On-Demand Bonds vs Cash Retention: What UAE Contractors Need to Know
An on-demand bond in UAE construction is a bank payment undertaking that is payable in favour of an employer as security for a contractor’s performance. This undertaking is provided as a letter of guarantee by the UAE commercial bank to pay a specified amount to the beneficiary according to the terms written in the letter. In a typical on-demand instrument, the bank’s obligation to pay arises upon a compliant demand. Its review is of the demand against the bond’s terms, not whether a breach under the construction contract has in fact occurred. The accurate position relies on the wording of the particular bond.
Note on current legislation: UAE legislation changed on 1 June 2026 when Federal Decree-Law No. 25 of 2025 entered into force. Civil-law references in this article have been reviewed against the current legislation as at September 2026.
What Is the Difference Between an On-Demand Bond and Cash Retention?
Retention is the money that is held back and cannot be accessed by the contractor. It is earned money but not received by the contractor. However, an on-demand bond can leave that cash available, but it consumes banking capacity and creates exposure if the beneficiary makes a compliant demand under the bond’s terms.
The Contractor Has Not Removed the Risk. It Has Changed the Risk.
The amount is held as security provided by the contractor. There can be options in that. The first option is cash retention, which is one of the most common forms of security, where a particular amount or percentage of the amount is deducted from the total payment and is held by the employer.
The second one is an on-demand bond. It is a bank-backed undertaking that the employer can make a demand under if the contractor fails to perform. The second option seems more attractive because a contractor keeps more of the cash. Certified payments are being received in full, and more working capital remains available.
But the question worth asking before the decision is made is: What has actually changed?
Retention creates a direct liquidity constraint, meaning money is earned but is not received. Meanwhile, an on-demand bond shifts the exposure to banking capacity, bank fees, any collateral requirements, and potential call risk. The security purpose is the same. But the risk for the contractor remains. Understanding that distinction is what this article sets out to explain.
Cash Retention and On-Demand Bonds Serve the Same Security Purpose Differently
Both of these things are there to protect the employer if the contractor fails to perform or if there are any defects in the project he has delivered. Just the ways of achieving this protection are different. Cash retention withholds the money from the total amount payable to the contractor. In retention, the cash is being held directly.
An on-demand bond provides security backed by a bank under its terms. The employer’s protection is the bank’s undertaking rather than withheld cash. In both cases, the employer is getting the security, but the contractor’s exposure is structurally different in each.
What Cash Retention Does to a Contractor
The impact of cash retention is direct on a contractor. In this case, money is being held back even if it is owed to the contractor through certified work. The reduction comes from working capital and has an immediate consequence on each certified payment.
In the UAE, the typical amount of retention is 10% of the contract price, with 5% released at handover and the other 5% released after the defect liability period, which is commonly 1 year after practical completion. However, UAE law does not prescribe a universal retention percentage, as stated in DLA Piper’s September 2025 UAE Security of Payment analysis. It also says that retention is commonly provided for contractually in UAE projects and that it is not mandatory for retention money to be held in a separate or ring-fenced account.
There are some practical consequences for contractors of retention money. The cash remains locked. The cash that is earned by the contractor is not received by them for a particular relevant duration.
This retention money is directly reduced from working capital, which immediately leads to a cash deduction for other projects, suppliers, and operational obligations The release of this amount completely depends on contractual conditions being met.
The risk character of retention is passive. It is considered a breach if there is a wrongful refusal to release retention when it is due. The contractor can recover it with the help of the dispute resolution process.
Source: DLA Piper: Security of Payment: UAE, September 2025
What an On-Demand Bond Changes for a Contractor
Unlike retention, with an on-demand bond, the contractor gets the full amount of the working capital, which brings improvement in cash flow and can be commercially significant. It is beneficial in large projects with long programs.
However, an on-demand bond brings different obligations. The contractor’s guarantee facility or credit line is consumed for the duration of the bond. The facility capacity is then unavailable for other purposes, like other bonds, other projects, and other working capital requirements.
There can be additional charges when bank fees apply for issuance, renewal, or amendment on extension. In the UAE, a bank is permitted to require security against issuing a letter of guarantee, as stated by the UAE Commercial Transactions Law. It is not necessary that every contractor faces this requirement, but there is a possibility depending on the facility arrangement in place.
