When the retention payment is made, it is posted against accounts payable to clear the amount owing. When the $90,000 is paid, it is posted with a debit to the bank or cash account and a credit to accounts receivable, clearing the account for that project. The rate of retention is stipulated retention vs retainage in the construction contract and can often be negotiated. Some states even have a statutory limit on retention for projects within the state boundaries. Lien waivers and lien releases are completely different documents (even though they are often confused by the construction industry).
- These laws also set a deadline for the payment of retainage, though the timeline is typically based on the payment to the contractor’s hiring party.
- Or it could mean that a different rate applies to labor and materials.
- Since some accounting software packages, like Quickbooks, don’t track retention on either the receivable or payable side, companies either don’t track it or use other tools, like Excel, to track these amounts.
- In addition, it helps to track the retention on your books as an asset until the customer pays the balance.
- Usually, the owner holds back money from the general contractor, who in turn holds back money from their subcontractors and so on.
- At the end of the day, there’s really just one reason why a business — any business — fails.
- With retainage, you can also withhold funds from the subcontractor to ensure that their work matches your quality before releasing the funds.
Does retainage change according to the project type?
That means that if you agree on a 10% retainage fee, your progress payments will be deducted that amount. It is only after the successful completion of the construction project occurs that the withheld balance is bookkeeping paid to contractors and subcontractors. But just because retention is commonplace doesn’t mean it’s always used fairly.
The Dark Side of Retainage: Why Contractors Grumble
During my talk at CFMA Annual 2025, one attendee mentioned they’ve been waiting on a retainage payment since 2022. Though indirectly, construction project management software can help secure your retainage fee. With detailed and up-to-date contract records stored in one place, you have all the necessary information at hand when it comes to filing a lien or bond claim.
Mechanics Liens As a GC Security Measure in Private Construction Projects
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AccountingTools
If your company is using QuickBooks, read up on recording retention receivable in QuickBooks. “When tracking and collecting accounts receivable, we only want to track those that are collectible. Therefore, they must be kept separate from the uncollectible,” Peterson says. People throw around “retainage” and “retention” like they’re the same thing – and most of the time, they are. But there’s a sneaky little distinction that can matter when money’s on the line. As with so many things across the industry, it all comes back to the contract between the owner and general contractor.
Business Principles
Hence, in most cases, the percentage of the amount varies according to the type of project. When retention is subtracted from the invoice, the amount held is recorded as retention receivable. A conditional (default) bond, is when the surety agrees to pay only when there is a breach of contract or other forms of default, making the surety partly responsible for the performance of the contractor or sub. A conditional retention bond requires a heightened level of proof in order to recover on a claim against the bond. Perhaps you can offer a letter of credit or a surety bond to substitute for the retainage requirement.
Nevertheless, the bottom line here is that Retainage can almost always be included in a lien claim…long before the withheld funds are ever actually due. Thus, it’s easy to see how retainage only makes a bad problem worse for many contractors. Staying on top of retainage is part of maintaining a financially healthy construction business. Retainage terms typically allow payers to hold retainage until the end of the project or until a certain percentage of work is finished. Though a typical retainage percentage is 5-10%, this can vary depending on the project and jurisdiction.
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- This article discusses construction retainage, where it comes from, whether it is still relevant in today’s construction industry or maybe there are better ways to secure both owner’s & contractors’ interests.
- While retainage has advantages, the practice may cause additional burdens on the contractor.
- For example, in the American Institute of Architects (AIA) A401 — the standard contract between a contractor and subcontractor — the retainage amount is blank.
- Explore valuable insights into the latest construction trends and project management best practices, and learn how Procore’s platform can optimize your projects.
- With full payment being withheld until the required standards are met, general contractors can mitigate the risk of poor workmanship or defects that lead to costly repairs or legal disputes.
It’s common for retainage to get withheld from contractors on construction jobs all across the world. But, did you realize that it’s sometimes required to send specific notices and legal documents to maintain your rights to claim retainage? Otherwise, the general contractors, owners, developers, or lenders may just sit on the retainage and wait for subcontractors to take action.