What is retainage and how do I account for it?
Retainage is a percentage of each progress payment that gets held back until a construction project is complete. Usually 5% to 10% of the contract amount, it protects the owner or general contractor from unfinished work, punch list items, or disputes. The withheld amount accumulates throughout the project and releases when the work is accepted as complete.
The accounting challenge is that retainage represents earned revenue you haven’t collected yet. If you bill $50,000 for work completed and the contract has 10% retainage, you receive $45,000 now and are owed $5,000 later. Your books need to reflect both the cash you received and the amount you’ve earned but won’t collect until project completion.
Track retainage receivable separately from regular accounts receivable. In QuickBooks, create a separate asset account called Retainage Receivable. When you invoice with retainage, record the full amount as revenue but split the debit between regular AR and Retainage Receivable. This keeps your revenue accurate while showing the different collection timelines.
When you’re a general contractor holding retainage from subcontractors, you need to track it as a liability. The sub has done the work and you owe them, but the payment isn’t due yet. Create a Retainage Payable account for these amounts. When a sub bills you $20,000 and you’re holding 10%, record $18,000 to accounts payable and $2,000 to retainage payable.
Release retainage when you receive or pay it. When the owner finally pays your held retainage, debit cash and credit Retainage Receivable. When you release retainage to a sub, debit Retainage Payable and credit cash. The balance in each retainage account should always represent amounts currently being held.
At any point, you should be able to run a report showing total retainage owed to you by project and total retainage you’re holding from subs. A construction contractor with $80,000 in retainage receivable across several projects has real money tied up that won’t arrive until those projects close out. This affects cash flow planning significantly.
Job costing reports need to include retainage to show true project profitability. If your reports only show collected revenue, you’re understating what you’ve actually earned on active jobs. Getting this right usually requires a bookkeeper for small business who understands construction accounting and can configure your chart of accounts to track retainage by project from the start.
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More Questions
What is a chart of accounts and how do I set one up?
A chart of accounts is the complete list of categories your business uses to record every financial transaction. Setting one up involves choosing account types for assets, liabilities, equity, income, and expenses that match how you run your business.
Read answerCan I import my existing data into QuickBooks?
Yes, QuickBooks Online supports importing data from spreadsheets, other accounting software, and bank connections. The bigger question is whether your existing data is clean enough to be worth importing.
Read answerWhat financial reports should contractors review monthly?
Job cost reports are the most important because they show profitability by project, not just overall. Beyond that, review your profit and loss, cash flow position, accounts receivable aging, and accounts payable aging every month.
Read answerHow is construction bookkeeping different from regular bookkeeping?
Job costing is the fundamental difference. Construction bookkeeping tracks every expense and labor hour by individual project, not just by category. This adds complexity with progress billing, retainage, work in progress accounting, and subcontractor management.
Read answerCan a bookkeeper work remotely for my business?
Yes, and for most small businesses, remote bookkeeping is now standard practice. Cloud-based accounting software and secure digital tools make location irrelevant. What matters is finding a bookkeeper with good systems, clear communication, and expertise in your industry.
Read answerWhat is IFTA and how does it affect my trucking bookkeeping?
IFTA is the International Fuel Tax Agreement that lets trucking companies file one quarterly fuel tax return instead of getting permits for every state. It affects your bookkeeping by requiring detailed tracking of miles driven and fuel purchased in each jurisdiction.
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