Contractors in Dubai are struggling to win new business because they cannot secure the bank guarantees demanded by real estate developers.

Banks are refusing to provide contractors with two different types of guarantees - performance and tender bonds - because they fear that struggling Dubai developers will cash the bonds to finance their running costs.

Performance bonds offer clients a financial guarantee that a contractor will undertake work to the timetable and quality agreed, while tender bonds guarantee that the price submitted by a contractor is realistic. If a contractor fails to meet the requirements attached to a bond, the client can cash it in as compensation.

Banks' concerns over issuing such bonds were triggered in January when Dubai-based developer Meydan cashed a performance bond provided by a joint venture of the local Arabtec Construction and Malaysia's WCT for its AED4.6bn ($1.25bn) Meydan racecourse grandstand at Nad al-Sheba.

Meydan is using the money to pay for work on the project.

"We cannot get [performance] bonds in Dubai," one international contractor tells MEED. "The bank that we use has told us it will not provide bonds for any Dubai-based client."

Another contractor says he believes the problem is specific to Dubai, as one bank that refused to provide a performance bond for a project he had already won in the emirate was happy to provide one for a new project in Abu Dhabi.

Contractors struggling to secure tender bonds are also losing out on work. In late April, 12 companies submitted prices for an accommodation project for Dubai Electricity & Water Authority (Dewa). But Dewa only accepted four bids because eight of the companies did not provide tender bonds.

"[Tender] bonds are a big problem," says one local contractor. "The banks are concerned they will be forced to finance a project if the client cashes in the contractors' bonds."

Performance bonds are typically worth 10 per cent of the total value of the contract, while tender bonds are normally worth 5 per cent.

Contractors that are unable to raise bonds from the banks can only negotiate with developers to waive the performance bond or drastically reduce its value.

With private clients, this strategy is often successful. But government developers generally abide by strict regulations that often lead to a situation where the contractor wins a job but is unable to start work because he cannot provide the client with a performance bond.

Contractors that are unable to obtain tender bonds are forced to submit written guarantees that they are committed to the price quoted in their bids.

In many cases, the client decides that the written guarantee is unacceptable and rejects the tender. This is especially true on government projects.

Winning new contracts is a major challenge for Dubai-based contractors as the volume of new contracts has shrunk.

So far this year, Dubai clients have awarded just one major contract, to the local Alec for Concourse 3 at Dubai International Airport.

"There has been very little new work in Dubai," says the international contractor. "Some projects are being tendered, and a couple of awards have been made, but no one seems to have started work on a project."