So much so, that most owners don’t pay contractors in full until a construction project is “substantially complete” according to its design intent. This concept of holding back balance sheet a portion of money until a job is signed off on is called retainage. It’s just another one of the many ways construction accounting is unique. Paul’s Masonry is a subcontractor working on a project with ABC Contractor as the general contractor. ABC records the transaction as a debit of $50,000 to cost of goods sold, a credit of $45,000 to accounts payable, and a credit of $5,000 to retention payable. When ABC completes the project, they will invoice the customer for $10,000 in retention.

Benefits of Cloud-Based Financial Management Software

• This concept of holding back a portion of money until a job is signed off on is called retainage.
• It’s common for retainage to get withheld from contractors on construction jobs all across the world.
• Because retention is often held for a long period of time, it can create cash flow problems for contractors.
• Retained money is usually withheld from all parties until the very, very end of the project.
• This invoice is recorded in the chart of accounts as a credit of $10,000 to retention receivable and a debit of $10,000 to accounts receivable.
• Mehdian recommends companies use software specifically designed to track retention.

Most construction contracts mandate retainage in construction that a certain percentage of the contract price (frequently 5% or 10%) is withheld from the contractor until the entire project is substantially completed. This creates cash flow challenges in an already cash-poor industry, the practice is too frequently abused, and of course, it’s subject to complicated regulations that make it tricky to execute. In construction accounting, you have your accounts receivable and accounts payable, which record cash flowing in and out of your business. While they might sound similar, these shouldn’t be confused with retainage receivable or retainage payable.

• No surprise here — with one notable exception (the state of New Mexico forbids retainage) — money can be withheld from contractors on all private construction projects.
• Retainage, or retention, is the portion of a contract payment withheld until project milestones are met.
• 👉 Retainage receivable – The amount of retainage owed to a contractor, sub, or supplier from the project owner or GC.
• Next, let’s look at how retention is recorded from an accounting perspective.
• Retainage is an amount of money withheld from payment to a contractor or subcontractor until the end of the construction project, or a time specified in the contract.

Using QuickBooks to track retainage deadlines

Retention bonds offer a viable alternative Accounting for Churches to traditional retainage, providing security without withholding funds. Similarly, letters of credit can also be used to guarantee a contractor’s obligations. Retainage is an amount of money withheld from payment to a contractor or subcontractor until the end of the construction project, or a time specified in the contract. Also known as “retention,” the practice of withholding retainage is commonly used to ensure that the contractor or subcontractor finishes work completely and correctly. Retainage, or retention, is the portion of a contract payment withheld until project milestones are met.

Accounting for Retainage: Best Practices

Every single one of the 50 states allows retention to be withheld on a public works project. However, each state has different rules and limitations that govern the practice. As with all good accounting processes, all parties on a project need to maintain up-to-date balances as it relates to retainage receivables. When retention is subtracted from the invoice, the amount held is recorded as retention receivable.

Tools and Software for Managing Retainage

• While it’s a cornerstone of successful construction projects, mishandling retainage can lead to financial strain and project delays.
• These tools make it easier for contractors and project managers to stay on top of retainage percentages, set up payment schedules, and avoid mistakes.
• Did you know that retainage delays can tie up 5–10% of project funds for months, impacting cash flow for over half of construction firms?
• Contractors must weigh whether to use a mechanics lien to protect their payment rights.

Retainage can be considered a current asset if it is expected to be received within a year from the reporting date. It represents funds owed for services rendered, implying that control over these funds will be obtained in the near future. If you have any questions or concerns, it’s critical to address them before signing a new contract.