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Call it subtraction by addition. Advancing contractors money to mobilize construction equipment and other resources can be a smart way for owners to cut their final project costs, but it can also expose them to considerable financial risk.
Contractors know that a successful bid on a project often translates into huge up-front expenses. After all, the first stage of any project is mobilization, which means assembring equipment, personnel and facilities at a designated place to perform the work. And heavy civil construction projects can have staggeringly high start-up costs.
On projects such as these, where mobilization costs are likely to be high, it may be in the best interests of all parties for the owner to bear the financial risk associated with mobilization. The reasoning is simple: without a contractual provision that provides for payment of these costs, the contractor will include the cost of mobilizing (and the associated finance charges) in the bid for the work. An owner should consider supplying an advance payment to the contractor for mobilization when the following conditions obtain:
* The mobilization cost is large, typically when the contractor must acquire special equipment
The financing cost arises, at least in part, from clear-cut, up-front expenses, such as those associated with mobilization.
The owner can borrow money less expensively than the contractor.
Reducing the contractor's dependence on the financial markets should work to the owner's advantage. But by advancing the contractor money for mobilization, the owner assumes the risk of overpaying the contractor. (In this context, the contractor is considered overpaid if the progress payments exceed the value of the work performed to date.) Ignoring the time value of money, such a situation isn't inherently bad for the owner, since the total amount paid for the project is unaffected. However the owner's financial risk of loss in the event of the contractor's default is increased.
CRITICAL ELEMENTS The two most important elements of the mobilization provision are the amount of the advance and the time when the contractor receives it (how the contractor earns the advance).
There are three common tactics for handling the amount of the mobilization payment. The first is for the contractor to bid the amount as it would any other lump-sum item. The second is...