Retainage Accounting for Contractors

Retainage is a portion of each progress payment – commonly 5 to 10 percent – withheld by the owner or general contractor until the job is substantially complete. Accounted for properly it sits as a separate receivable. Accounted for poorly it disappears into aged AR and quietly becomes the largest uncollected balance on your books.

Key Takeaways

Retainage is earned revenue you have not been paid yet. It belongs on the balance sheet, tracked separately from ordinary receivables.
If retainage sits inside regular AR, your aging report is misleading and your collections process ignores it.
You are usually withholding retainage from your own subs at the same time – that is retainage payable, and it is not your cash.
Retainage is a structural cash flow drag on growing contractors: the faster you grow, the more of your margin is held back.
Many states regulate retainage on public works, including caps and release timing.

How Should Retainage Be Recorded?

Retainage receivable should be a separate account from trade accounts receivable. When you invoice a progress billing with retainage withheld, the full earned amount is recorded as revenue; the withheld portion is posted to retainage receivable rather than to standard AR.

The reason is practical. Ordinary AR is collectible in 30 days and belongs in your collections cycle. Retainage may not be collectible for a year, is contingent on closeout, and requires entirely different follow-up. Blending them makes both numbers useless.

What About Retainage You Withhold From Subs?

The mirror image. When you withhold retainage from a subcontractor payment, the full amount of their work is recorded as cost, and the withheld portion posts to retainage payable – a liability.

This one catches contractors out on cash flow. That withheld money is sitting in your operating account and does not belong to you. Contractors who treat it as available cash discover the problem at closeout, when several subs release at once.

Why Does Retainage Hurt Cash Flow So Much?

Because it is withheld from the margin, not from the cost. You have already paid for the labor and materials. The 5 to 10 percent held back is disproportionately the profit on the job.

Run several jobs at once and the effect compounds: a growing contractor can be profitable on paper and short of cash, with the difference sitting in retainage across a dozen closeouts. This is one of the most common reasons a busy construction business feels broke.

When Does Retainage Get Released?

Typically at substantial completion, often after punch list closeout, lien releases, and final documentation. On public works, many states set statutory limits on how much may be withheld and how quickly it must be released after acceptance. In Washington, public works retainage is governed by state law and administered alongside the prevailing wage affidavit process – which means release depends on your certified payroll paperwork being complete.

Confirm the specific statute and contract terms for each job. Requirements vary by state, by public versus private work, and by contract.

What We Do

Set up separate retainage receivable and retainage payable accounts
Record progress billings so retainage splits out automatically
Track retainage by job with expected release dates
Produce a retainage aging report separate from standard AR aging
Flag retainage that is past its expected release and not being chased
Reconcile retainage balances at closeout

Frequently Asked Questions About Retainage

What is retainage in construction?

Retainage is a percentage of each progress payment, commonly 5 to 10 percent, withheld by the owner or general contractor until the project is substantially complete. It exists to give the paying party assurance that the work will be finished and corrected.

Is retainage an asset or revenue?

Both, at different points. The work is recognized as revenue when earned, and the withheld portion is recorded as retainage receivable, a balance sheet asset. It should be tracked separately from ordinary trade receivables because the collection timing and process are entirely different.

How do I record retainage withheld from a subcontractor?

Record the subcontractor’s full earned amount as cost, and post the withheld portion to a retainage payable liability account. The cash remains in your account but is owed to the sub on release, so it should not be treated as available working capital.

Why does retainage cause cash flow problems?

Because it is withheld disproportionately from profit rather than cost. Labor and materials are already paid, so the withheld 5 to 10 percent is largely the margin. Across several concurrent jobs, a profitable contractor can be genuinely short of cash.

How long can retainage be held?

It depends on the contract and, for public works, on state law. Many states cap the percentage that may be withheld and set deadlines for release after acceptance. Private contracts vary widely, so the contract terms govern.

Know What You Are Owed

Most contractors underestimate their outstanding retainage because it is not on a report anywhere. Once it is tracked separately with expected release dates, it becomes collectible money instead of a vague sense that something is owed.