How do I manage retainage in my construction accounting?
Retainage is the portion of each progress payment that owners or general contractors hold back until project completion. Usually 5% or 10% of each billing. The money is earned but not collected, which creates an accounting challenge because you need to track what’s owed without mixing it up with regular receivables.
Start with a dedicated retainage receivable account in your chart of accounts. This should be separate from your standard accounts receivable. When you bill $50,000 on a progress payment with 10% retainage, you record $45,000 to accounts receivable and $5,000 to retainage receivable. Both represent money owed, but they have different collection timelines and need separate tracking.
In QuickBooks, you can set this up as a sub-account under accounts receivable or as a standalone current asset. The key is consistency. Every progress billing should split the retained portion into this dedicated account so your regular AR aging reflects what you can actually collect now versus what’s being held.
Track retainage by job. You need to know exactly how much is being withheld on each project because release terms vary. Some contracts release retainage at substantial completion, others at final completion, and some have partial release milestones. If you’re running ten jobs with different retainage percentages and release dates, you’ll lose money without job-level tracking. Job costing that ties retainage to individual projects prevents this.
When you bill for retainage release, move the amount from retainage receivable to regular accounts receivable. This keeps your aging reports accurate and shows you’ve formally invoiced for the held funds. Some contractors skip this step and just deposit the check when it arrives, but that makes reconciliation messy and can hide collection problems.
Watch your release dates closely. Retainage often gets forgotten when projects drag on or closeout paperwork stalls. Build a routine to review your retainage receivable balance monthly and flag any amounts older than expected. A job that closed six months ago with $8,000 still sitting in retainage means someone didn’t follow up.
The cash flow impact is real. On a $500,000 project with 10% retainage, you’re carrying $50,000 in withheld funds until closeout. That’s money you can’t use for payroll, materials, or equipment. Factor this into your business bookkeeping and cash planning so you’re not surprised when progress payments come in short.
Common mistakes include lumping retainage with regular receivables, not tracking by job, and failing to bill for release when it’s due. Any of these can cost you money. The contractor who doesn’t track retainage properly often discovers at year-end that thousands of dollars were never collected because nobody was watching.
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