How do I handle retainage in construction accounting?
Retainage is the portion of each progress billing that the owner or general contractor holds back until the project is complete. Typically 5-10% of each invoice, it protects the party writing the checks in case you don’t finish the job or something needs to be fixed. From an accounting standpoint, you need to track this separately because it’s real money you’ve earned but won’t collect for months.
Create a retainage receivable account separate from your regular accounts receivable. When you bill a client $50,000 and they retain 10%, you have $45,000 in accounts receivable and $5,000 in retainage receivable. Both represent money owed to you, but they behave differently. Regular receivables should collect in 30 days. Retainage might not come for six months or longer.
If you use subcontractors, set up a retainage payable account too. When your plumber invoices you $12,000 and your contract allows you to hold 10%, you owe $10,800 now and $1,200 when the project closes out. Tracking this separately keeps your accounts payable accurate and prevents you from accidentally paying retainage early.
Track retainage by project, not just as a lump sum. You need to know that Project A has $8,000 in retainage receivable and Project B has $22,000. When Project A reaches substantial completion and you’re entitled to collect, you need to bill for that specific amount. If everything is lumped together, you lose visibility into what you can actually collect and when.
The release process matters. When the owner releases your retainage, invoice for it specifically. Move the amount from retainage receivable to regular accounts receivable when you bill, then clear it when payment arrives. On the payable side, don’t release retainage to subs until you’ve collected from the owner. Many contractors get burned paying sub retainage before the owner pays them.
Watch your retainage aging. A Scottsdale bookkeeper familiar with construction will tell you that old retainage receivable often signals a problem. If a project finished eight months ago and you still haven’t collected retainage, something is wrong. Either you haven’t billed for it, there’s a dispute, or the owner is having financial trouble. Age your retainage just like regular receivables so these issues surface quickly.
Cash flow planning requires knowing your retainage position. You might show strong receivables on paper, but if 15% of that is retainage that won’t convert to cash for months, your actual cash position is weaker than it looks. Understanding this distinction helps you avoid cash crunches on projects where you’re fronting labor and materials.
Most accounting software can handle retainage with proper setup. QuickBooks needs sub-accounts configured correctly and consistent use of classes or projects. Construction-specific software handles it more naturally with built-in retainage fields on invoices and bills. Either way, the discipline of recording it correctly matters more than which tool you use.
Proper construction job costing treats retainage as part of the project’s financial picture. You’ve earned that revenue and incurred those sub costs. The fact that cash moves later doesn’t change the profitability of the job. But ignoring retainage tracking leads to messy books, collection failures, and cash flow surprises that could have been avoided.
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