Retainage Receivables and Payables
Retainage in construction describes the money withheld from a project’s progress payments in order to ensure that contractors, subcontractors, and suppliers complete the job in accordance with the stipulations and specifications set forth in the contract.
On typical construction jobs, the project owner will hold retainage from payments owed to the General Contractor, who may, in turn, withhold retainage from payments due to subcontractors and suppliers. In this regard, retainage functions as an informal insurance policy to help ensure quality work and the successful completion of the job. Retainage rates in construction generally range from five to ten percent, depending on negotiations between contractors and project owners.
Retainage receivable and retainage payable should not be confused with accounts receivable or accounts payable. Retainage receivable describes the amount owed to the contractor, sub, or supplier from the project owner or GC upon successful completion and/or final approval.
On the other hand, retainage payables are funds held by the general contractor or project owner and ultimately owed to downstream contractors, subcontractors, or vendors once the job is finished. In either case, the holdback is generally due and payable only upon project completion; therefore, retainage should be recorded in its own account on the general ledger.
In this Article
Recording and Tracking Retainage Receivables
One of the first and most critical steps for properly recording and tracking retainage receivables is the addition of the proper retainage accounts to the contractor’s Chart of Accounts. Adding an account for Retainage Receivables is essential for properly recording and tracking holdback. Because the Chart of Accounts is fundamental to proper construction accounting processes and serves as the foundation for creating the balance sheet and P&L, the incorporation of retainage receivables is crucial for accurate accounting.
It’s also important for retainage to be recorded properly on the balance sheet. Contractors who are due retainage fees should record that holdback as an asset, whereas the party that owes the retainage should record the amount as a liability. As such, retainage receivable accounts will reflect as a debit balance, and retainage payables will show as a credit. As with all good accounting processes, it’s important for all parties on a project to maintain up to date balances as is related to retainage receivables.
Accounting for Retainage Payables
Accounting for retainage payables typically involves tracking funds held back from contractors, subs, and suppliers until the completion of the project. Similar to the steps for recording and tracking retainage receivables, an account for retainage payables should be created in the construction company’s Chart of Accounts to track these transactions and balances. Solid documentation and record keeping are also critical to the proper management of retainage payables and ensuring accuracy and financial compliance in accordance with Generally Accepted Accounting Principles (GAAP).
When retainage payables are billed, they move to accounts payable or subcontract payable. Similarly, retainage receivable moves to accounts receivable when billed. Following GAAP guidelines, accounts receivable are debited for retainage amounts withheld, and accounts payable are credited an equal amount. This is an important consideration, as retainage balances don’t have a due or payable date. Due dates are applied only when retainage moves to AR or AP.
Timely Payments and Releases
Laws vary by state regarding how long retainage can be held back. There are also differences from one state to the next regarding what constitutes the satisfactory completion of the job. Some states call for the release of retainage within a set number of days from the project’s date of completion, whereas others require retainage to be released upon final approval of the work. In either event, the failure to receive the timely release and payment of retainage receivables frequently results in serious cash flow issues for contractors.
As indicated previously, retainage in construction generally ranges from five to ten percent, mirroring the profit margin most contractors expect on their jobs. While construction companies are often required to make significant outlays for upfront costs on a job, and they are faced with ongoing expenses like labor and supplies, these cash flow concerns are heightened by having to wait for the release of retainage.
In a similar fashion, subcontractors and suppliers are frequently made to wait until project completion or final approval for the release of any holdback amount, even if their portion of the project was finished early on. So, it’s easy to see the importance of managing both retainage receivables and payables sufficiently to ensure timely payments and the release of holdback.
Integration with General Accounting Processes
Successful contractors today have discovered the benefits of utilizing construction-specific software to assist with their accounting functions, allowing them to focus more on the actual job of building. Among the best solutions available to contractors is the construction accounting software from CrewCost.
CrewCost offers a comprehensive, cloud-based accounting platform developed by construction industry experts specifically for contractors. With CrewCost, general contractors, and subcontractors find it easy and straightforward to streamline and automate core accounting functions as well as manage processes such as invoicing, job-costing, accounts payable, and financial reporting.
Contractors with CrewCost in their toolbox also benefit from customizable reporting and project dashboards designed to provide them with real-time access to project finances for better visibility and improved decision-making. Ultimately, contractors using CrewCost for their construction accounting are better able to mitigate the impact of cash flow issues while maximizing their project profitability.
Contractors looking for solutions to managing their retainage receivables and payables, as well as all other construction accounting processes, owe it to themselves to try CrewCost today for free. Sign up now for early access!