The bond also creates contingent exposure that cash retention does not. A compliant demand under the bond’s terms can result in payment being made before the underlying contractual position has been resolved.
On-Demand Bond vs Cash Retention: Cash Risk and Call Risk
In cash retention, it is expected that the amount is being held back from working capital. The earned money belongs to the contractor, and it remains so. An employer cannot refuse to release the retention money, as it is a breach. The contractor and the dispute travel together through the resolution process.
An on-demand bond creates contingent financial exposure of a different kind. It is another instrument. A compliant demand results in payment being made against the bond’s terms. A contractor’s way of recovering a wrongfully called bond is through arbitration or court proceedings, but this process is run separately.
During this process, the bank facility may be drawn. Any posted collateral is held, and the working capital impact is real, regardless of what the outcome will be.
The key question for each instrument is different.
For cash retention: When will the money be released?
For an on-demand bond: What happens if it is called, and what does the bond’s wording say about when a call can be made?
On-Demand Bond vs Cash Retention
| Area | Cash Retention | On-Demand Bond |
|---|---|---|
| Contractor cash | Part of payment is withheld | Cash generally remains available |
| Working capital | Directly reduced | Potentially preserved |
| Banking capacity | Not required for retention itself | Guarantee or credit facility may be used |
| Direct financial effect | Cash remains withheld | Bank fees, facility costs and possible collateral costs |
| Main exposure | Delayed release of retained cash | Potential demand under the bond |
| Expiry | Release depends on contract conditions | Expiry and extension must be actively managed |
| Security held by employer | Cash | Bank-backed undertaking |
| Key contractor question | When will my money be released? | What happens if the bond is called? |
What Happens When an On-Demand Bond Is Called
If a contractor is receiving a demand under a bond, they need to be quick and structured in their response. Whatever the wording is according to the demand document and how quickly the contractor is engaging with it can affect the outcome.
The following is a practical sequence for an initial response. It does not substitute for legal advice on the specific facts.
Check the demand against the bond wording: There are many times when demands do not meet the bond’s requirements. There may be incorrect statements, missing documents, or demands made outside the validity window, which is why a contractor needs to put together the bond document and the demand side by side to analyze both documents. If there is any defective demand, the bank will reject it without any legal proceedings.
Notify the bank and legal team immediately: The contractor’s bank has its own process obligations upon receipt of a demand. If there is a formal agreement with the bank in writing, it gives the contractor confidence that they have visibility into where the demand stands and enough time to assess the position.
Check expiry and extension provisions: There is an option to extend or pay the request that can arise as the expiry date approaches. It works in cases where underlying disputes remain unresolved. This is why every bond expiry date should be tracked and treated as the point before which the plan decision should be made on time.
Assess whether urgent legal relief is required: There are cases under UAE law in which, keeping in mind particular circumstances, the court may restrain or attach a call on a bond. Fraud and manifest abuse of the instrument have been raised as grounds in court proceedings. The availability of such relief depends on different factors, like the specific facts, the bond wording, and the jurisdiction. Considering the relief may require legal advice and should be acted on immediately. Any delay in the relief application is itself a significant factor.
Separately prepare for the underlying contractual dispute: If money has already been paid out under the bond, the contractor’s repayment claim, which includes any damages from a wrongful call, is pursued through the court. Losing just a bond call does not mean losing the dispute, but it is one of the immediate financial events that changes the contractor’s operating position while the dispute still runs. This position needs to be managed.
Sources: Neo Legal– Performance Bonds and Guarantees in UAE Construction, July 2026; Mondaq– UAE Bonds: Calling On A Bond or Performance Guarantee in the UAE
Why the Wording of the Bond Matters More Than the Percentage
The importance of the percentage of the contract value is far less important than what the bond actually says. Most disputes about bond calls, as specialist UAE construction law commentary consistently notes, come from wording that is ambiguous and does not reflect what either party intended. This leaves critical mechanisms undefined.
Demand requirements: The requirements for the demand help in deciding what the beneficiary must represent for a demand to be compliant. It can be a specific statement, supporting certificate, or other documentation. Any wording that is vague can create confusion and uncertainty in both directions.
Call conditions: Call conditions are basically a specific number of conditions that should be fulfilled before an employer can become entitled to make a call. They are based on the underlying construction contract, which holds back or binds the employer under the contract. However, they do not bind the bank in its payment obligation. Any call that is made ignoring these conditions can give the contractor a claim in arbitration. However, the bank remains obliged to pay on the demand if it complies with the bond’s terms.
