Recording & Tracking Retainage Receivable: QuickBooks for Contractors

Clear documentation of retainage transactions aids in managing cash flow. You can improve financial management by accurately reflecting these amounts on financial statements. 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.

Legal Limits

In either case, the place for everyone to start is with the construction contract. We are a subcontractor in Colorado, we entered into a contract for $43K. The contract law firm chart of accounts that was signed states that retainage will be 10%, however…

Integrating Retainage Into Your Accounting Processes

A process that can create challenges for subcontractors throughout the construction process. If you choose to use payment applications fixed assets than they must clearly reflect the correct retainage amount withheld. Paul’s Masonry is a subcontractor working on a project with ABC Contractor as the general contractor. ABC records the transaction as a debit of $50,000 to cost of goods sold, a credit of $45,000 to accounts payable, and a credit of $5,000 to retention payable.

• With a retainage bond, the project owner has an insurance plan against poor performance, and contractors can avoid the financial harm of withheld funds.
• Consider withheld funds as sunk costs as you’re budgeting and bidding.
• Contractors will need to customize their Chart of Accounts in QuickBooks to record construction-specific transactions, like retainage.
• Plus, the process of managing and tracking withheld money is a real pain in the neck for everyone involved.
• Mastering retainage accounting is crucial for enhancing your financial management in the construction industry.

What steps must be taken to ensure compliance with various state construction retainage laws?

If a contractor or subcontractor fails to complete the work as agreed, the owner or general contractor can approach the surety company for compensation. There are two main alternatives owners or general contractors typically request in lieu of holding retainage on a construction contract. Subcontractors and other down-the-chain participants have gripes about retainage – with good reason. Retainage practices are problematic because they cause practical issues and business relationship issues within the already-complicated accounting and payment systems of the construction world.

• If you’re relying on retainage funds to hit your account in order to procure materials or hit payroll, you need to take a step back and rethink how you are budgeting for retainage contracts.
• Internationally, there is a huge cry to abolish retention practices in construction.
• ENR.com and the Construction Financial Management Association (CFMA) recently published some articles suggesting that “cash-strapped public and private owners are…
• If, for example, 30% of work is completed, the developer or GC will only pay 25% of the price.

How do construction companies calculate the appropriate retainage amount during a project?

• Project owners use retainage to enforce accountability, ensuring contractors complete projects to the expected standards.
• Most of these laws were created to regulate and create limitations on the practice, mostly to promote its fair use and to prevent its abuse.
• This percentage aids in securing project completion by retaining funds as a guarantee of performance.
• But using QuickBooks Online (the standard for many subcontractors) isn’t enough as it doesn’t have true retainage management.
• Effective risk management in construction accounting often involves the strategic use of retainage.
• This is because, under most construction contracts, you won’t be able to collect it yet.

Things can easily be forgotten, misremembered, or misunderstood, so keeping written documentation of communications, invoices, and receipts is a must. Substantial completion is when a job has been sufficiently completed to the owner and/or contract specification and the owner can use it for their intended purpose. Substantial completion could have specific items which might need to be met to happen like a permanent certificate of occupancy. Many projects will have a contractor bill retainage upon project completion or “substantial completion”. This type of flow does not work well for many contractors because you are waiting for substantial completion on a job and different trades finish at different times on the same project. Accounting for retainage payables generally means tracking holdback from contractors, subcontractors, and vendors throughout the entire project.

• At first glance, it may appear that retainage belongs in Accounts Receivable.
• As you can see, retainage laws vary significantly from state to state.
• When the project is complete, Paul’s invoices ABC for $5,000 in retention.
• Retainage, a portion of the payment withheld until project completion, requires careful management on the balance sheet and adherence to GAAP.
• Yet, even with all of these potential problems, retention clauses in construction contracts are rarely questioned or even thought about very much, at all.

This promotes trust and collaboration, minimizing disputes and maintaining strong business relationships. Plus, the process of managing and tracking retainage accounting withheld money is a real pain in the neck for everyone involved. Internationally, there is a huge cry to abolish retention practices in construction. In the construction industry, payment mechanisms, such as retainage, are applied differently across public and private projects. This variance impacts how contractors manage receivables, exercise lien rights, and deal with reserve accounts.