For projects with extended timelines, it’s quite possible that the mechanic’s lien deadline may expire long before the retainage is actually due. Retained money is usually withheld from all parties until the very, very end of the project. On average, that means that general contractors wait about 99 days to get withheld money, and subcontractors (who likely finish before the general contractor) wait an average of 167 days.
Using QuickBooks to track retainage deadlines
- The sector’s boom led to hundreds of new construction companies entering the market to capitalize on the opportunity.
- Retentions are usually due 30 days following the completion of a project and acceptance by the customer.
- To make matters more complicated, every state has a different definition of what constitutes the satisfactory completion of a job.
- A mechanics lien is the most powerful tool in a contractor’s collection toolkit, but it has an expiration date.
- This financial tool is a guarantee from a bank that a contractor’s obligations will be met.
Under GAAP, retainage payable is recognized as a current liability on the balance sheet. Construction companies must record retainage held from subcontractors separately, reflecting the amount that will be due once the subcontractor’s work is satisfactorily completed. A thorough assessment of project risks is crucial when determining the terms of retainage. Construction businesses must evaluate the complexity of the job, the reliability of the parties involved, and the likelihood of on-time project completion. Establishing variable retainage rates can offer flexibility, enabling the adjustment of withheld funds in accordance with project progression and risk assessment. Second, it’s abused by holding money too long or withholding high percentages.
Recording and Tracking Retainage Receivables
- The specifics of retainage are usually detailed in the construction contract between the project owner and the contractor.
- Some states have prompt payment laws that regulate how much can be withheld from contractors, while other states don’t.
- In either case, any holdback is normally due and payable only upon project completion.
- In construction accounting, the management of retainage receivable is crucial as it directly impacts a firm’s cash flow and reflects their financial health during a project.
- Careful balance between withholding retainage and maintaining a positive business relationship is important.
When you submit an invoice or pay application, you subtract retainage retainage accounting from the total currently due. At the end of the project, or whenever it becomes due under your contract, you will bill for retainage in its own invoice. Maintain ongoing communication with stakeholders throughout the project.
How is retainage accounted for in construction industry financial statements?
In other states, the normal practice is that no more can be withheld after 50% of the project has been completed. Consult the law in the state where your projects are located and confirm that the retainage in place on your project is allowable according to the law. You can view the laws and rules for your state by reviewing our 50-State Retainage Law Guide & FAQ Pages. In Iowa, a contractor may request the early release of retainage on a public project. Does the state regulate how much money can be withheld from a subcontractor? So, each of your ten scheduled payments will be reduced by $3,000 for a combined retainage of $30,000 and a total of $270,000 paid over the course of the job.
This account will typically be listed under current assets on the balance sheet. Proper documentation and timely recognition of these funds are essential payroll for precise financial statements. Effective management of retainage receivable is crucial for construction businesses to maintain healthy cash flow and accurate financial reporting. This section explores how contractors should handle this component in their accounting practices. While retainage is designed to protect project owners, it can sometimes be misused, leading to unfair treatment of contractors and subcontractors. Common abuses include withholding excessive amounts of money, delaying the release of retained funds, or using retainage as a means to exert undue control over contractors.
Retainage: How It Works and Best Practices
Either way, Food Truck Accounting if you don’t receive your retainage payment on time, you’re likely to face serious cash flow issues. To help avoid this, you should create a basic cash flow project that includes dates for both receiving and paying retainage. But just because retainage doesn’t come into play until the end of a construction job doesn’t mean you don’t have to think about it before then.
