Construction Retainage 101: The Ultimate Guide

Continuing education is the key to keeping up with opportunities and regulation in a growing and competitive industry. Any unconditional rights to consideration are reported separately as a receivable. The PCC is considering a private company alternative to simplify the guidance. For example, some PCC members have suggested allowing private companies to bypass the required assessment and account for the transaction as a debt extinguishment. Additionally, some members have questioned whether it’s necessary to have different guidance for term debt and line-of-credit or revolving-debt arrangements when evaluating debt modifications and extinguishments.

• Let’s say you are working on a construction project with a total contract amount of $100,000 and a retainage percentage of 7%.
• The enforcement of lien rights is a critical aspect for contractors seeking to protect their payments, including retainage receivable.
• On top of that, it can take years for subcontractors to receive their retainage payments.
• Ensure that you provide all the necessary paperwork and details correctly, as any missing or incorrect information may lead to GCs rejecting your pay app, which can cause further delays.
• Some jurisdictions set limits on the amount of money that may be retained on payments, how that money must be held, and which types of projects are allowed to use retention in the first place.
• These terms should specify the percentage of retainage, the conditions under which it will be released, and any penalties for non-compliance.
• The project phases or stages and the construction benchmarks may also determine retainage conditions, such as assigning milestones to release withheld funds upon project delivery.

Retainage creates crippling cash flow issues.

Given the ever-evolving nature of the construction industry, it’s essential to have a comprehensive understanding of retainage construction. This knowledge equips you not only with a strategy to ensure a consistent cash flow and enhance record-keeping but also serves as a vital component for better project management. Software systems are critical to keep clients, contractors and subs on the same page. A general contractor having 10% withheld by the customer but only withholding 5% from subcontractors is at risk of a cash flow crunch.

The Art of Retainage Management:

• This is especially true if your accounting software isn’t tailor-made for construction companies (like QuickBooks).
• If you’re not sure how retainage affects your taxable income, an experienced small business tax accountant can help you prepare an accurate return.
• Bills can also be impacted by construction change orders or issues that might come up during the project.
• Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.
• This amount will be retained until the project is completed and accepted, at which point it should be released according to the terms of the contract.

Often, this happens between a project owner and the general contractor but can also be used between general contractors and their vendors/subcontractors. Our team of experts can help you streamline your processes, improve accuracy, and free up your time to focus on core business activities. To learn more about how we can help you maximize your retainage receivables and optimize your construction accounting, contact us today. Retainage meaning refers to the amount of money owed to a contractor by the owner, which is being held back until the project is completed. This amount is typically a percentage of each progress payment, usually ranging from 5% to 10%.

Construction accounting explained: 6 methods & how to use them

Businesses must maintain accurate records of the amounts withheld and ensure that these funds are segregated from other financial resources. This segregation helps in preventing the misuse of retainage funds and ensures that they are available when needed. Utilizing specialized accounting software can streamline this process, providing real-time tracking and reporting capabilities that enhance financial oversight.

• We’re getting back to basics with actionable strategies for profitability – and tips directly from top builders on the importance of financial management.
• Helping clients meet their business challenges begins with an in-depth understanding of the industries in which they work.
• Consult the law in the state where your projects are located and confirm that the retainage in place on your project is allowable according to the law.
• Yet, even with all of these potential problems, retention clauses in construction contracts are rarely questioned or even thought about very much, at all.
• Thus, it’s easy to see how retainage only makes a bad problem worse for many contractors.

Add Retainage to an Invoice

If retainage details are not spelled out specifically in a contract, then there is no retainage. Recording and tracking retainage can seem confusing at first, but here’s a quick breakdown of what you need to know. But while 59% of executives say there is strong consensus among their leadership teams around their company’s future vision, only 41% say there is strong consensus around how they’ll adapt their business model. Despite the alarm, about seven in 10 business leaders agree they have the right talent mix to support their company’s future vision, and the capabilities to execute business model changes at scale and at speed.

• However, it is possible to record retainage using general accounting software if you know how to do it.
• When retainage is held back in each progress payment, the contractor must account for it in each pay app.
• Job costing sounds complex, but there are accounting software tools to make it more manageable.
• Retainage in construction is a practice where a part of the payment due to a contractor or subcontractor is held back by the developer, project owner, or general contractor.
• Indirect costs might include training expenses, personal safety equipment and other incentives you might offer your staff like retention bonuses.

However, each state has different rules and limitations that govern the practice. A performance bond guarantees that a contractor or subcontractor will complete the work outlined in a construction contract, and a surety company issues this type of bond. If a contractor or subcontractor fails to complete the work as agreed, the owner or general contractor can approach the surety company for compensation.

Retainage as a Financial Incentive and Risk Control Tool

When it comes to accounting for retainage payable, there are specific guidelines that need to be followed. Retainage payable is generally considered a liability and should be recorded on the balance sheet under current liabilities. The calculation of retainage payable typically follows a predetermined percentage agreed upon in the contract.

Sidebar: PCC abandons project on share-based payment transactions

Consider scheduling periodic meetings or conference calls to discuss project status and retainage-related matters. Effective risk management in construction accounting often involves the strategic use of retainage. This practice serves as a financial incentive for contractors to complete projects satisfactorily while providing a mechanism for controlling project risk. As the practice of withholding retainage can be abused, it’s important retainage in construction to read the fine print in construction contracts and only accept the projects that are clearly worded. “Substantially complete,” “100% complete,” and “95% complete” can leave room for interpretation and have a significant impact on when you’re paid out. In general, working with an accountant who is experienced in construction accounting and the legal limitations set on retainage in your state can help you protect your bottom line.

Throughout a project, you may want to track accumulated retainage on a specific project or withheld across all projects with a customer. When you are ready to bill for retention, you can use the Account QuickReport for the Retainage Receivable account. This is because, under most construction contracts, you won’t be able to collect it yet. When you submit an invoice or pay application, you subtract retainage from the total currently due. At the end of the project, or whenever it becomes due under your contract, you will bill for retainage in its own invoice. The contract between the owner and contractor, and between the contractor and subcontractors, must clearly state the details of the retainage agreement.

Retainage Management Collection Example

Accordingly, rules, requirements, and practices have been built into federal law and the laws of many states, with respect to retainage to promote its fair use and to prevent its abuse. The amount of the contract price that can be withheld and the time for which the retainage may be withheld vary by state (and federally), and be dependent on project type. Although retainage rates can vary, you’ll typically encounter a range from five to ten percent. Even at the lower end, this can be a sizable chunk of money, especially for new businesses and smaller contractors who might not have the resources and cash reserves to easily overcome this impact to their cash flow.