Retainage is the portion of a contract, usually 5 to 10 percent, that gets held back until the project is complete. It protects owners and general contractors from paying in full for unfinished work. Tracking it correctly matters because retainage can represent tens of thousands of dollars sitting in limbo across multiple projects.

Set up a separate account for retainage receivable on your balance sheet. This is money you’ve earned but won’t collect until project completion or final inspection. Don’t lump it with regular accounts receivable because it has different collection timing and you need visibility into how much is being held across all your jobs.

If you hold retainage from subcontractors, create a retainage payable account too. This tracks what you owe subs once they complete their scope. You’ll release this when the project closes out and you collect your own retainage from the owner or GC above you.

When you invoice for a progress payment, split the billing. If your contract calls for 10% retainage on a $50,000 draw, you invoice $50,000 but only $45,000 goes to accounts receivable. The remaining $5,000 goes to retainage receivable. Most accounting software can handle this split if configured properly, though generic setups often miss it entirely.

The same logic applies to subcontractor bills. When your electrician invoices you for $20,000 and your contract holds 10% retainage, you record $18,000 in accounts payable and $2,000 in retainage payable. Pay the $18,000 now and the $2,000 when the job closes out.

Track retainage at the job level, not just in aggregate. You need to know that the Martinez project has $12,000 in retainage receivable while the Cordova project has $8,000. This detail becomes critical when projects drag on and you’re trying to figure out why cash is tight despite showing profit. Job costing for contractors should include retainage tracking by project so you see the complete financial picture.

Release retainage when the conditions are met, usually final completion, punch list sign-off, or a specified number of days after substantial completion. Record the release by moving the amount from retainage receivable to regular accounts receivable, then collect it like any other invoice. Do the same on the payable side when you release funds to your subs.

The cash flow impact catches many contractors off guard. You might show strong profit on a job but not see that cash for months after the work is done. Retainage sitting on your balance sheet is real money you’ve earned, but it’s not in your bank account. Factor this into your cash planning, especially if you have multiple large projects with significant holdbacks.

A common mistake is forgetting to invoice for retainage when projects close. The work is done, crews have moved on, and that final 10% never gets billed. Track open retainage monthly and follow up on collection when release conditions are met.

If your current bookkeeping doesn’t separate retainage from regular receivables, your financial statements are misleading. You think you have $80,000 collectible in 30 days when really $15,000 of that won’t come in for six months. Bookkeeping services in Santa Fe that understand construction can set this up correctly so you always know where your money actually is.