- Intro to Construction Accounting
- Key Accounting Reports for Construction
- Recognizing income
- Chart of Accounts
- General ledger
- Best practices for billing
- 8 ways to improve accounts receivable
- Tips to improve accounts payable
Cash flow is a problem in construction, especially before progress payments start to kick in. By planning for mobilization costs from the jump, like in the initial schedule of values, construction businesses can clearly communicate their mobilization needs and avoid cash flow issues at the beginning of the job.
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What is construction mobilization?
Mobilization refers to the effort it takes to get a job off the ground. A lot of different activities might be considered mobilization. Sometimes mobilization might be purely administrative, other times they might relate to transportation, or they could refer to actual costs of job site preparation.
What activities are considered mobilization activities?
There’s no blanket answer as to what will constitute a construction mobilization activity. But, in many well-written construction contracts, mobilization costs will be specified right there in the contract terms or in the initial schedule of values. We’ll dive into this a little more a little later on, but any activities that are not explicitly a part of the construction work being performed might fall under mobilization.
What are construction mobilization costs?
Construction mobilization costs are the costs required to get a job rolling before the progress payments start flowing. The problem often faced with mobilization costs is that these costs might not be explicitly reimbursable unless the contract expressly accounted for these costs. Even if they are, the initial hit to cash flow for floating mobilization costs could spell trouble down the line.
Mobilization should be taken into account when job costing.
Types of mobilization costs
The following aren’t “official” categories, but it should provide a good breakdown of the various types of activities that might fall under construction mobilization.
What we’ll call “administrative” mobilization costs are things that take time and money, but might not be tied directly to the actual performance of work. These costs include things like licensing, obtaining payment bonds, and securing permits; which all have real costs and take up a lot of time. Even back office and project planning activities such as overhead costs, creating a project schedule, trade sequencing, and even finalizing plans or having them reviewed – they all require time and funds, too.
All of the activities described above relate to the construction industry, but there are mobilization activities that more closely relate to the actual work that will be performed. Things like transportation, fuel, equipment rental, initial materials, tools – they aren’t free, and they don’t happen instantaneously. Also, some site prep activities, setting up site office trailers, etc. will take place before the first progress payment rolls in.
Remobilization occurs when a construction business must undertake additional mobilization activities after initial mobilization has already taken place. In a situation where a contractor or sub must return to the job for some reason (like poor scheduling), they might be undertaking additional costs to pick up where they left off. In situations where remobilization costs are incurred, it might be possible to recover them. Of course, if a construction business must remobilize due to their own actions (or inaction) – like with defective work – those costs may not be recoverable.
Not all startup costs should be included
Don’t get carried away with mobilization costs. Obviously, some mobilization costs should be covered by the customer, but nickel and diming them could start the project off on the wrong foot.
How to responsibly manage construction mobilization costs
So, if there are a bunch of costs at the start of the job that aren’t accounted for – how can a contractor or sub stay ahead in the cash-flow tug of war? Unfortunately, one common method to deal with startup costs is to front-load the schedule of values.
Rather than game the system, wouldn’t it be easier to just deal with the reality? It costs time and money to start up a construction project. Starting the project with sound communication and collaboration is generally better than potentially raising suspicion with a front-loaded schedule of values. Plus, even if an invoice or pay app is inflated, construction mobilization costs wouldn’t be recouped until far beyond the times when they’re actually incurred.
Don’t rely on front-loading to pay for mobilization costs, include them in the schedule of values.
- Schedule of Values | Levelset Construction Payment Blueprint
- Front Loading | Risks of Gambling with Cash Flow
The simplest way to make sure that mobilization is accounted for and ultimately paid is to set the costs out in the contract explicitly. Whether this is accomplished with one lump sum mobilization fee or a line-item list of costs. Having the cost of mobilization explicitly stated in the contract is always a good idea.
All things considered, if a mobilization fee is outlined item by item, it will likely be easier to justify the fee and could help maintain or even strengthen a customer relationship. They’ll know that mobilization costs are going toward actual project costs and not some arbitrary “fee.”
One way that mobilization costs are often accounted for is with the inclusion of a mobilization percentage. Mobilization percentages are calculated as a portion of the overall contract price. This is how a lot of construction businesses and project owners handle mobilization currently; particularly on large public projects. And in some cases, utilizing a mobilization percentage will be mandatory.
However, using a mobilization percentage doesn’t account for the actual costs incurred in mobilizing. Sure, the rate can be increased or decreased in anticipation of the costs. The problem is that there’s a lot of room for windfall or shortfall when a straight percentage is used. By actually tying mobilization payments to specific mobilization costs, everyone gets a fair deal. Neither party has to worry that they might be getting ripped off.
Including a mobilization fee or percentage ensures that mobilization costs are accounted for. But they don’t do anything to solve the timing issue. Again – these activities take place at the very start of the job, or during the planning phases. Which means floating these costs until the first progress payment arrives. There is still a cash flow problem.
An easy fix might be simply to require an advance for mobilization costs. Obviously, not every customer will be thrilled about paying for things up front – but by communicating why it’s important for mobilization funds to be advanced, and explaining what the advance will cover, it will be an easier pill to swallow.
Mobilization draws, like mobilization advances, help to minimize the timing issues created by mobilization costs. Unlike an advance, a mobilization draw would occur after the costs have been incurred. This would operate similarly to any other typical draw request. By enabling a draw request specifically for mobilization, the temptation to front-load payments can be lessened.
Communicating mobilization costs builds trust and helps avoid disputes
Everyone in the construction industry knows that it takes time and money to get a construction project off the ground, and the concept isn’t hard to explain to project owners who might not be familiar. Further, obtaining construction payments is currently a slow process fraught with danger and potential for further delays.
Instead of playing the good soldier, or front-loading costs to survive mobilization; why not plan ahead? By accounting for mobilization in the initial schedule of values, and being open and honest about what costs are going into the project, it’s easier to build trust and avoid disputes.
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