Retainage in Construction: What It Is and How to Track It in Your Books
- Retainage is a portion of each progress payment, commonly 5 to 10 percent, held back until the job is finished and accepted.
- If you book the full invoice into regular accounts receivable, your income and AR look larger than what you can actually collect this month.
- Track money owed to you in a separate Retainage Receivable account, and money you hold from subs in a Retainage Payable account, so neither hides in your normal AR and AP.
- Retainage is mostly a cash flow problem, not a profit problem. A job can be profitable on paper while 5 to 10 percent of it sits locked up for months after completion.
What Retainage Actually Is
Retainage, sometimes called retention, is a percentage of each progress payment that the party paying you holds back until the work is complete and accepted. It is a standard tool in construction contracts, meant to give the owner or general contractor leverage to make sure the job gets finished correctly before the last dollars are released.
The amount is usually 5 to 10 percent, and in many states the maximum percentage and the release timing are set by law, especially on public projects. The exact figure and the rules for when it has to be released live in your contract and your state statutes, not in your accounting software, so the first step is always knowing what your contract says.
Retainage runs in both directions. When you are the contractor billing an owner or a general contractor, they hold retainage from you. When you bring on subcontractors, you typically hold retainage from them on the same terms. A clean set of books has to track both sides, because the money you are owed and the money you owe behave very differently.
Why Retainage Breaks Generic Bookkeeping
Here is the trap. You send a progress invoice for 50,000 dollars, the contract holds 10 percent retainage, so the customer will pay you 45,000 now and keep 5,000 until the end. A generic bookkeeping setup records the whole 50,000 into accounts receivable as if it is all collectible.
Now your AR aging shows 5,000 that is not actually late and is not actually due. You or your office manager start chasing a payment that the contract says nobody owes yet. Multiply that across every open job and your AR report becomes noise. You cannot tell which balances are genuinely overdue and which are retainage sitting exactly where the contract put it.
The opposite mistake is just as common: only recording the 45,000 you got paid and never tracking the 5,000 at all. Now the money you are genuinely owed at the end of the job is invisible. Jobs close, retainage never gets billed or collected, and it quietly walks out the door. On a handful of jobs a year, that is real profit you earned and never received.
Tracking Retainage Receivable: Money Owed to You
The fix is to give retainage its own home on the balance sheet. Create a Retainage Receivable account, separate from your regular accounts receivable. When you bill a progress invoice, the retained portion gets split out of normal AR and into Retainage Receivable.
That single move keeps two reports honest at once. Your standard AR aging now only shows balances that are actually due, so collections calls go to the right places. And your Retainage Receivable balance becomes a running list of everything you are owed at the end of your open jobs, so nothing gets forgotten when a project wraps.
Whether the retained amount counts as income now or later depends on the accounting method your books are kept on, and the tax treatment is a question for your CPA or tax preparer, not something to guess at. The bookkeeping job is to make sure the billed revenue and the retained portion are both recorded and visible, so whatever method applies, the numbers are there and they are right.
Tracking Retainage Payable: Money You Hold From Subs
The other side is the retainage you hold back from your subcontractors. When a sub bills you, you pay them the contract percentage now and hold the rest, on the same logic the owner is using on you.
That held-back amount is a liability. You owe it, but not yet. It belongs in a Retainage Payable account, separate from your regular accounts payable, for the same reason as the receivable side: so your normal AP only shows what is actually due, and the retained amounts are tracked in one place until release.
Getting this right also protects your relationships and your cash. You do not want to accidentally pay a sub their full retainage early because it was mixed into normal AP, and you do not want to forget to release it when the job is done and the sub is calling. A clean Retainage Payable balance is the list of exactly who you still owe and how much, on every job.
Retainage Is a Cash Flow Problem First
The reason retainage matters so much to contractors is cash, not profit. A job can show a healthy margin on the P&L while 5 to 10 percent of every dollar you billed is locked up and unavailable, sometimes for months after the work is finished, while the project is closed out and final acceptance grinds through.
Stack a few jobs together and the numbers get serious. If you are carrying 5 to 10 percent across several hundred thousand dollars of completed and in-progress work, that is a large amount of your own money you cannot touch, even though the books say you earned it. This is a big part of why profitable contractors still run short on cash.
The defense is visibility. A simple retainage aging, showing what is held on each job, when the contract allows release, and whether you have billed for it, turns retainage from a surprise into a schedule. You can plan around it, push for release on the jobs that qualify, and stop treating the eventual retainage check as a bonus instead of money you already earned.
How a Trade Bookkeeper Handles Retainage
Retainage is exactly the kind of thing that generic bookkeeping misses and trade-native bookkeeping is built for. The setup is not complicated, but it has to be deliberate and it has to be maintained every month.
Working inside your QuickBooks Online file, we set up the separate Retainage Receivable and Retainage Payable accounts, split the retained portion out of each progress invoice and each sub payment, and keep a running aging of what is held in and held out on every open job. When a job qualifies for release, it shows up instead of getting forgotten.
The result is an AR report you can trust for collections, a Retainage Receivable balance that makes sure you actually get paid the last slice of every job, and a clear picture of how much of your cash is tied up in retention at any moment. If retainage is currently buried in your regular AR and AP, or not tracked at all, head to the get-started page and tell us where your books stand.
FAQ
Is retainage considered income?
From a bookkeeping standpoint, retainage is part of the revenue you have billed on a job, so it should be recorded and tracked rather than ignored. Whether it is recognized as income now or when the job completes depends on the accounting method your books are kept on, and the tax treatment is a question for your CPA or tax preparer. The bookkeeping priority is to record the full billed amount and split the retained portion into a separate Retainage Receivable account so it is visible and never lost, whatever method applies.
How much retainage is normal in construction?
Retainage is commonly 5 to 10 percent of each progress payment. The exact percentage, and the rules for when it has to be released, are set by your contract and, especially on public projects, by state law. Several states cap the maximum retainage percentage and require timely release. Always check the contract and the applicable statute for the specific job, because the number is not standardized across every project or state.
Where does retainage go on the balance sheet?
Retainage you are owed sits as an asset, in a Retainage Receivable account kept separate from regular accounts receivable. Retainage you hold back from subcontractors sits as a liability, in a Retainage Payable account kept separate from regular accounts payable. Keeping both out of your normal AR and AP is what keeps those reports accurate, so your aging only shows balances that are actually due.
Can you track retainage in QuickBooks Online?
Yes. QuickBooks Online can track retainage cleanly once the right accounts and invoice items are set up so the retained portion splits out of normal AR and AP automatically. This is part of what we handle inside your QBO file: we configure the Retainage Receivable and Retainage Payable accounts, split each progress invoice and sub payment, and keep a running aging of held amounts so releases are not missed. Head to the get-started page to have it set up correctly.
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