Retainage: how to track money you have earned but cannot spend

Retainage — also called retention — is a percentage of each progress payment withheld by the owner or general contractor until the work is complete and accepted. Five to ten percent is common, and on a long project it accumulates into a significant sum that is fully earned, fully invoiced, and entirely unavailable.

Why it deserves its own account

Buried inside general accounts receivable, retainage makes your receivables look healthier than they are. A receivables aging showing large balances at ninety-plus days looks alarming to a lender, but if most of it is contractual retainage on jobs still in progress, that is a different story — one you can only tell if the two are separated.

The mirror image applies to the retainage you withhold from your own subcontractors. That is cash sitting in your account which is not yours to keep, and treating it as working capital is a common and painful mistake when several jobs close out in the same quarter.

How to record it

• Create a separate asset account for retainage receivable, distinct from trade accounts receivable.
• Create a separate liability account for retainage payable to subcontractors.
• When you invoice a progress billing, split the invoice: the payable-now portion to accounts receivable and the withheld portion to retainage receivable.
• When you receive a sub invoice with retention, post the withheld portion to retainage payable rather than reducing the bill.
• Track each retainage balance by job, with the expected release trigger noted — substantial completion, punch list sign-off, or final acceptance.

One habit that gets retainage released faster

Treat closeout as a scheduled task with a date on it, not as something that happens when the general contractor gets around to it. Two weeks before substantial completion, assemble the package the release depends on: signed lien waivers from you and every sub you held money from, warranty letters, as-builts, operation and maintenance manuals, and final inspection sign-off. Send it as one complete set rather than in pieces. Most delayed retainage we see is not a dispute — it is a missing document sitting in someone else's inbox with nobody chasing it. A short, friendly email every two weeks with a specific ask outperforms a strongly worded one every quarter.

Cash flow planning around it

If you run at ten percent retention on a portfolio of jobs, roughly ten percent of your revenue is permanently in transit — a rolling balance that only converts when jobs close. That is working capital you must finance somewhere, whether from reserves, a line of credit, or supplier terms. Knowing the number lets you plan for it; not knowing it is why profitable contractors run out of cash.

Many states also regulate retainage on public and, in some cases, private projects — capping the withheld percentage, requiring release within a set period after substantial completion, or requiring interest on amounts held. Rules vary considerably by state and by project type, so check your own state's requirements and your contract terms before assuming a withholding is enforceable.

A worked example: 10 percent on a $250,000 job

You take a $250,000 tenant improvement with 10 percent retainage. You bill in five monthly progress applications of $50,000. Each month the general contractor approves the full amount and pays you $45,000, holding $5,000.

By the end of month five you have delivered the whole job and collected $225,000. The remaining $25,000 is earned revenue you cannot spend, and it will not arrive until the project closes out — which depends on punch list, a final inspection, lien waivers, and often the general contractor being paid by the owner first. Ninety days after substantial completion is a normal wait. Six months is not unusual.

Now notice what that $25,000 represents. If your gross margin on the job was 18 percent, your total gross profit was $45,000. The retainage is more than half of everything you earned on the job, sitting in someone else's bank account. See retainage tracking for general contractors is part of every monthly close we run.

Why it belongs on its own line

If retainage sits inside your regular accounts receivable, two things go wrong. Your aging report fills with balances that are not late and never were, so real overdue invoices stop standing out. And your sense of incoming cash is inflated by money nobody intends to send this quarter. A separate retainage receivable account fixes both in about ten minutes of setup.

Retainage you hold from your own subs

If you hold back from subcontractors on the same terms, that is a liability, not extra cash. Tracking it separately keeps you from spending money that is contractually promised, and it makes closeout negotiations straightforward because both sides can see the same number.

Practical steps

1. Read the retainage clause before you sign: the percentage, whether it reduces at substantial completion, and what triggers release.
2. Set up a retainage receivable account and post the held portion there on every application, not at the end.
3. Keep a one-page log per job: billed to date, retained to date, released to date, outstanding.
4. Price it. Money held for six months has a cost — either build it into your bid or negotiate a reduction after 50 percent completion, which many owners will accept if you ask at signing.
5. Chase release on a schedule. Put the closeout date in the calendar and start the paperwork two weeks before, with lien waivers and warranties ready.