Construction businesses are especially vulnerable to cash flow issues when retainage retainage in construction is involved on most of their projects. As such, it is in your best interest to establish practices where cash flow is carefully tracked and managed. One of the most important legal stipulations for private projects that you should be aware of is how you can use a mechanic’s lien. This allows you to make a lien claim on their property if they fail to provide payment to the general contractor, subcontractor, or both. Make sure you know your lien rights so that you can fight for the money you’re owed if necessary.
Lien Waiver vs. Lien Release: What’s the Difference?
And in order for retainage to be enforced, it should be part of the contract. This post covers the certified payroll requirements for contractors working on federal construction projects. QuickBooks includes a standard Chart of Accounts that works for many small retail businesses, which includes an Accounts Receivable (A/R) account. Contractors need to take some additional steps to set up a QB account to record and track retainage payments. Retainage accounting, while beneficial, presents several challenges for contractors and construction company owners.
How to record & track retainage in QuickBooks
- There are a lot of things that are different about construction accounting, but retainage may be one of the most unique.
- By holding back a portion of payments, it ensures that contractors complete their work according to agreed terms.
- Like receivables, it must be tracked meticulously to avoid disputes, improve relationships with subcontractors, and ensure accurate financial records.
- It’s then the hiring party’s responsibility to deduct the retainage percentage and hold it in a separate account.
- Key benefits include improved cash flow for contractors and reduced financial pressures.
- The retention amount acts as a financial reserve, ensuring that contractors remain committed to completing the project and addressing any issues that arise.
- Underbilling occurs when a contractor does not bill for all the labor and materials delivered in a billing cycle.
But actually collecting retention payments — and making sure they don’t tank your cash flow — is an entirely different ballgame. Depending on the phase of a construction project you typically work in, you may end up waiting for retainage to be collectible for a year or longer, well after your company’s work on the job was finished. Retainage percentage refers to the portion withheld from contractor payments during a project.
- Nevertheless, the bottom line here is that Retainage can almost always be included in a lien claim…long before the withheld funds are ever actually due.
- It’s crucial for both parties to clearly understand these stipulations to avoid disputes and ensure smooth project execution.
- This financial reserve serves as a guarantee that issues, if any, will be resolved promptly to meet expectations.
- The last thing you want is to be facing a fine because of accounting negligence, or be on the hook for a large sum if there’s a breach in contract between a contractor and home buyer.
- Retainage, also called “retention,” is an amount of money “held back” from a contractor or subcontractor during the term of a construction project.
- It’s important to note that mechanic’s liens are often handled differently in public projects vs. private projects.
Construction Contracts: What Does “Workmanlike Manner” Mean?
Now that we’ve explored where this practice comes from and why it exists, let’s dig into some of the rules of the game, and how it may impact your project and your pocketbook. I am reviewing a schedule of value for a project that does not have a % of the project total assigned to project closeout. I have heard the industry standard is 10% of the overall project is given to project closeout. Yancy Lassiter, a CPA with a degree from the University of Texas, has 12 years under his belt as a Controller and CFO in the construction industry; he’s your go-to guy for finance in the building industry.
For example, let’s say a $350,000 project contract calls for 10 payments throughout the timeline. These payments are subject to the builder meeting certain obligations, at which point the payment received would be recognized as revenue in each installment. For custom home builders, every Law Firm Accounts Receivable Management project is different, which means every accounting cycle can change. The specifics of each job’s retainage, including the rate of holdback and payment schedules, should be clearly detailed in the contract agreement. In both sectors, it is crucial for contractors to understand the stipulations that apply to their specific project type as retainage terms should be explicitly outlined within the contract.
Understanding these advantages helps enhance business operations and financial stability. Often, retainage is released upon project priority or substantial completion. Checking state or local regulations may be beneficial since they sometimes govern retainage practices and limits. The Federal Acquisition Regulation describes rules for federal construction contracts in the United States. According to the ACEC, federal laws put a limit of 10% on retainage and don’t require the full 10% of the contract value to be withheld. Federal projects for the Department of Defense, General Services Administration, and Department of Transportation do not use retainage.
Financial Statement Impact
If you have set up job costing in QuickBooks correctly, you will be able to generate a retainage report for specific projects using the steps below. The Chart of Accounts is the backbone of a contractor’s accounting system, and contains a list of all the accounts income statement used to categorize transactions. These accounts are used to build the Balance Sheet (where Retainage Receivable will be reported) and the Profit and Loss Statement. As the leading provider of construction budgeting software, Buildertrend is committed to helping you stay on top of your bottom line. Buildertrend’s financial tools offer intuitive solutions and integrations – like our QuickBooks integration – to help you work simpler, especially when working with complex accounting rules.