In either case, any holdback is normally due and payable only upon project completion. Because of this, retainage should be recorded in its own account on your general ledger. 👉 Retainage payable – Funds held by the general contractor or project owner that are owed to contractors, vendors, and subs downstream. We are a subcontractor and the GC we are working for is asking us to sign and notarize progress payment line waivers for amounts they have not paid us for, is this legal? They are 60 days behind on our payment yet they are refusing to give us… When the $90,000 is paid, it is posted with a debit to the bank or cash account and a credit to accounts receivable, clearing the account for that project.
Track Retained Amounts
Yet, even with all of these potential problems, retention clauses in construction contracts are rarely questioned or even thought about very much, at all. According to a 2004 report published by the American Subcontractors Association, the majority of subcontractors believe that “prime contractor abuse of their retainage” is a widespread problem. As with a lot of things in construction, where you work will influence the rules and standards around retainage. To make matters more complicated, every state has a different definition of what constitutes the satisfactory completion of a job.
- The challenge in managing retainage receivable lies in addressing cash flow issues inherent in the construction industry.
- The amount of the contract price that can be withheld and the time for which the retainage may be withheld vary by state (and federally), and be dependent on project type.
- This policy helps ensure subcontractor compliance with quality and project timelines but requires careful handling to maintain trust.
- Has your company been in business for a long time with an equally long track record of success?
- Retainage acts as a buffer against potential issues such as defective workmanship or failure to complete the project.
Collecting Retainage
But, did you realize that it’s sometimes required to send specific notices and legal documents to maintain retainage in construction your rights to claim retainage? Otherwise, the general contractors, owners, developers, or lenders may just sit on the retainage and wait for subcontractors to take action. Retention can be withheld on residential or commercial projects and on both public and private projects. The project owner usually holds retention from the general contractor’s payments, and the GC in turn holds it on their subcontractors.
Retention Bonds – An Alternative to Waiting for Retainage
This percentage is predetermined in the construction contract and applied to each progress payment throughout the project’s duration. In Iowa, a contractor may request the early release of retainage on a public project. Does the state regulate how much money can be withheld from Law Firm Accounts Receivable Management a subcontractor? A mechanics lien is the most powerful tool in a contractor’s collection toolkit, but it has an expiration date.
- We are a subcontractor and the GC we are working for is asking us to sign and notarize progress payment line waivers for amounts they have not paid us for, is this legal?
- Accurately managing and tracking retainage receivables and payables from the get-go is a must, no matter where you are in a project’s hierarchy.
- Since these funds aren’t due until the project is completed, they are recorded in a separate account on the general ledger.
- First, it’s abused to “stay ahead.” It’s a common construction practice to underpay a contractor for work done on a job.
- Once substantial completion is achieved all the contractors on a job will normally put in retainage billings.
- When done right, any unreleased retainage should reflect as revenue on your profit and loss statement, and as uncollected funds on your balance sheet.
Under the accrual method of accounting, income is typically recognized when earned, not necessarily when received. However, the unearned revenue retainage portion complicates this, as it is earned but not received until project completion. This discrepancy can lead to a situation where contractors owe taxes on income they have not yet collected, impacting their cash flow and tax planning strategies. As the project progresses and milestones are achieved, partial releases of retainage may occur.
