Mobilization fund - is it correct to use it for bank guarantee?

In the construction industry in India, usually, mobilization fund is given by the customer at the start of the project and this is adjusted with each milestone payment as per mutually agreed terms. The main purpose of giving the mobilization fund is to ensure that the cash flow of the contractors remains healthy for working capital requirements.

Most EPC contractors instead of using it for working capital requirements, use it for making fixed deposits in the bank to get a bank guarantee for the project as demanded by the customer in the contract. In short, this money gets locked for the time project is running.

The EPC contractors now take loans from their family members or friends to get the working capital needs for the project. The amount is much less than the mobilization funding given by customers. All this leads to a slow & below standard start by EPC contractors in front of the customers. Ultimately this decision makes EPC contractors work in a very suboptimal way and always short of cash flow.

The situation further worsens when EPC contractors start moving cash they earn from one project to another leading to cash flow problems in both projects.

By being truthful to all for using the cash for what it is intended to be used, EPC contractors can solve the problem of cash flow in their business. The only thing they need to ensure is that at the start of the project, they have to use their own money for making a bank guarantee. This will ensure a good start and healthy cash flow throughout the project.

If you have some other thoughts, please share them in the comments section below. This will help in understanding the right way forward.