practices to defer payment
• Default rule: Payment due upon delivery of work
• Explicit contractual terms required for alternative arrangements

Progressive Payment Obligations: Mandatory Segment-Based Payments

The New Civil Code further strengthens contractor protections by introducing an obligation of proportional payment for completed segments of work. Where work is divided into several parts or priced on a unit basis, employers are now obliged to pay contractors progressively upon inspection and acceptance of each segment. This is contingent on whether the relevant parts are sufficiently distinct or significant relative to the overall works, unless otherwise agreed by parties (Article 827).

Contractor Financial Protection:

This reduces contractors’ financial exposure on long-running projects and limits the risk of employers withholding payment until full completion. Both parties should ensure that matters of payment are clearly set out in the contract, in order to avoid falling back on the default legal position in cases of legal dispute, as the legislation makes it clear that contractual intention is to be given precedence.

Progressive Payment Requirements:

• Trigger: Work divided into parts or priced on unit basis
• Obligation: Payment due upon inspection and acceptance of each segment
• Condition: Segments must be sufficiently distinct or significant
• Default rule: Applies unless parties agree otherwise
• Benefits: Reduces contractor cash flow risk on long projects

Practical Implications:

For Contractors:

• Improved cash flow management on multi-phase projects
• Reduced working capital requirements
• Lower exposure to employer insolvency mid-project
• Can structure work packages to trigger progressive payments
• Must ensure segments are “sufficiently distinct or significant”

For Employers:

• Cannot withhold payment until final completion on segmented work
• Must implement inspection and acceptance procedures for each segment
• Should establish clear milestone definitions in contracts
• Need adequate payment provisions for progressive releases
• Must coordinate payment schedules with financing arrangements

Drafting Considerations:

• Define segments/work packages clearly in contract
• Specify inspection and acceptance procedures for each segment
• Establish payment timelines post-acceptance (e.g., within 14/30 days)
• Clarify what constitutes “sufficiently distinct or significant”
• Address retention percentages per segment vs. overall project
• Include dispute resolution for segment acceptance disputes

Payment Upon Death of Contractor: Estate Protection

The New Civil Code introduces provisions that ensure fairness where contract rescission takes place upon a contractor’s death. It stipulates that the employer must compensate the contractor’s estate for completed work and preparatory expenses which yield benefit to the employer, per contract terms and custom. The employer may claim such prepared materials upon fair payment. This provision upholds equity for heirs while securing employer interests.

The same rule applies if the contractor starts work but is unable to complete work for a reason not attributable to them (Article 839).

Scope of Compensation:

• Completed work: Valued according to contract terms and custom
• Preparatory expenses: Only those yielding benefit to employer
• Materials: Employer can claim prepared materials upon fair payment
• Applies to: Death or inability to complete for non-attributable reasons

Unit Price Contracts: Notification Requirements

For contracts concluded on a unit price basis, the New Civil Code preserves the contractor’s obligation to notify the employer if it becomes apparent during the work that the cost estimate will be exceeded. It maintains that if the contractor fails to give notification, they lose the right to recover expenses exceeding the estimate.

Employer Withdrawal Rights:

The new law also preserves the employer’s right to withdraw from the contract if the price overrun is “onerous,” with an obligation to pay the contractor for the value of work completed. However, the Old Civil Code’s equivalent (Article 886 Old Civil Code) used the word “considerably” to describe the price overrun threshold which triggers the employer’s right to withdraw from the contract, whereas the New Civil Code uses “onerous”. As such, there is a possibility that the threshold for withdrawal may have changed, and a different threshold may be litigated in due course.

Changing Threshold Analysis:

• Old Civil Code: “Considerably” exceeded estimate
• New Civil Code: “Onerous” price overrun
• Potential impact: Lower threshold for employer withdrawal
• Uncertainty: Judicial interpretation required

As such, industry professionals should be sure to consult with legal professionals in order to stay abreast of developing legal thresholds and ensure their business practices and contracts are in compliance with the New Civil Code.

Contractor Obligations:

• Notify employer immediately when cost estimate will be exceeded
• Document notice with detailed cost breakdown
• Failure to notify = loss of right to recover excess expenses
• Maintain contemporaneous cost records throughout project

Lump Sum Contracts and the Hardship Provision: Game-Changing UAE Construction Contract Payment Relief

The Traditional Lump Sum Rule:

The fundamental lump sum principle is preserved in the new law, which stipulates that where a contract is based on an agreed design with a fixed lump sum price, the contractor bears full financial responsibility for any cost fluctuations and cannot claim additional payment due to rising material, labor, or other project expenses.

