Retainage is the part of each progress payment that the customer holds back until the job, or a set stage of it, is finished. It is earned money that has not been paid yet. In your books it belongs in its own account, retainage receivable, so it does not sit in regular accounts receivable looking like an overdue invoice.
If you hold retainage from your own subcontractors, the same idea runs the other way: the amount you held back is a liability, retainage payable, until you release it.
Why retainage needs its own account
When a full progress bill is entered as one receivable, the customer pays the bill less the retainage, and the leftover balance stays open. A month later the aging report shows it as past due. Do that across several jobs and the A/R report fills with balances that are not late at all, while the invoices that really are late get lost among them.
Separating retainage keeps the A/R aging honest and gives you a clean list of what is due at closeout on each job. Our guide to reading A/R and A/P aging reports covers why that matters for cash planning.
Recording retainage you are owed
Here is a hypothetical example, not a Shea Business Solutions client result. A contract withholds 5 percent of each progress payment, and you bill $40,000 for work completed this month.
- Revenue for the work: $40,000.
- Due now (accounts receivable): $38,000.
- Held back (retainage receivable): $2,000.
In QuickBooks Online, one common way to record this is a progress invoice for the full amount with a negative line for the retainage, where that line's item posts to a retainage receivable asset account. The invoice total then matches what the customer will pay now, and the $2,000 builds up in the retainage account job by job.
When the retainage is released, invoice it to the same customer and job using the same retainage item as a positive line. That moves the balance out of retainage receivable and into regular A/R, where the payment is applied as usual.
Is retainage income now or later?
It depends on your accounting method. Under accrual accounting the work has been performed, so the full $40,000 is revenue in the period you billed it, and the $2,000 is an asset you are waiting to collect. Under cash basis, income is recorded when the money arrives, so the retainage shows up when it is paid. Our explainer on cash basis vs. accrual covers the difference. How retainage is treated for income tax is a question for your tax preparer, since it can differ from how you keep the books.
Recording retainage you hold from subcontractors
Say a sub bills you $10,000 and your subcontract lets you hold 5 percent. Enter the bill for the full $10,000 to the job so the job cost is complete, hold $500 in a retainage payable liability account, and pay the sub $9,500. When the subcontract terms are met, pay the $500 out of that liability.
Keep the full cost on the job. If only the amount paid is recorded, the job looks more profitable than it is until the retainage goes out. Our guide to job costing for contractors explains why every cost needs to land on its job.
Florida public projects
For construction contracts with Florida public entities, section 255.078 of the Florida Statutes lets the public entity withhold no more than 5 percent of each progress payment as retainage, with some exceptions listed in the statute. Private contracts set retainage in the contract itself. Read the retainage clause on each job, set up your books to match it, and take legal questions about the clause to an attorney.
A monthly retainage review
- Confirm the retainage receivable balance on each job matches the total withheld on its progress bills.
- Confirm the retainage payable balance on each subcontract matches what you held back.
- List jobs nearing completion and the closeout paperwork each contract requires before release.
- Invoice released retainage promptly, to the right job.
- Check A/R aging for old partial balances that are really unrecorded retainage.
Retainage is easy to lose track of on long jobs. A balance held for a year can be forgotten at closeout and never billed.
When retainage is already a mess
A common starting point is an A/R report full of small leftover balances from progress bills, with no record of which are retainage and which are short payments. Sorting that out means matching each balance to the contract and payment history, then moving the retainage to its own account. That kind of rebuild is part of our QuickBooks cleanup work.
For contractors who want retainage, job costing and progress billing kept straight every month, see our construction bookkeeping service in Orlando.