What is retainage and how do I record it in my books?
Retainage is a portion of each progress payment that clients withhold until the project is finished. In construction, this is usually 5% to 10% of every invoice. The client holds it as security until you complete the punch list, fix any defects, and close out the job. Once everything is done, they release the retainage as a final payment.
From a bookkeeping perspective, retainage is money you’ve earned but haven’t collected yet. It belongs on your balance sheet as an asset, but you don’t want it mixed in with regular accounts receivable. Those are invoices you expect to collect in 30 days. Retainage might not come in for months, depending on how long the project runs.
Set up a separate account in QuickBooks called Retainage Receivable or Retention Receivable. Make this an Other Current Asset account, not a regular receivable. This gives you a clear view of how much retainage is outstanding across all your projects without cluttering your A/R aging report.
When you invoice for a job, record the full amount you billed. Say you bill $10,000 and the client pays $9,000 while holding back $1,000 as retainage. The $9,000 payment goes against your receivable as usual. The $1,000 gets moved to retainage receivable. Both amounts were invoiced, but only one is collectible right now.
At project completion, when the client releases the retainage, record that payment against the retainage receivable account. The asset goes to zero and your cash goes up.
Tracking retainage by job matters. If you have five projects running and $30,000 in retainage outstanding, you need to know which jobs that money is tied to. When a project closes, you should know exactly what retainage to bill for and collect. Lumping it all together means things slip through the cracks and you leave money on the table.
The most common mistake is forgetting to invoice for retainage when the project ends. You finished the work, moved on to the next job, and never billed for the 10% that was held back. On a $200,000 project, that’s $20,000 you earned but never collected. Skilled trades and construction businesses lose real money this way because there’s no system flagging that the retainage is due.
For cash flow planning, knowing your retainage balance helps you understand what’s actually coming in. If your books show $80,000 in receivables but $25,000 of that is retainage tied to jobs that won’t finish for three months, you’re working with $55,000 in near-term collectible revenue. That distinction matters when you’re deciding whether to take on another project or cover payroll.
Working with small business bookkeepers who understand construction accounting makes this easier. The chart of accounts, the job costing setup, and the retainage tracking all need to work together. When it’s configured right, you can see at a glance what’s owed on each project and what’s waiting on final completion.
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