Modelling Advance Payments & Retentions In Construction Contracts

what is retention in construction accounting

A private members bill was introduced to the House of Commons by Peter Aldous on 9 January 2018 seeking to introduce protection to retention money but did not proceed through parliament. For example, in Illinois, private projects have a 10% maximum retainage amount, but it drops to 5% when half of the project has been completed. But this doesn’t apply to residential projects of 12 or fewer units.

Good financial management software for projects will have line items to enter for retainage to help construction businesses manage receivables and payables. And with the uniqueness of the construction industry, contractors need management software that best optimizes their administrative and accounting work. From digital invoicing to invoice approvals, and lien management to paying retainage, cloud-based financial management software can help construction businesses of all sizes. It can automate invoicing, with specific line items for retainage in both directions . Progress billings include a technique called the schedule of values, which outlines the different costs or values for each of the project’s tasks. A schedule of values is common in the construction industry whereby owners and contractors work together to determine how much will be spent on each phase of the project.

What Are Retention Payments in Construction?

It’s pretty common for the parties to include some retention agreement within their construction contract. In fact, most of the popular form contractors contain retainage agreement provisions. Dawn Killough is a construction writer with over 20 years of experience with construction payments, from the perspectives of subcontractors and general contractors. Dawn has held roles such as a staff accountant, green building advisor, project assistant, and contract administrator. Her work for general contractors, design firms, and subcontractors has even led to the publication of blogs on several construction tech websites and her book, Green Building Design 101. DebitCreditBank or cash$90,000Retention receivable$90,000When ABC completes the project, they will invoice the customer for $10,000 in retention.

In a trust account, retainage is withheld by the owner, placed in a trust account with a trustee that has a fiduciary relationship to the contractor. The trustee can invest the retainage at the contractor’s direction, thereby allowing the contractor to “use” the retained funds that normally would construction bookkeeping sit idle in an escrow account. Even when getting paid on a regular schedule, the contractor still has to wait to be paid in full. The time frame for retainage release varies by state, and even then, there can be debate about whether a job is completed to the satisfaction of the parties.

Contractor ASC 606 Reporting: Where are we now?

Retainage refers to withholding of the money slated for a construction project until it is confirmed that contractors have satisfied the terms of the contract or have completed the job as per the requirements. The practice was created to protect the client’s investment in case of the contractor’s inability to work on the project. In some projects, a specific amount or percentage might be withheld by the owner until the completion of the project. The retention amount or retainage can be 5% to 10% of the total project or for each progress value.

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