Accountability is huge in construction. So much so, that most owners don’t pay contractors in full until a construction project is “substantially complete” according to its design intent. This concept of holding back a portion of money until a job is signed off on is called retainage. It’s just another one of the many ways construction accounting is unique.
But just because retainage doesn’t come into play until the end of a construction job doesn’t mean you don’t have to think about it before then. Accurately managing and tracking retainage receivables and payables from the get-go is a must, no matter where you are in a project’s hierarchy.
In this guide, we’ll walk you through retainage payables and receivables so you can streamline your accounting process and make sure you get the funds you’re owed.
Key Takeaways
In construction, retainage is money withheld from a project’s progress payments to ensure contractors, subcontractors, and suppliers complete the job according to the specifications set in the contract. Generally speaking, retainage rates range from 5-10% depending on the payment terms negotiated in the construction contract.
On a typical job, the owner will hold retainage from payments owed to the general contractor, who might also withhold retainage from subcontractors and suppliers under them. It’s easy to think about retainage as a form of insurance for an owner; by withholding a portion of payment, a project is more likely to be completed successfully.
🔎 Dive Deeper: Check out our Ultimate Guide to Retainage in Construction
In construction accounting, you have your accounts receivable and accounts payable, which record cash flowing in and out of your business. While they might sound similar, these shouldn’t be confused with retainage receivable or retainage payable.
👉 Retainage receivable - The amount of retainage owed to a contractor, sub, or supplier from the project owner or GC.
👉 Retainage payable - Funds held by the general contractor or project owner that are owed to contractors, vendors, and subs downstream.
In either case, any holdback is normally due and payable only upon project completion. Because of this, retainage should be recorded in its own account on your general ledger.
Tracking and recording retainage is a vital part of managing your cash flow. To do this, you’ll first want to add the appropriate retainage accounts to your Chart of Accounts. Your Chart of Accounts is a fundamental part of good construction accounting and serves as the foundation for creating your balance sheet and P&L. By incorporating retainage receivables here, you’ll be able to accurately record and track holdback on each project you take on.
Let’s move on to the balance sheet. If you’re due retainage fees, this should be recorded as an asset.
If you owe retainage though, this should be recorded as a liability. Based on this, retainage receivable accounts will reflect as a debit balance, and retainage payables will show as a credit.
As with all good accounting processes, all parties on a project need to maintain up-to-date balances as it relates to retainage receivables.
Accounting for retainage payables typically involves tracking funds held back from contractors, subs, and suppliers until a project is finished. Just like the steps for recording and tracking retainage receivables, an account for retainage payables should be created in your company’s Chart of Accounts to monitor these transactions and balances. When in doubt, always document. You can’t accurately manage retainage payables without good record-keeping. With a solid process in hand, you’ll not only be able to track the numbers correctly but will keep your company in compliance with Generally Accepted Accounting Principles (GAAP).
When retainage payables are billed, they’ll 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. Heads up: Retainage balances don’t have a due or payable date. Due dates are applied only when retainage moves to AR or AP.
As with a lot of things in construction, where you work will influence the rules and standards around retainage. Each state has its own rules on how long retainage can be held back. To make matters more complicated, every state has a different definition of what constitutes the satisfactory completion of a job.
Some states call for the release of retainage within a set number of days from the project’s date of completion, while others require retainage to be released upon final approval of the work. Either way, if you don’t receive your retainage payment on time, you’re likely to face serious cash flow issues. To help avoid this, you should create a basic cash flow project that includes dates for both receiving and paying retainage.
Like we mentioned before, retainage in the construction industry generally ranges from 5-10%, which mirrors the profit margin many construction contractors expect from each job. Because contractors often need to make outlays for upfront costs on a job, waiting for retainage to be released can make a tough financial situation even more difficult. On the other side, subcontractors and suppliers are often made to wait until project completion or final approval to see their retainage payment, even if their portion of the project was finished early on. All this to say, it’s not hard to see just how important managing retainage receivables and payables is - not just for your construction company, but for everyone under you as well.
Because of the pay-when-paid clause, most general contractors will notice that their accounts receivable retainage and accounts payable retainage line up with their payments. This can help keep your cash flow in a good spot once retainage payments start flowing down from upstream.
💥 Dive deeper into all aspects of construction accounting with our Ultimate Guide to Construction Accounting for Contractors.
If paper and Excel sheets still dominate the accounting process for your construction business, you’re missing out on valuable time back. CrewCost is construction-specific accounting software that streamlines company financials, so you can focus on delivering great work and winning more projects. Along with automating core accounting functions, this purpose-built construction software seamlessly integrates retainage, along with other processes like invoicing, job costing, and financial reporting.
Sound good to you? Try CrewCost for free for 30 days.