What Is Retainage in Construction? How It Impacts Contractor Cash Flow
Contractor Pain Point
You invoice $100,000 on a progress billing.
You receive $90,000.
The other $10,000 is held as retainage.
Payroll still runs.
Suppliers still expect payment.
Overhead doesn’t pause.
And now you’re financing the job with your own cash.
Retainage is normal in construction. But the cash strain it creates isn’t caused by retainage itself — it’s caused by how it’s tracked, forecasted, and reconciled.
When retainage isn’t clearly separated, reconciled monthly, and tied to job-level reporting, contractors lose visibility fast.
If you’re unsure whether retainage is being tracked correctly by job and customer, start with the Job Costing Health Report. It helps identify where revenue, billing, and job-level reporting are breaking down before cash flow feels tight.
And if your month-end process doesn’t include a retainage reconciliation step, the Monthly Close Checklist for Contractors (The Control System Most Shops Skip) is where most shops realize the gap.
Why Retainage Exists (And Why It Becomes a Problem)
Retainage is a percentage of each progress payment withheld until substantial or final completion.
Typical structure:
5%–10% withheld on each invoice
Released at substantial completion or after punch list
Sometimes split (half at substantial, half at final)
On paper, it protects the owner.
In practice, it:
Delays cash you’ve already earned
Skews AR balances
Distorts job profitability if not tracked correctly
Creates reporting confusion between billed vs. earned revenue
Retainage itself isn’t the issue.
The issue is when:
It’s buried inside Accounts Receivable
It isn’t tracked by job
It isn’t forecasted in cash flow
It isn’t reconciled monthly
That’s a systems problem — not a billing problem.
Step-by-Step: How Contractors Should Handle Retainage
1. Separate Retainage From Standard Accounts Receivable
What to do
Create a dedicated retainage receivable account, separate from regular trade AR.
Invoice example:
$100,000 earned
$10,000 retainage
$90,000 current due
Books should reflect:
$90,000 in Trade AR
$10,000 in Retainage Receivable
Why it matters
If retainage sits inside normal AR:
Aging reports become misleading
Collection efforts target the wrong balances
You think customers are slow when they aren’t
What goes wrong if skipped
Contractors chase retainage like overdue AR — creating friction with owners and distorting cash planning.
If you’re unsure whether your chart of accounts and job reports are structured correctly, the Job Costing Health Report flags these structural issues quickly.
2. Track Retainage by Job, Not Just by Customer
What to do
Ensure retainage is tied to the specific project.
Each job should show:
Total retainage withheld to date
Expected release timing
Remaining contract balance
Why it matters
Cash flow planning is job-driven, not customer-driven.
Example:
You have:
$40,000 retainage on Project A
$15,000 retainage on Project B
Project A closes in 30 days.
Project B runs six more months.
That’s a major difference in cash timing.
What goes wrong if skipped
Retainage turns into a mystery balance that surfaces months later when the job is wrapping up.
3. Forecast Retainage in Your Cash Flow Planning
What to do
Include retainage releases in your forward-looking cash projections.
Not just:
What’s invoiced
What’s due
But:
What’s locked until completion
Why it matters
Retainage is delayed cash, not lost cash — but it still affects liquidity.
If you run:
$2M in active jobs
10% average retainage
That’s $200,000 potentially tied up at any given time.
What goes wrong if skipped
You appear profitable on paper while feeling cash-constrained in reality.
This is why retainage must be part of your month-end review process. The Monthly Close Checklist for Contractors (The Control System Most Shops Skip) includes reconciling receivables, retainage balances, and WIP so cash projections match reality.
4. Reconcile Retainage Monthly
What to do
At month-end, verify:
Retainage balance per job
Retainage total in GL
AR aging matches expected structure
WIP aligns with billed vs. earned
Why it matters
Retainage errors compound quietly.
If:
Billing is off by 2%
Retainage percentage changes mid-job
Change orders aren’t included properly
Your final retainage release won’t match expectations.
What goes wrong if skipped
Contractors discover discrepancies when the job is closing — exactly when cash matters most.
This is where disciplined monthly reconciliation changes outcomes. The Monthly Close Checklist for Contractors (The Control System Most Shops Skip) exists because most contractors simply don’t have this control step built in.
5. Align Retainage With WIP Reporting
What to do
Ensure your Work in Progress report clearly shows:
Contract value
Costs to date
Earned revenue
Billed revenue
Retainage held
Why it matters
Retainage affects billing timing — not profitability.
If WIP reporting isn’t structured properly, you can misinterpret:
Overbillings
Underbillings
Cash position
What goes wrong if skipped
You make operational decisions based on incomplete financial visibility.
The Job Costing Health Report is useful here because it highlights when WIP, billing, and job-level reporting aren’t aligned — which is where retainage confusion usually starts.
Insider Notes / Contractor Gotchas
Retainage percentages sometimes change mid-project (especially on public jobs).
Subcontractor retainage must be tracked separately from owner retainage.
If you release subcontractor retainage before collecting yours, you’ve just financed the project twice.
Some contracts allow early release of retainage upon completion of specific scopes — but only if you ask.
Retainage on change orders is often miscalculated.
These are system setup issues — not field mistakes.
Real-World Impact
When retainage is structured correctly:
AR aging becomes clean and usable
Cash flow projections become realistic
WIP reporting reflects reality
Job profitability isn’t distorted
Final billing runs smoothly
When it’s not:
Cash feels tight despite “good revenue”
Owners look slow to pay (when they aren’t)
Final job closeouts become accounting clean-up exercises
Margin visibility disappears
Retainage doesn’t hurt contractors.
Lack of retainage systems does.
If you’re unsure where retainage stands inside your current reporting, running the Job Costing Health Report is a fast way to identify structural gaps.
And if your month-end process doesn’t include AR and retainage reconciliation, the Monthly Close Checklist for Contractors (The Control System Most Shops Skip) is the control framework most shops are missing.
Summary: Retainage Is Not Admin Work — It’s Margin Protection
Retainage is delayed cash.
Delayed cash without visibility creates stress.
Retainage tracked by job, reconciled monthly, and forecasted correctly becomes predictable.
Predictable cash flow protects labor decisions, supplier relationships, and margin stability.
This isn’t bookkeeping.
It’s operational control.
FAQ
1. Do I really need to track retainage separately?
Yes. If retainage is mixed into regular AR, your aging reports and cash projections become misleading. Separate tracking improves visibility and prevents collection confusion.
2. How does retainage work in QuickBooks?
You typically create a separate retainage receivable account and structure invoices so retainage is tracked independently from current amounts due. It must also tie to job-level reporting and WIP.
3. What happens if I don’t reconcile retainage monthly?
Errors accumulate. Final retainage releases won’t match expectations, AR aging becomes unreliable, and cash forecasting becomes inaccurate.
4. Is retainage tracking required or just best practice?
Retainage itself is contract-driven. Separate tracking and reconciliation are best practices — but practically necessary for contractors running multiple active jobs.
5. When should I fix retainage setup?
Immediately if:
AR aging looks inflated
Cash feels tight despite billing
You’re unsure how much retainage is outstanding by job
The earlier it’s structured correctly, the easier it is to maintain.
If retainage confusion, cash strain, or reporting gaps keep surfacing, it’s usually a setup and control issue — not a revenue issue. Looking for a solution? Check out our services page for details.
Disclaimer:
This content is for general educational purposes only and does not constitute tax, legal, or accounting advice. Individual circumstances vary, and tax and reporting requirements can change. Always consult a qualified CPA, tax professional, or legal advisor for guidance specific to your business.
