Saudi Arabia’s Jabal Omar Development Company is renegotiating a contract with two of the kingdom’s largest contractors to ensure a fixed cost for its Mecca real estate project.

The contract renegotiation has been forced on the company by local lenders in a SR1.35bn ($360m) bridge loan to Jabal Omar that is close to being agreed.

Saudi Oger and Saudi Binladin Group had agreed to build the first phase of the project on a cost plus contract, which covers the contractors’ expenses plus an agreed profit. The new contract will be structured as a lump sum deal, where the contractor is paid a fixed sum upon delivery.

Drawdown of the SR1.35bn loan is limited until the new construction contract is signed. One banker in Riyadh says, “The change in contract was a requirement of the lenders. Financing will only be dispersed once the lump sum contract is in place.” Commercial terms of the new contract are understood to be already agreed and the new contract should be in place soon.

The final SR750m of the bridge loan is conditional on the new construction contract being agreed.

The bridge loan is being provided by Al-Rajhi, which is also financial adviser to Jabal Omar, Saudi Hollandi, Sabb, National Commercial Bank and Bank al-Jazeera. It will have a tenor of six months, with the first SR350m used to refinance a loan provided earlier in 2010 by Al-Rajhi.

The loan is structured to be sharia-compliant and pays a 4 per cent profit rate. Jabal Omar held a signing ceremony for the bridge loan on 2 October in Jeddah.

Jabal Omar now hopes to refinance the SR1.35bn loan with a SR5bn loan before the end of the year. The existing lenders are expected to increase their loans to the development, along with the additional participation of other Saudi lenders. A rights issue and a sukuk are also planned to fund the SR19bn project.