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How to Accurately Track Retainage Receivables in Construction

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what is retainage in accounting

This should only be done when all other options have been exhausted. If you do go this route, you’ll need to make sure you do your homework and have plenty of supporting documentation and evidence to support your lien actions. As always, consult with a lawyer before signing contracts or enacting your lien rights. Most payment applications will include specific fields and guidelines to help you calculate payments with retainage included. When the retention payment is made, it is posted against accounts payable to clear the amount owing.

Familiarize yourself with federal and state laws on retainage

In other cases, retention payments are made as the project progresses. Retention payment is a percentage of the total value of a contract between an owner and contractor or a contractor and subcontractor. Contractor retainage has been around for over 100 years in the US to safeguard owners and employers.

The Ultimate Guide to Lien Waivers in Construction

what is retainage in accounting

It is often painted as a burden placed on the owners and contractors by the lending institution, even though it primarily serves to provide added assurance that the construction project will be completed. But, before we get ahead of ourselves, let’s first define what we’re what is retainage in accounting talking about. Ideally, retainage funds should be your profit rather than regular business cash that’s spent on supplies. However, as profit is often reinvested in future construction projects, it makes sense to get access to retainage earlier rather than later if you can.

Comprehensive guide to contract retention in construction

However, it is possible to record retainage using general accounting software if you know how to do it. The specifics of each job’s retainage, including the rate of holdback and payment schedules, should be clearly detailed in the contract agreement. When you’re entering into a contract for a project where there will be money withheld, make sure you examine the terms to find out everything you possibly can about how the retainage will work. The challenge with the private project laws is that those who need the money the most won’t have the cash to fight for the penalties.

  • You can also look into and instigate financing options early so you can secure cash for job phases where you need it most.
  • For example, if you’re working under a $50,000 contract with a retainage percentage of 5%, the total amount retained will equal $2,500.
  • It can expedite payments and reduce the possibility of errors, while helping to ensure that you’re fully compliant with industry standards.
  • While highly divisive, retainage remains a construction industry standard.
  • Because construction involves long-term contracts, typically with delayed payments, revenue recognition helps contractors decide when their income and expenses should be officially recorded.
  • But, before we get ahead of ourselves, let’s first define what we’re talking about.

Contractors should maintain a separate account for retainage receivables on the general ledger to accurately reflect funds withheld from a contract that are due upon project completion. This account will typically be listed under current assets on the balance sheet. Proper documentation and timely recognition of these funds are essential for precise financial statements. Tracking and recording retainage is a vital part of managing your cash flow. To do this, you’ll first want to add the appropriate retainage accounts to your Chart of Accounts.

On large projects this final payment can be quite substantial, so it is in the contractor’s best interest to finish the project quicklyso they can get paid. Legal advice may be necessary to navigate these rules effectively, especially in complex projects or when disputes arise. Lastly, you’ll want to double-check you’re accurately accounting for retainage in your billing and invoice process. When done right, any unreleased retainage should reflect as revenue on your profit and loss statement, and as uncollected funds on your balance sheet. Make sure to protect your retainage and other progress billings by filing the proper mechanic’s lien on the public project you are working on.

Substantial Completion

Sign up for early access today and see how you can simplify your construction accounting process. If you have any questions or concerns, it’s critical to address them before signing a new contract. Don’t hesitate to clarify things with your legal department or a qualified construction law attorney – you’ll thank yourself later. Variable retainage changes the percentage of retained funds as a job moves forward.

what is retainage in accounting

It is argued that retainage can be abused and can cause disputes and delays in payment when the contractor and the owner have differing views on the project’s completion. This can result in financial burdens for the subcontractors involved in the project. Whether or not you agree with retainage, construction businesses will usually need to deal with this practice at some point and it’s best to be prepared.

Guide to Alternative Dispute Resolution (ADR) in Construction

  • What this means is that general contractors may have to wait a couple of months for full payment, while subcontractors may have to wait up to 5-months or longer.
  • As always, consult with a lawyer before signing contracts or enacting your lien rights.
  • In traditional accounting, your general ledger gives you a snapshot of all your transactions and overall financial health.
  • When an invoice from your vendor is recorded, the retention will go to this account, with the balance going to Accounts Payable.
  • So the amount you have earned in the pay period is $5,000, but retainage is 5%.
  • For example, the G702 and G703 AIA-style documents include sections that prompt you to determine the actual amount that you receive minus retainage.

So, if the contract between them provides for retainage, they are allowed to do so under the terms set forth, even if the government is not withholding retainage from the prime. You can also look into subcontractor performance bonds or retainage bonds as a unique alternative to traditional retainage. Subcontractor performance bonds are a special agreement between a subcontractor and a surety. In this agreement, the surety guarantees to complete the project in place of a subcontractor should the subcontractor fail to meet contractual obligations. This clears the retention receivable account and moves the amount to accounts receivable, where it can then be paid.

Factor it into your cash flow needs

Notably, software like QuickBooks provides dedicated functionalities tailored to manage retainage for contractors, supporting both standard accounting and construction specific needs. In construction, retainage is money withheld from a project’s progress payments to ensure contractors, subcontractors, and suppliers complete the job according to the specifications set in the contract. Generally speaking, retainage rates range from 5-10% depending on the payment terms negotiated in the construction contract. Purpose-built by contractors for contractors, CrewCost’s construction accounting platform is made to automate billing, invoicing, payment tracking and more – including managing retainage receivables and payables. With cloud-based connectivity, CrewCost’s job dashboards enable real-time reporting and actionable data, anywhere, any time, so you can make better decisions, improve your cash flow, and grow your business. Retainage, also called “retention,” is an amount of money “held back” from a contractor or subcontractor during the term of a construction project.