The New Civil Code also maintains the design modification rule where the contractor is not entitled to additional payment for any design changes or additions unless these were caused by or carried out with the employer’s explicit approval, and both parties had previously agreed on the additional payment.

Hardship Provision and Judicial Rebalancing:

A commercially significant reform introduced by the New Civil Code is the new hardship provision applicable to lump sum contracts, which introduces a substantive change that did not exist under the Old Civil Code. It stipulates that where reasonably unforeseeable exceptional circumstances disrupt the balance of the contract, such that the financial basis on which it was formed collapses, a court may intervene and order appropriate remedies (after weighing both parties’ interests). These may include (Article 829):

• Extension of the performance period
• Revising remuneration
• Rescission of the contract

Most Significant Provision for Contractors:

This provision introduces a construction-specific codification permitting judicial intervention in contracts where unforeseen events have upset the balance of obligations. It aims to address issues arising from the unique characteristics of construction contracts (including long durations, fixed prices, exposure to price volatility of materials and supply chain disruption), and provides a targeted judicial mechanism for restoring equilibrium where these factors cause the financial foundation of the original bargain to collapse. The COVID-19 pandemic and recent supply chain disruptions are the type of “exceptional general circumstances” that Article 829 appears designed to address.

Taken together, this may be the most significant new provision for contractors in the New Civil Code. Contractors in lump sum contracts who are facing severe financial imbalance due to unforeseen circumstances now have an express statutory basis on which they can seek judicial rebalancing of the contract, as per the aforementioned remedies.

Requirements for Hardship Relief:

1. Exceptional circumstances must arise
2. Circumstances must be reasonably unforeseeable
3. Circumstances must disrupt contract balance
4. Financial basis of contract must collapse
5. Court must weigh both parties’ interests

Examples of Qualifying Events:

• Pandemic-related lockdowns and restrictions
• Extreme supply chain disruptions (e.g., post-2022 materials crisis)
• War or regional conflict affecting material supplies
• Government expropriation or regulatory changes
• Currency collapse or hyperinflation
• Embargo or trade sanctions affecting project inputs

What Does NOT Qualify:

• Normal market fluctuations in material prices
• Foreseeable seasonal variations
• Contractor’s own poor planning or underestimation
• General economic downturn without exceptional circumstances
• Risks expressly allocated to contractor in contract

Strategic Implications:

For Contractors:

• Document exceptional circumstances thoroughly
• Demonstrate unforeseeability with market data
• Quantify financial collapse of contract basis
• Seek judicial relief before project failure
• Consider hardship provisions in contract drafting
• Maintain detailed cost records throughout project

For Employers:

• Review standard contracts for hardship allocation provisions
• Consider contractual caps on hardship relief
• Define “exceptional circumstances” explicitly
• Include risk-sharing mechanisms for material price escalation
• Update force majeure clauses to coordinate with hardship provision
• Assess insurance coverage for hardship scenarios

Employers should consider whether their standard contracts need to be updated to address the changes this provision brings and their existing risk allocation provisions, agreement variation procedures, and force majeure clauses.

Engineer’s Remuneration: Separate Design and Supervision Fees

The New Civil Code now expressly codifies the separate remuneration entitlements for engineers. The Old Civil Code entitled Engineers (referred to as “Architects” in the Old Civil Code) to remuneration of a value customary for similar work if the remuneration value was unspecified, covering both design and supervision, with partial payment based on performance if completion was impeded (Article 889 Old Civil Code).

Separate Role Recognition:

However, the New Civil Code introduces separate entitlements for engineers’ design/estimation and supervision/execution roles (unless agreed otherwise), guaranteeing independent remuneration for each role. Furthermore, the law stipulates that any payment defaults to fair market rate where the contract does not specify remuneration, and guarantees fair market remuneration assessment for work done, even if the work isn’t completed per the engineer’s design (Article 831).

