Retainage is the portion of each progress payment that an owner withholds from a contractor, or that a general contractor withholds from a subcontractor, under a construction contract. It is held as security against incomplete or defective work and released on the schedule the contract or the governing statute sets, normally at acceptance of the work or completion of the job. Retention is the same thing, and holdback is usually a synonym too.
What the Federal Rule Requires
On a federal fixed-price construction contract, withholding is the exception rather than the routine. Payment is authorized in full for any period in which the contracting officer finds that satisfactory progress was achieved. Only where satisfactory progress has not been made may a maximum of 10 percent of the amount of the payment be retained, and it is held until satisfactory progress is achieved (FAR 52.232-5(e)).
The policy behind that clause is written just as plainly. Retainage is not to be used as a substitute for good contract management, funds are not to be withheld without cause, and the decision and the amount are made case by case. The withheld amount may also be adjusted as the contract approaches completion to recognize better than expected performance and the ability to rely on alternative safeguards, and on completion of all contract requirements the retained amounts are to be paid promptly (FAR 32.103).
Where Retainage Sits in a Firm’s Books
Retainage is tracked per job on both sides: retainage receivable for what an owner holds back from the contractor, retainage payable for what the contractor holds back from its own subcontractors. Neither belongs with ordinary trade accounts payable or trade receivables, because retainage waits on acceptance rather than on the calendar. The test that separates a receivable from a contract asset is set out in accounts receivable.
Tax does not wait for the release. Total contract price under the percentage-of-completion rules is the amount the contractor reasonably expects to receive under the contract, retainages included (26 CFR 1.460-4(b)(4)(i)(A)), a rule construction accounting outsourcing sets out in full.
A Progress Billing With Retainage
Say a subcontractor on a private job bills a month of completed work under a contract that fixes retainage as a flat share of every progress payment, with nothing else withheld.
Work completed this period 40,000
Retainage rate set by the contract 10%
Retainage withheld this period (4,000)
Due on this pay application 36,000
Cumulative work completed to date 260,000
Cumulative retainage held 26,000The amount due is what the subcontractor can bill and collect on the contract’s normal payment terms. The cumulative retainage held is revenue the subcontractor has already earned and cannot spend. It sits on the balance sheet as retainage receivable until the contract’s release condition is met.
What Retainage Is Not
A retainer moves money the other way: a CPA firm’s engagement retainer is a fee the client pays before the work, while retainage is money the payer keeps back after it.
The retention ratio borrows the word retention for unrelated work. In dividend ratios and the dividend payout ratio it names the share of a period’s profit a corporation keeps rather than distributes.
Holdback is a plain synonym for retainage, but a lien holdback usually names something narrower: funds set aside against the risk that a lower-tier subcontractor or supplier goes unpaid and files a mechanics lien.
Common Questions About Retainage
The contract fixes the withheld share of each progress payment at that rate, so the payer pays the certified balance now and keeps the rest until the release condition is met. That rate is a contract term rather than an industry standard, and on federal fixed-price construction work it is a ceiling reached only where satisfactory progress has not been achieved (FAR 32.103).
Retention is the same question, and the answer is the date the contract or the governing statute sets. On federal fixed-price construction contracts, once the work is substantially complete the contracting officer may keep only the amount considered adequate for protection of the government and must release the remaining withheld funds, and each separately priced building, public work or other division of the contract is paid on completion and acceptance without retention of a percentage (FAR 52.232-5(e)).
Firms carrying construction clients can test whether per-job retainage tracking survives a handoff with Accountably’s trial task on their own work.
