How do I handle retainage in construction accounting?
Retainage is the portion of each progress payment that owners hold back until project completion, typically 5% to 10% of the contract value. It protects the owner in case you don’t finish the work or fix punch list items. Proper accounting for retainage requires tracking it separately from regular receivables because the timing of when you’ll collect it is different.
Set up a separate asset account called Retainage Receivable in your chart of accounts. When you invoice a progress billing, record the full amount earned but split the entry. The portion the client will pay now goes to Accounts Receivable. The portion they’re holding goes to Retainage Receivable. This shows the true amount you’ve earned while reflecting the reality that part of it won’t arrive until later.
When the retainage gets released, usually at substantial completion or after the warranty period, you move the amount from Retainage Receivable to regular Accounts Receivable, then collect it like any other invoice.
If you use subcontractors, you’re likely holding retainage from them too. Create a Retainage Payable liability account to track what you owe subs when their retainage is released. This keeps your obligations straight and prevents surprises when you suddenly owe significant amounts at project closeout.
The timing mismatch matters for cash flow. You might be holding 10% from each sub but only receiving 10% back on your billings. If your retainage payable to subs exceeds what you’re holding from the owner, you’ll need cash reserves to cover the difference at project end.
Track retainage by project, not just as a company-wide total. You need to know exactly how much is being held on each job and what triggers its release. Some contracts specify retainage drops to 5% at substantial completion. Others hold the full amount until final completion. Proper construction job costing includes retainage tracking at the project level so you always know your true position.
QuickBooks can handle retainage but needs proper setup. Construction-specific accounting often requires custom invoice templates that calculate and display retainage, along with reporting that shows retainage balances by job. Without this configuration, tracking becomes manual and error-prone.
Document everything related to retainage release. When you submit a final retainage invoice, include any required lien releases, warranties, or closeout documents. Owners won’t pay until they have what the contract requires, and missing paperwork can delay collection for months.
For subcontractor retainage you’re holding, keep records of release conditions and pay subs promptly once those conditions are met. Slow payment damages relationships and can create lien problems on future projects. A San Diego bookkeeper familiar with construction can set up systems that track retainage properly from the start and keep you from scrambling at project closeout.
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