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Treatment of mobilisation cost received from client

Suman Chattopadhyay (Finance Controller) (25 Points)

11 October 2015

I would like to know the accounting treatment for Mobilisation Costs.

Mobilisation cost is to be paid by the client to the Contractor as per the milestone achievements. The milestone includes acquiring the assets for the project and once the assets are acquired, mobilisation payment will be done which may or may not be equal to the cost of the assets. As the assets are owned by the Contractor, it will be capitalised. Here what is the treatment of the amount received from the Client for this milestone payment in the books of the Contractor?

Further milestone payment also includes keeping the workforce ready for operation, so what will be the treatment of the money received from the Client for keeping the workforce ready.

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2 Replies

RAVIKUMAR (STUDENT) (107 Points)
Replied 25 November 2015

Suppose assume its a fixed price contract of 100,000 and there are three milestones 40% upon purchase order from client, 30% upon mobilization and 30% upon completion of project.

When the client issues the PO, you can invoice the client initial 40% of project value (ie 40% x 100,000=40,000). The entry will be dr client cr sales 40,000.

At the end of the month you need to see what % of the project is complete and this is based on various calculation methods like cost, labour time, etc. For example if the budgeted cost of the project is 60,000 and if by the end of the month you have incurred 20,000 , then % of completion of project is 20,000/60,000= 33%. So you can only record 33% of what you have invoiced as revenue, which will be 33% of 40,000 = 13,200. Which means you need pass an adjusting entry dr sales cr work in progress (b/s) for the amount of (40000-13200) which is 26,800. Hope this makes sense.

CA Goutam Sharma (Chartered Accountant in Practice) (468 Points)
Replied 25 November 2015

Mobilisation Cost: It is nothing but a sort of financial assistance provided to contractors so that they can aquire assets required to carry on the contract. These are specific in nature so as to ensure that the assistance provided by client is not used elsewhere.

It is merely an advance paid to contractor. In case if contractor fails to complete project, the same stands recoverable from him. Therefor the contractor should not record it as his income, even not on the basis of work certified untill the work is completed. Such amount shall be adjusted at the time of full and final payment.