Enhanced Professional Protections:

These changes serve to bolster professional protections in construction projects and provide engineers with a more robust and predictable framework for fee recovery, thus reducing the scope for disputes over entitlement where they are taking on multiple roles. Parties drafting agreements should take care to clearly define and separately address remuneration for each distinct role to ensure certainty.

Key Changes:

• Design/Estimation: Separate remuneration entitlement
• Supervision/Execution: Independent remuneration right
• Default payment: Fair market rate if unspecified
• Incomplete work: Fair market assessment for work done
• Unless agreed otherwise: Parties can contract out

Drafting Requirements:

• Specify remuneration for each role separately
• Define scope of design vs. supervision services
• Establish fair market rate methodology if applicable
• Address payment for partial completion scenarios
• Include fee schedules for additional services

Termination for Convenience: Codified Employer Right with Comprehensive Compensation

The New Civil Code now gives employers the right to withdraw from the contract and stop execution at any time before completion. However the contractor must be compensated for any expenses, for work completed, and for any lost profit (expected earnings from completion of the work). Courts may reduce compensation for the contractor’s lost profit, if equitable, by deducting contractor cost savings from non-performance or alternative earnings from projects taken on during the time originally engaged by the employer (Article 836).

Clear Termination Mechanism:

This provision introduces a clear termination for convenience mechanism for employers. Though employers gain considerable flexibility, it is balanced by a comprehensive compensation framework ensuring contractors are compensated for all actual losses. However, courts do retain a degree of discretion to moderate lost profit compensation where the contractor has mitigated their loss, thus preventing employers from having to pay potentially unfair compensation.

Compensation Components:

1. Expenses incurred: All actual costs to date
2. Work completed: Value of work performed
3. Lost profit: Expected earnings from completion
4. Less: Cost savings from non-performance
5. Less: Alternative earnings from replacement projects

Practical Application:

As such, employers considering early termination should carefully assess their potential exposure before exercising this right. Contractors should be aware that the employer now has a clearly codified right to terminate at any time, and ensure they document their costs, alternative work opportunities and other relevant information carefully in anticipation of any termination dispute.

For Employers:

• Assess total compensation exposure before terminating
• Calculate contractor’s potential lost profit
• Document legitimate business reasons for termination
• Consider cost of completion vs. termination compensation
• Negotiate termination caps in original contract

For Contractors:

• Document all expenses and work completed contemporaneously
• Maintain detailed profit calculations for overall project
• Track alternative work opportunities and earnings
• Quantify cost savings from early termination
• Preserve evidence of original contract timeline and scope

Risk Mitigation:

• Include contractual caps on lost profit compensation
• Define methodology for calculating lost profit
• Specify notice periods for termination for convenience
• Address mitigation obligations explicitly
• Consider advance payment provisions to reduce exposure

Force Majeure Events: Risk Allocation Framework

The New Civil Code also addresses the position where works perish or are damaged before delivery in employer-contractor specific relationships. If the thing perishes due to a force majeure event before delivery, the contractor cannot claim remuneration for work or reimbursement of expenses. The risk of loss falls upon whichever party provided the thing that perished (Article 837).

Default Risk Allocation:

Furthermore, if the thing perishes after the employer puts the contractor in default to take delivery of the work, or due to the contractor’s own fault, the employer is entitled to compensation. Similarly, if the thing perishes after the contractor puts the employer in default to take delivery, or the fault was the employer’s, the contractor may be entitled to remuneration and compensation when appropriate.

Risk Allocation Matrix:

Practical Importance:

These stipulations reduce uncertainty and provide a clearer legal baseline from which parties can structure their contractual risk allocation. For both employers and contractors in the UAE, this confirms the practical importance of timely delivery notices and clear handover procedures in managing risk at the final stages of a project.

Key Takeaways:

• Timely delivery notices critical for risk allocation
• Clear handover procedures essential
• Default notices shift force majeure risk
• Documentation of delivery readiness crucial
• Insurance should align with statutory risk allocation

Practical Compliance Checklist for UAE Construction Contract Payment

To ensure full compliance with UAE construction contract payment provisions effective June 1, 2026, parties should:

Before June 1, 2026:

• Review all standard form construction contracts
• Update payment provisions to eliminate custom-based delays
• Incorporate progressive payment mechanisms for segmented work
• Add hardship provisions with defined exceptional circumstances
• Clarify engineer remuneration for separate design/supervision roles
• Define termination for convenience compensation methodology
• Align force majeure clauses with new risk allocation framework