Expiry date: There is always an expiry date that helps in determining the timeline of the contractor’s exposure. It also determines the point from which an extend-or-pay situation cannot arise. The expiry date can be fixed, linked to a project milestone, or subject to automatic extension.
Extension mechanism: If the extension is triggered, it may depend on who is initiating it and on what terms. All of this is agreed before any issuance. An unmanaged expiry creates pressure at the worst possible moment.
Release conditions: The release condition is the event or certificate that triggers the full release of the bond. The conditions for release should be clear. It should happen automatically rather than depending on a request that may be disputed or delayed.
Governing law and jurisdiction: Which law governs the bond and which courts or tribunals have authority over disputes about it affects both the remedies available and the process for pursuing them.
A contractor needs to thoroughly review the bond and the underlying construction contract together rather than treating them as separate documents. A comparison between both of them can save the contractor a lot of trouble.
An On-Demand Bond Can Improve Cash Flow Without Eliminating Financial Exposure
It is true that a contractor choosing an on-demand bond has more cash available compared to a contractor who chooses retention. This works better for large projects over a long program.
But having more cash at present does not automatically mean less financial risk overall. A contractor may have better day-to-day liquidity while simultaneously carrying a banking facility consumed for the duration of the bond, which is completely unavailable for other uses.
There are also ongoing fee obligations across the bond’s life. If the bank asks for it, there should be collateral against the facility. There is also contingent exposure to a call that, under the instrument’s terms, results in payment before the dispute is resolved.
The difference between an on-demand bond and retention is that the form of financial exposure is converted into facility costs, fee costs, collateral, and call risk rather than money being held back.
A contractor’s overall financial position can only improve depending on the specific bond terms, the cost of the facility, the available banking capacity, and the project’s risk profile. It is not automatically better. It is just a different set of risks.
How Multiple On-Demand Bonds Affect a Contractor’s Banking Capacity
The risk of a single on-demand bond and the risk of multiple on-demand bonds are different in many ways. One performance bond is still a manageable commitment. Meanwhile, a contractor running 5 projects simultaneously while carrying 5 active bonds, each drawing on the same banking facilities with different dates, may face different reduction and release schedules.
The relevant question at that level is not whether any individual bond is within the contractor’s capacity. The real question is how much of the total banking facility is already committed across all active bonds and how much remains available for new projects, new bonds, and any unexpected working capital demands that arise.
Security Checklist: Before Signing On-Demand Bond
☐ Security type identified and understood — on-demand, conditional, or other
☐ Bond amount and percentage of contract value confirmed
☐ Demand conditions reviewed — what the beneficiary must produce for a compliant demand
☐ Contract conditions on calling reviewed alongside the bond wording
☐ Expiry date recorded and diarised as a planned decision point
☐ Extension provisions reviewed — trigger, initiative, and cost
☐ Reduction mechanism confirmed — automatic or request-based
☐ Release conditions confirmed — event or certificate that triggers full release
☐ Bank fees confirmed for the full duration of the bond
☐ Collateral requirements confirmed and assessed
☐ Available banking capacity checked against existing commitments across all active projects
☐ Outstanding bonds across all projects reviewed before committing to a new one
What UAE Contractors Should Record for Every Bond
Every active bond should be recorded in a bond register maintained by the contractor’s finance team and reviewed at each project and business review. A demand or an extend-or-pay request should never arrive as a surprise the register provides the early warning.
| Field | Record |
|---|---|
| Project | |
| Beneficiary | |
| Issuing bank | |
| Bond amount | |
| Issue date | |
| Expiry date | |
| Next review date | |
| Extension provisions | |
| Reduction mechanism | |
| Release conditions | |
| Related contract clause | |
| Facility used | |
| Annual fees | |
| Collateral or security requirements |
The Decision Does Not End When the Bond Is Signed
Choosing between retention and an on-demand bond is a separate decision. Meanwhile, managing either of them is different and continuous. Retention requires tracking release triggers. It requires monitoring whether contractual conditions have been met. On the other hand, an on-demand bond requires tracking expiry dates, monitoring facility utilization, managing fees and renewal schedules, and treating every approaching expiry as a decision point.
