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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