Payment Provisions:

• Specify exact payment timing (e.g., within 30 days of delivery)
• Define “sufficiently distinct or significant” segments for progress payments
• Establish inspection and acceptance procedures for each segment
• Include retention percentages and release conditions
• Address payment for incomplete work scenarios
• Specify currency and payment method

Hardship and Price Variation:

• Define “exceptional circumstances” triggering hardship relief
• Establish threshold for financial basis collapse
• Include price escalation formulas for materials/labor
• Set caps on hardship-based adjustments
• Specify documentation requirements for hardship claims
• Coordinate with force majeure provisions

Unit Price Contracts:

• Require immediate notification of estimate overruns
• Define “onerous” price overrun threshold
• Establish valuation methodology for work completed
• Include dispute resolution for cost overrun disputes
• Document cost tracking and reporting requirements

Termination Provisions:

• Specify notice period for termination for convenience
• Define lost profit calculation methodology
• Address mitigation obligations and cost savings
• Set caps on termination compensation
• Include dispute resolution for compensation disputes
• Preserve contractor’s rights to work completed payment

Engineer Agreements:

• Separate remuneration for design and supervision roles
• Define scope of each role clearly
• Establish fair market rate methodology
• Address payment for partial completion
• Include fee schedules for additional services

Risk Management:

• Implement contemporaneous cost documentation systems
• Establish delivery and handover procedures
• Create default notice protocols
• Maintain detailed project records
• Obtain appropriate insurance (CAR, professional indemnity)
• Consider performance bonds aligned with new payment rules

Key Changes Summary: UAE Construction Contract Payment

Eight critical changes contractors and employers must understand:

1. Custom-Based Payment Delays Eliminated: Payment can only be delayed by express written agreement (Article 826)
2. Mandatory Progressive Payments: Employers must pay for completed segments on segmented/unit-priced work (Article 827)
3. Hardship Relief for Lump Sum Contracts: Courts can revise remuneration for exceptional unforeseen circumstances (Article 829)
4. Unit Price Overrun Threshold Changed: “Onerous” replaces “considerably” for employer withdrawal rights (Article 828)
5. Separate Engineer Remuneration: Independent payment for design and supervision roles (Article 831)
6. Termination for Convenience Codified: Employers can terminate anytime with comprehensive compensation (Article 836)
7. Force Majeure Risk Allocation: Clear rules for loss risk based on default and fault (Article 837)
8. Estate Protection: Contractor’s estate entitled to payment for completed work and beneficial preparatory expenses (Article 839)

Conclusion

Taken together, the reforms introduced under the New Civil Code reflect a clear shift towards greater financial discipline, transparency, and structured risk allocation in UAE construction contract payment frameworks. The clarification of employer payment obligations, the introduction of mandatory progress payments in certain cases, and the reduced reliance on customary practices collectively strengthen the contractor’s position and reduce uncertainty in long-term projects.

The hardship provision for lump sum contracts represents the most significant change, providing contractors with judicial relief from exceptional unforeseen circumstances that fundamentally disrupt contract economics. Combined with the termination for convenience regime, clearer force majeure risk allocation, and progressive payment obligations, the New Civil Code creates a more balanced and commercially responsive framework for construction projects.

Standard form contracts should be reviewed to ensure that payment terms, variation mechanisms, hardship provisions, and termination rights are clearly defined and aligned with the New Civil Code. Failure to do so may result in unintended reliance on statutory defaults, which may not reflect the parties’ commercial intentions.

For tailored advice and strategic support on navigating UAE construction contract payment requirements, drafting compliant construction agreements, and ensuring full compliance with Federal Decree-Law No. 25 of 2025 effective June 1, 2026, consulting with an experienced law firm in UAE like Economic Law Partners (ELP Legal) ensures your construction agreements are commercially sound, enforceable, and aligned with the New Civil Code. Visit our law firm in Sharjah or contact ELP Legal for expert legal support on all aspects of UAE construction law.

Disclaimer: This article is provided for informational purposes only and does not constitute legal advice. Federal Decree-Law No. 25 of 2025 takes effect on June 1, 2026. Readers should consult qualified legal counsel specializing in UAE construction law for advice specific to their projects, contracts, and risk allocation strategies.