Any contractor with better information can manage security instruments well. They can maintain a bond register and review each project with clear visibility across all active commitments.
Construction management platforms like Onsite help contractors keep project financial records, contract documents, and commitment tracking connected across active sites, so the information needed to manage security instruments is available at the business level, not buried in individual project files.
Frequently Asked Questions
What is an on-demand bond in UAE construction?
An on-demand bond is a bank’s payment undertaking issued in favour of an employer as security for a contractor’s performance. The UAE Commercial Transactions Law provides that a letter of guarantee is an undertaking by the bank to pay a specified or determinable amount to the beneficiary according to the terms of the letter. Under a typical on-demand instrument, the bank’s payment obligation arises when a demand is presented that complies with the bond’s requirements — the bank does not assess whether a breach of the underlying construction contract has occurred. The exact operation depends on the wording of the particular bond and the terms of the instrument.
What is the difference between an on-demand bond and cash retention in UAE construction?
Cash retention withholds a percentage of certified payments — money the contractor has earned but has not yet received. It creates a direct and passive reduction in working capital. An on-demand bond allows certified payments to be received in full, but it consumes the contractor’s banking facility and creates contingent call risk. With retention, the dispute and the money travel together — a wrongful refusal to release is a breach the employer must justify. With an on-demand bond, payment on a compliant demand may precede resolution of the underlying dispute, and recovery of a wrongfully called bond requires separate proceedings. The contractor has not eliminated the security risk — it has changed the form it takes.
Does an on-demand bond improve a contractor’s cash flow?
It can. By replacing cash retention with a bank-backed bond, certified payments are received in full rather than with amounts withheld. On large projects over long programmes, the difference in day-to-day working capital can be substantial. However, the bond consumes banking capacity, carries fees, and may require collateral — and it creates contingent call exposure that cash retention does not. More cash today does not necessarily mean less financial risk overall. The benefit depends on the cost of the facility, the amount of capacity available, and the contractor’s broader financial position.
Does a performance bond use a contractor’s banking facility?
Typically yes. A performance bond or letter of guarantee issued by a bank draws on the contractor’s guarantee facility or credit line. That capacity is then committed for the duration of the bond and is unavailable for other purposes — other bonds, other projects, or other working capital needs. The UAE Commercial Transactions Law permits a bank to require security against issuing a letter of guarantee, so the bank may also require cash, property, or other collateral depending on the contractor’s facility terms and the bank’s assessment of the risk.
Can an employer call an on-demand bond during a contract dispute?
Under a typical on-demand instrument, a beneficiary can make a demand that complies with the bond’s terms — including during an ongoing dispute about the underlying construction contract. The bank’s obligation under the instrument is generally to assess the demand against the bond’s wording, not to assess the merits of the construction dispute. Whether the employer has the contractual right to make a call under the construction contract — and whether making a call in particular circumstances would give rise to liability — are questions of contract and depend on the specific terms. Contractors who receive a demand should obtain legal advice immediately.
Why does the wording of an on-demand bond matter?
The wording determines what constitutes a compliant demand, what conditions govern when a call can be made, how and when the bond reduces and expires, and what mechanisms exist for release. Most disputes involving bond calls originate in wording that is ambiguous or that does not reflect the parties’ intentions. The contractor should review the bond and the underlying construction contract together — not as separate documents — because the protections that the contract places on calling the bond are only effective if they are understood before a demand arrives.
How should UAE contractors track multiple performance bonds?
Through a centralised bond register maintained by the finance team and reviewed at each project and business review. The register should record the project, beneficiary, issuing bank, bond amount, issue date, expiry date, extension provisions, reduction and release mechanisms, the related contract clause, the facility used, fees, and any collateral or security requirements. Bond expiry dates should be diarised as planned decision points. The overall picture — how much of the banking facility is committed across all active bonds — should be reviewed when considering any new project that requires a further bond.
What should contractors review before accepting an on-demand bond obligation?
Three things: first, the demand conditions — what exactly can trigger a compliant demand, and whether the contract places any conditions on when a call may be made. Second, the reduction and expiry mechanics — how the bond value reduces over the project life, when it expires, and what the extension provisions say. Third, the overall cost to the business — bank fees for the full duration, facility utilisation and its effect on capacity for other needs, any collateral requirements, and the cumulative position across all active bonds on the order book.
