Retainage is the portion of a contract payment that a project owner holds back until the work is complete. On a $100,000 contract with 10% retainage, you receive $90,000 through your progress billings and the final $10,000 only after the project meets certain completion milestones.

The practice exists to protect project owners and is standard in construction work. It gives them leverage if punch list items aren’t finished or if defects show up after substantial completion. Most commercial projects include retainage terms, and general contractors typically pass similar terms down to their subcontractors.

Typical retainage rates run between 5% and 10% of each progress payment. Some contracts reduce retainage to 5% after 50% completion. Others hold the full percentage until final acceptance. Read your contracts carefully because the terms vary by project and customer.

For accounting purposes, retainage needs its own asset account on your balance sheet. When you invoice a customer $20,000 with 10% retainage, you’re really creating two receivables: $18,000 in regular accounts receivable that you expect to collect soon, and $2,000 in retainage receivable that you won’t see until the job is done.

Setting this up in QuickBooks means creating a Retainage Receivable account under current assets. Each progress invoice gets split accordingly. Your regular AR ages normally. Your retainage receivable sits there until release conditions are met.

Don’t skip this step. If all your billings hit regular accounts receivable, your aging reports become meaningless. You’ll show $50,000 in receivables over 90 days when really $45,000 of that is retainage that isn’t even due yet. You’ll waste time chasing payments that customers aren’t obligated to make, and your financial picture looks worse than it actually is.

When retainage gets released depends on your contract. Some release at substantial completion. Others wait for final completion and inspection. Government contracts often have specific milestones and paperwork requirements. Track the release date for each project so you know when to follow up.

Cash flow planning has to account for retainage. You’re paying for materials and labor today, but 5-10% of your revenue won’t arrive for months. On a large project, that gap adds up fast. Contractors who don’t plan for this can end up cash-strapped even on profitable jobs.

If you’re a subcontractor, you’re often dealing with retainage from both directions. The GC holds back on your payments, and you might need to hold back on any subs working under you. Your books need to track both what’s owed to you and what you owe others.

The key is treating retainage as real money that’s coming, just on a delayed timeline. Proper tracking means you know your true position on every project and can plan accordingly. Many Macomb, MI bookkeepers don’t understand construction-specific accounting, so make sure whoever handles your books knows how retainage works and sets up your system to track it correctly from the start.