Retainage is money you've already earned. The fact that it sits on someone else's books for months doesn't change that — but how you track it on yours absolutely should.
Here's what retainage actually is: on most construction contracts, the client withholds a percentage of each progress billing — typically 5% to 10% — until the job is substantially complete or passes final inspection. You've done the work, you've billed for it, but you don't get to collect that slice of cash yet.
The correct way to handle it: When you bill a job with retainage, the retained portion should move out of regular Accounts Receivable and into a separate Retainage Receivable account (an Other Current Asset). Revenue is still recognized in full as it's earned — retainage isn't a revenue question, it's a collectibility question. The separate account is what lets you see, at a glance, how much of your "money owed to you" is actually collectible now versus tied up until closeout.
If you're the one holding retainage on subcontractors, the same logic runs the other direction: retainage withheld from a sub's invoice is a liability — Retainage Payable — not extra job profit. You still owe that money; you're just holding it as leverage until the sub's portion of the work is accepted.
What goes wrong when retainage isn't tracked this way: Lump it into regular AR and your cash flow projections lie to you. You might think $40,000 is coming in next week when half of it is retainage that isn't due until the job closes out months from now. Write it off or forget to track it at all, and you're simply leaving earned money on the table — collected retainage is one of the most common "found money" cleanups we do for contractor clients. And if retainage held from subs isn't recorded as a liability, your job costs get distorted and it's easy to accidentally pay a sub the full amount, including the piece you were supposed to hold back.
Bottom line: retainage isn't lost revenue and it isn't free cash — it's earned income with a delayed collection date, and it deserves its own line on the books.
Not sure your retainage is being tracked correctly? Send us a message and we'll take a look.
Have a question about your own books? Call 919-268-6490 or send a message.
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