Accounting for Retention Receivable & Payable: A Contractors Guide

Under GAAP, retainage payable is recognized as a current liability on the balance sheet. Construction companies must record retainage held from subcontractors separately, reflecting the amount that will be due once the subcontractor’s work is satisfactorily completed. Proper recording and tracking starts with adding the right fields to your Chart of Accounts. Given how important your CoA is in ensuring accurate accounting, including an account for retainage receivables is essential. Although retainage rates can vary, you’ll typically encounter a range from five to ten percent. Retainage is commonly withheld until the end of a construction project overall, rather than the completion of a particular contractor’s work.

Iowa Notice of Request for Early Release of Retainage Form

• While this does not address the retainage problem head-on, it does minimize the problem significantly since the completion of the project will also trigger the retainage payment.
• Most construction contracts mandate that a certain percentage of the contract price (frequently 5% or 10%) is withheld from the contractor until the entire project is substantially completed.
• Delays in the release of retainage can strain a company’s liquidity, highlighting the need for effective retainage management within construction accounting.
• As with a lot of things in construction, where you work will influence the rules and standards around retainage.
• Retainage payable serves as a financial safeguard in construction contracts, ensuring that contractors and subcontractors fulfill their obligations before receiving full payment.
• The tax implications of retainage payable are an often-overlooked aspect that can have significant consequences for both contractors and project owners.

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. According to Mehdian, a lot of contractors don’t record retention receivable or payable, especially those using Quickbooks accounting software. Retention receivable is recorded by general contractors and subcontractors and is the number of funds due from a contractor’s customer for retention.

• Features like digital invoicing and progress payment tracking help businesses maintain a detailed record of financial transactions, ensuring that retainage receivables are easy to report and reconcile.
• Not only does retainage make it harder for a construction business to manage cash flow — simply recording the transaction can be a feat.
• Once you know what you’re getting into, and once you’ve exhausted all of your alternatives, then you can plan for the cash flow reality.
• If you can’t afford software with this capability, do what you can to record retention receivable and payable with each transaction.
• Proper recording and tracking starts with adding the right fields to your Chart of Accounts.

A Quick Overview of Retainage

• It appears that the laws on retainage and the laws on mechanic’s lien rights were written in 2 different universes and 2 different eras.
• If retainage is withheld on any of your projects, you need to track it separately from Accounts Receivable.
• In most jurisdictions, there are established legal rules regarding how much may be held back in retainage, when payment can be withheld, and who has access to it.
• Retention can be withheld on residential or commercial projects and on both public and private projects.
• A thorough assessment of project risks is crucial when determining the terms of retainage.

Contractors on public projects might need to secure a bond or a reserve in lieu of a standard mechanics lien due to sovereign immunity that protects public entities from liens. In contrast, those in the private sector can generally rely on mechanics liens to claim unpaid retainage. Effective management of retainage receivable is crucial for construction businesses to maintain healthy cash flow and accurate financial reporting. This section explores how contractors should handle this component in their accounting practices. Retainage refers to a portion of the payment due to contractors and subcontractors that is withheld until the completion of a project. This practice ensures a financial incentive for the completion of high-quality work.

• When ABC writes a check, it is recorded with a debit to accounts payable to clear the amount there.
• It involves withholding a portion of payment to contractors or subcontractors until project completion, ensuring that all work meets specified standards and contractual obligations.
• Depending on the phase of a construction project you typically work in, you may end up waiting for retainage to be collectible for a year or longer, well after your company’s work on the job was finished.
• Accounting for retainage payables typically involves tracking funds held back from contractors, subs, and suppliers until a project is finished.
• And so, beginning with the Office of Federal Procurement Policy’s urging in 1983, federal and state governments started passing laws governing and limiting retainage.
• It’s just another one of the many ways construction accounting is unique.

Accounting for Retention Receivable & Payable: A Contractor’s Guide

Retainage is considered a standard practice in construction accounting and is designed to not only protect project owners but to encourage contractors to complete a job as agreed upon. If, for some reason, a job falls short in its progress or materials, this held-back amount should be able to cover retainage in construction the cost of replacement labor or supplies. In construction, retainage is the practice of holding back a portion of payments on a job as a kind of financial incentive that ensures each milestone is successfully completed. Often, this happens between a project owner and the general contractor but can also be used between general contractors and their vendors/subcontractors. Generally speaking, the parties can agree to anything they want, so long as they don’t run into a legal limitation (we’ll discuss those below).

Retainage is typically released after final inspections and approvals, providing a layer of protection for clients against incomplete or substandard work. Some jurisdictions might require the release of retainage fees within a defined period of time after a project is finished. Others might require reimbursement to be made in a set number of days after final approval. Some states even limit the amount of money that can be retained, and some might require it to be held in escrow. As a result, the deadline to Law Firm Accounts Receivable Management file a mechanics lien for retainage also differs from regular payments, as does the deadline under Prompt Payment rules. Once you know what you’re getting into, and once you’ve exhausted all of your alternatives, then you can plan for the cash flow reality.

Best Practices for Contract Negotiation

Retainage practices are problematic because they cause practical issues and business relationship issues within the already-complicated accounting and payment systems of the construction world. Click here to see Retainage rules, info, and FAQs for all 50 states, and you can also take a look at the map below to see an overview of the requirements in your state. Just like with federal projects, retainage can be withheld on state, municipal, and county projects. In fact, there are very few instances when the laws are in agreement in every state, but this is one of those instances.

ABC Contractor is billing a project owner for $100,000 with 10% retention. The invoice is recorded in the chart of accounts with a credit to the income account for $100,000, a debit of $90,000 to accounts receivable, and a debit of $10,000 to retention receivable. Since some accounting software packages, like Quickbooks, don’t track retention on either the receivable or payable side, companies either don’t track it or use other tools, bookkeeping like Excel, to track these amounts. Mehdian recommends companies use software specifically designed to track retention. If you can’t afford software with this capability, do what you can to record retention receivable and payable with each transaction.