The week of September 19, 2022 is National Construction Appreciation Week. In honor of National Construction Appreciation Week, this article focuses on an accounting consideration specific to construction contractors: capitalization of mobilization costs under ASC 606. While ASC 606 was adopted by most calendar year-end construction companies in 2019, the standard continues to warrant additional consideration even years after its adoption.
Mobilization costs represent pre-contract costs incurred by a contractor to prepare a job site before the actual commencement of the contract. These costs can include administrative costs such as licensing, securing permits, etc. as well as construction-related costs such as transporting personnel, equipment, and other supplies to the job site, equipment rentals, tools, etc. Under prior accounting guidance, mobilization costs were simply included in job costs and factored into the calculation of percentage complete for a contract. Therefore, these costs ultimately impacted the revenue recognized on the contract.
Under ASC 606, mobilization costs are capitalized as an asset on the balance sheet and amortized over the life of the contract if the following criteria are met (as prescribed by ASC 340-40-25-5):
- The costs relate directly to a contract or to an anticipated contract that the entity can specifically identify (for example, costs relating to services to be provided under renewal of an existing contract or costs of designing an asset to be transferred under a specific contract that has not yet been approved).
- The costs generate or enhance resources of the entity that will be used in satisfying (or in continuing to satisfy) performance obligations in the future.
- The costs are expected to be recovered.
Some examples of costs that relate directly to a contract include:
- Direct labor costs,
- Direct materials costs,
- Allocations of costs that relate directly to the contract,
- Costs explicitly chargeable to the customer under the contract, and,
- Other costs incurred only because the entity entered into the contract.
If mobilization costs never rose to the level of significance that they were reevaluated under ASC 606, a construction contractor may have never considered how the accounting for these costs changed under the technical guidance. Analyzing contract costs and properly applying ASC 606 remains important as the year comes to a close and construction contractors begin preparing for annual audits.