Skip to main content

Mobilization advance and contractor cash flow

Short answer

Mobilization advance, usually about 10% of contract price and recovered from running bills, provides early cash when spending is highest, reducing the peak deficit and the need for overdraft. It lowers interest cost and allows bulk buying and timely wage payment. Later, recovery from each bill flattens the net payment curve, but the overall peak borrowing is reduced.

How does mobilization advance affect the cash flow of a contractor?

Mobilization advance is an advance, usually interest-free, paid by the client to the contractor at the start of the contract against a bank guarantee. It is normally about 10% of the contract price (up to the limit allowed by the contract and Nepal's Public Procurement Regulations). It is recovered gradually from the running bills.

Effect on the contractor's cash flow:

  • It gives cash in the early stage, when spending on equipment, camp, materials and wages is highest and no bill has yet been paid. This reduces the cash flow deficit at the most critical stage.
  • It lowers the need for a bank overdraft, and so reduces interest cost.
  • It improves the contractor's ability to buy materials in bulk and pay workers on time.
  • Later, the recovery (a deduction from every bill) reduces the cash received per bill, so the net payment curve is flatter in the later stage.
  • The cost of the bank guarantee (and any interest, where the contract charges it) is small compared with the saving in financing cost.

In short, the advance raises the cash inflow curve in the early period and lowers the peak borrowing.

✓ Answer checked by Claude Opus 5.5 (high effort)

Related questions

All Construction Management chapter 6 questions →