What is retainage?

Definition

Retainage is the percent of each progress bill a customer is allowed to withhold until the job is accepted. On the books, this is a current asset, not cash in the till and not a late invoice.

A remodeler who bills a stage still cannot collect the held piece until punch list, inspection, or final acceptance is done. The held amount is money the customer will owe, just not yet.

It sits beside ordinary accounts receivable because the current bill is due now and the holdback is not. The two pieces should not share one aging bucket.

Stay with the holdback when you read it. Progress invoices, earned-revenue math, and later collections each belong on other pages.

Where it shows up

Balance Sheet: Located in the current assets section.

P&L: Related to nothing extra; the revenue was already earned or billed.

Cash flow: Decreases in this account, reported cash from operating activities increases.

See also: Progress Billing · Accounts Receivable · Contract

When you look at your Balance Sheet, retainage sits in current assets, next to the receivable that is due now. When the figure is high, a lot of billed work is waiting on acceptance; when it is low, jobs are being closed and the holdback is being released.

The Income Statement does not list this holdback as a line. Related revenue was already earned or billed; parking the slice does not record a second sale.

On the Statement of Cash Flows, cash does not move for the held piece. Cash moves when the owner releases it and the remodeler collects.

Liquidity can look tighter than the billed total suggests. The 10 percent sitting as retainage is not spendable until it is released.

How it works

A typical path starts with a staged invoice on a job. The contract says a percent of each bill is held until the work is accepted.

The remodeler invoices the full stage amount. The currently due piece goes to accounts receivable, and the held piece goes to retainage receivable.

Stay on that split. Do not drop the held piece into the same aging as amounts the customer can pay this week.

The holdback stays until punch list, inspection, or written acceptance. Then the remodeler bills the retained slice, or reclasses it into ordinary accounts receivable so it can be collected.

If the owner never signs off, the held amount can sit for months after the last progress bill. It is still a receivable, just not one that is due under the original invoice terms.

Tracking the held piece by job keeps the total honest. A lump in one account with no job list is hard to collect later.

The supporting file is the contract clause and the invoice that shows the withheld percent. Those two documents are what prove the $2,000, not a collections call.

Example

North Pine Kitchens, a neighborhood remodeler, sends a $20,000 progress invoice on a kitchen job. The contract holds back 10 percent until the owner accepts the work, so $2,000 is retainage and $18,000 is due now.

The $20,000 bill is recorded as accounts receivable. The held slice is then pulled into its own receivable:

Debit: Retainage receivable $2,000

Credit: Accounts receivable $2,000

Retainage receivable goes up by the $2,000 the owner will not pay until acceptance. Ordinary accounts receivable is left at the $18,000 that is due now.

Cash has not moved. The Income Statement does not get a second $20,000 of revenue from this split; the holdback is a timing split of the same bill.

When the owner later accepts the job, the $2,000 moves back into ordinary accounts receivable, or it is billed on a retainage invoice. Cash then rises when that last slice collects.

Common mix-ups

Retainage is not ordinary accounts receivable. AR is the currently due piece of the bill; this asset is the contractual holdback that is not due yet.

Retainage is not a customer deposit. A deposit is money taken up front against future work; this amount is a slice held back from a bill already sent.

Retainage is not a slow-paying invoice. Collections follow unpaid amounts that are already due; this page is money the contract says the owner may wait to pay.

Related terms

• Progress Billing: Invoicing a customer in stages as work is completed.
• Accounts Receivable: Money customers owe the business for goods or services already delivered.
• Contract: The binding agreement that sets what will be delivered and what will be paid.
• Percentage Of Completion: Recognizing revenue in proportion to how much of a job is finished.
• Work In Progress Schedule: The job-by-job schedule comparing cost incurred, revenue earned, and amounts billed.
• Customer Deposits: Money taken up front against a specific future order or job.
• Collections: The process of following up on unpaid customer invoices.
• Change Order: A signed amendment adding or altering scope and price on a job.