Retainage and How it Works
Welcome back to our blog! This month we wanted to talk to you about a topic that comes up frequently when discussing best accounting practices. As many of our clients are contractors, we are often approached with the biggest accounting head-scratcher in the industry: Retainage. Although a simple concept, proper record keeping can be tricky without the right knowledge.
Retainage is the amount of money withheld from a contractor by a customer which is paid upon completion of the job. During multi-phase construction jobs where payments are made incrementally, a percentage will be retained on each invoice. This practice dates back decades and was implemented to protect customers as a pseudo “reverse security deposit”. You, like your clients, expect each job to be completed on time and to standards laid out in any contract. It is a way to ensure that jobs are finished to satisfaction and protects the customer against unfinished or unsatisfactory work.
Retainage amount typically ranges from 5% – 10%, meaning it can also cut into your profit margin and upfront costs. Since it is usually standard practice in the construction industry, it’s important that you understand it and know how to account for it properly from day one.
Laws regarding retainage and prompt payment vary by state so the first step is to become educated about your state policies. This will help you negotiate the strongest contract possible. Become familiar with mechanic lien laws in your state as well, as these can help you collect retainage fees that go unpaid.
At Moose Creek we are knowledgeable when it comes to retainage accounting. It can be quite the feat to set up QuickBooks Online for retainage properly without the right guidance, but Quickbooks Online is one of the best accounting platforms for tracking retainage. Common sense says that the retainage amount should be entered into the accounts receivable column; this is a very common (and sometimes costly) mistake. Quickbooks Online has a host of customizable features and accounts that can be added to meet your specific company needs. As a contractor, you may benefit from applying retainage to your subcontractors as well. We can assist in retainage accounting when you are the customer or the contractor. Please reach out any time so we can discuss your company’s accounting needs. We treat every client with respect and we will never make you feel bad for past accounting mistakes you have made. We learn by our errors and Moose Creek is ready to help get you back on track with confidence in your books.