In contract management, advance payments play a vital role in the performance of a Contractor. This is because the performance of a contractor is directly linked to their cash flow. Advances in the form of Mobilization advance and Secured advance help a contractor in a construction contract to improve their cash flow.

Table of Contents

• Types of Advance Payments in a Construction Project
• The Mechanism of Mobilization Advance and Secured Advance Payments
• Mobilization Advance Payment
• Secured Advance Payment
• Tips to Master Mobilization Advance payment
• Difference Between Mobilization advance and Secured advance

Types of Advance Payments in a Construction Project

The Contract Manager of a construction project must be familiar with the mobilization and secured advances which are the most common forms of advances in a project. In construction contracts, clients pay advances in various forms to the contractors. This is to ease the cash flow and reduce the capital expenditure of the contractor. This may be at the beginning or during the project.

Generally, the forms of advances to the contractors in a construction contract are:

1. Mobilization advance
2. Secured advances

Advance means paying someone before they have done the intended work. When we talk about a mobilization advance, it is the payment that the employer pays the contractor before they actually mobilize resources at the site. Similarly, a secured advance is a form of payment the Employer pays before the contractor consumes the intended materials they have brought to the site.

While the contractors get the benefit through advance payments, they must provide some guarantee to cover the employer’s risk.

The Mechanism of Mobilization Advance and Secured Advance Payments

There is a certain workflow of taking mobilization advance or secured advance from an Employer. Contract clauses always mention the appropriate conditions to receive and replay the advance payments. We have depicted the detailed workflow for both types of advance payments for a construction project.

Mobilization Advance Payment

Generally, Mobilization advances are 5% to 20% of the contract value. This can vary depending upon the requirement of cash the contractor may require and the client’s agreement to pay for the project to start.

Employers pay Mobilization advances generally against the submission of Bank Guarantees (BG) or Corporate Guarantees (CG) by the contractor for an equivalent amount. These act as a security to the client. In case, the contractor breaches the conditions of the contract, or does not perform, they become unable to repay the advance. In that case, these guarantees act as a tool to make the contractor accountable for the payments they have taken, and to repay the same to the Employer through their banks.

In some cases where the percentage is high (usually more than 10% of the contract value), a part of it is paid to the contractor at the beginning of the project and the remaining in phases. In that case, conditions are mentioned in the contract to be fulfilled by the contractor before they get the remaining part. E.g.-Mobilization of a few resources as agreed in the contract, execution of 25% of the contract value, etc.

Secured Advance Payment

On the other hand, the secured advance is the payment the client releases to the contractor throughout the project duration. This is payable against the received materials at the project sites. Usually, this percentage varied from 60% to 90% of the invoice value (including tax) of the materials brought to the site by the contractor. This is applicable against non-perishable materials only.

Read More: What is Performance Bank Guarantee (PBG)?

The clause should be explicitly written in the contract. The intention is to help the contractor to ease out the cash flow without waiting for the materials to convert to the bill, which is generally a longer process.

Secured advances are paid to a contractor based on the materials actually received at the site. Hence no bank guarantee is necessary for this payment. Employers recover the secured advance amounts from the running account (RA) bills when the contractors utilize the materials and raise the bill for the work.

Tips to Master Mobilization Advance payment

Here are some pro tips for contractors to efficiently manage their cash flow through advances.

Tip 1: How much advance to take?

Mobilization advances can be interest-bearing or interest-free. If it is interest-free you should take it from the client as soon as possible after the project starts. If it is interest-bearing then first prepare a month-wise cash flow (income and expenditure details) for the entire project duration and take the mobilization advance in phases, i.e., exactly at the intervals when you have a negative cash flow and really need fund support. This will reduce the interest part on the advance.

Tip 2: Keeping track is necessary

The Contract Managers should keep a track of the utilization of the MA taken in a project, separately for each installment. Keep a copy of the invoices (if you’ve purchased new assets) with this as evidence.

This can be helpful if the client asks for a utilization certificate before paying the next installments, or maybe for an audit.

Tip 3: Timing that Matters

The Contract Managers should get to know about the fund status of the client and submit only an equivalent amount of Bank Guarantee (BG) to the client up to which presently the mobilization advance will be released by them. This will ensure proper utilization and avoid the idling of BG.

Tip 4: Manage Bank Guarantees as Well

Employers recover the Mobilization advance from the running bills. When client recovers a substantial amount of the mobilization advances they have paid, withdraw the Bank Guarantee (BG) of the full amount, and submit a lesser value of guarantee that suffices the advance amount still balance with you.

For example, if you have taken a mobilization advance of $5 Million, and the client recovers $3 Million from your running account bills, then withdraw the full value guarantee and instead submit $5 – $3 = $2 Million value of the Bank guarantee.

This will free up the BG limit of your organization which you can utilize elsewhere.

Tip 5: Keep Track of the Materials

For secured advances against the running items like cement, steel, flooring items, etc. the Contract Managers should ensure to:

• Keep entry registers including quantity and value on a regular basis on receipt of the materials.

• Keep track of the reconciliation statements every month and tally the same with the recoveries made till that month.

This will ensure that the employer is recovering the advance payment only for the materials they have used from the running bills of the contractor.

Difference Between Mobilization advance and Secured advance

As evident from the discussion above, the basic difference between the two types of advance payments are:

• Workflow
• Guarantee for the type of advances
• Mode of payment
• Percentage of the advance, thereby the amount
• Mode of recovery

If you still have a query please let us know in the comment box.