Retainage definition

Remember, this comes into play because construction contracts are usually long-term and often have delayed payments. Contractors aren’t necessarily able to complete, bill and collect on a contract in the same month. Construction retainage is the final amount of payment kept, by the customer, to ensure satisfactory completion of a project. In both residential and commercial construction, construction retainage is also referred to retention money. Although it is extremely common to the construction world, you can use this method of quality control in other places.

• It ensures businesses have the cash flow to cover expenses, fixed assets, and liabilities.
• If you can’t afford software with this capability, do what you can to record retention receivable and payable with each transaction.
• They also proposed that retentions should only apply to permanent works, as temporary works are unlikely to lead to defects.
• It is argued that retainage can be abused and can cause disputes and delays in payment when the contractor and the owner have differing views on the project’s completion.
• By tagging every transaction with information from the job cost structure, contractors are able to see a whole new dimension to their costs.
• If the contract allows it, the project owner could hold money even after a project is completed.

Whether the industry starts using alternatives to cash retentions, or even abolishes cash retentions, remains to be seen. However, the use of retentions is not universal across the construction sector as a whole, nor does it need to be. There are already sub-sectors within the construction industry that do not use retentions. For example, cash retentions are not typically used at all in the lift industry.

Retainage in Construction Accounting

It’s designed specially to help contractors track each job and how it affects the company as a whole. While it draws on all the same basic principles of general accounting, it also has several important and distinct features. If a contractor defaults on a project, subcontractors can still get paid by the owner from the retainage.

• “When tracking and collecting accounts receivable, we only want to track those that are collectible.
• Some states have set limitations on how much can be withheld, and that can vary depending on whether it’s a public project or a private project.
• 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.
• There, managers might treat each store, plant, product line, or the entire business as a “profit center.” For most industries, these are stable and predictable.
• Many of its sub-contractors lost large sums of money as £250 million in unpaid retention was lost when the business went into liquidation.

In fact, while many U.S. small businesses prefer cash accounting for its simplicity and flexibility, only some contractors qualify. According to the IRS, only construction businesses with less than a set average annual revenue can use the cash method for tax purposes. If a business’ sales exceed that amount, they’ll have to use another method for tax purposes. In that case, they may decide simply to use another method for their own books as well.

Special Considerations: Factoring in Cost Changes

Ideally, you’d want the bond premium to be less than the retainage would have been in order for this to make the most business sense. Many construction businesses often lay out the full costs and expenses of projects up front, then hope to get paid along the way. Retainage, also referred to as a “hold back,” helps the owner ensure a contractor sufficiently completes the project, and that the work meets with their approval and terms of the contract. It also provides a financial incentive for the contractor to see the project through to its successful finish.

• A retention is money withheld by one party in a contract to act as security against incomplete or defective works.
• If you want to find out more about how mechanics lien rights can help your company, get in touch with us, or just go forward to file your lien online now.
• Retainage is less likely to be imposed when the client needs to have a project completed within an unusually short period of time.
• Retention can be a powerful tool when organized and managed correctly.
• Within those parameters, there can be even more nuance within a state.
• It is essential, when recording retention, to ensure that the amount of retention held can be easily identified and tracked.

ASC 606 impacts both public and private entities, and it includes additional disclosure requirements for both, however the disclosures for public entities are more robust. Progress billings are invoices requesting payment for work completed to date. Progress construction bookkeeping billings are prepared and submitted for payment at different stages in the process of a major project. When analyzing and determining aggregate performance obligations, it is important to consider contracts individually, or at the contract level.