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.
Greater Boston's Trusted Bookkeeping Partner
The Next Step:
A Short Conversation
We'll ask a few questions, figure out what you need, and give you a straightforward quote.
More Questions
Are there QuickBooks experts near Greater Boston?
Yes, there are certified QuickBooks professionals throughout Greater Boston and MetroWest. Finding the right one depends on whether you need one-time setup, cleanup, or ongoing support, and whether they understand your industry.
Read answerWhen should I hire a bookkeeper for my small business?
Most small business owners wait too long. If you're months behind on reconciliation, stressed at tax time, or spending evenings on QuickBooks instead of running your business, you're already past the point where a bookkeeper makes sense.
Read answerHow do I pay subcontractors vs employees?
Employees get paid through payroll with taxes withheld. Subcontractors get paid directly with no withholdings. The paperwork, tax obligations, and bookkeeping are completely different for each.
Read answerWhat are the penalties for late payroll tax deposits?
The IRS charges penalties starting at 2% for deposits 1-5 days late, escalating to 15% for deposits made after an IRS notice. The bigger risk is personal liability through the Trust Fund Recovery Penalty, which can hold business owners responsible for 100% of unpaid payroll taxes.
Read answerWhat records does a bookkeeper need from my business?
At minimum, your bookkeeper needs bank and credit card statements, sales invoices, and expense receipts. For contractors and service businesses, add job contracts, subcontractor invoices, and change orders. The more complete and organized your records, the more accurate your financials.
Read answerHow do slow-paying customers hurt my cash flow?
Late-paying customers force you to finance their work with your own money, creating a gap between when you pay expenses and when you collect. This leads to vendor relationship strain, credit card interest charges, lost discounts, and decisions made under pressure instead of strategy.
Read answer