These contractors have no way of knowing or verifying the amount owed and payable for retention, leaving them dependent on others’ record keeping outside of their accounting system which exposes them to additional errors. Learn more The pitfalls of not recording retentionĪccording to Mehdian, a lot of contractors don’t record retention receivable or payable, especially those using Quickbooks accounting software. Get Materials Financing with up to 120-day payment terms. A one-year time period is used as the basis for classifying all other current assets and liabilities.'” “There’s usually a paragraph in any construction company’s financial statements that indicates, ‘Assets and liabilities relating to long-term construction contracts (principally retention) are included in current assets and current liabilities since they will be liquidated in the normal course of contract completion, although this may require more than one year. Even though those funds may not be collected within the “current” timeframe, which is 12 months, they are shown on the balance sheet as current. “When the retention for a project is moved from retention receivable to accounts receivable, the project’s retention due to suppliers and subcontractors is moved from Accounts Payable-retention to Accounts Payable-trade,” Peterson recommends.įariba Mehdian, a CPA from California, says that both retention accounts are shown as current assets and current liabilities, respectively. Since these funds aren’t due until the project is completed, they are recorded in a separate account on the general ledger. Retention payable is recorded by owners and general contractors and is the amount owing to contractors or subcontractors for retention. Because these funds aren’t due until the project is completed, they are recorded in a separate account on the general ledger. Retention receivable is recorded by general contractors and subcontractors and is the number of funds due from a contractor’s customer for retention. Therefore, they must be kept separate from the uncollectible,” Peterson says. “When tracking and collecting accounts receivable, we only want to track those that are collectible. Peterson, a construction finance educator and author, “The retention in the retention receivable account is not collectible yet because the contractor has not earned the right to receive it.” Retention receivable and payable is different from accounts receivable and payable. It can significantly impact the financial standing of contractors, especially when working on projects with a small profit margin. Retention doesn’t usually apply to material suppliers.īecause retention is withheld from each payment and paid at a later date, the unpaid funds have to be recorded and tracked accurately. The project owner usually holds retention from the general contractor’s payments, and the GC in turn holds it on their subcontractors. Retention can be withheld on residential or commercial projects and on both public and private projects. Some states even have a statutory limit on retention for projects within the state boundaries. The rate of retention is stipulated in the construction contract and can often be negotiated. It is intended to cover additional expenses if the contractor or subcontractor doesn’t finish the work or there is a quality issue. It provides a financial incentive to ensure that the work is of appropriate quality and meets the plans and specifications. Retention, also called retainage, is money held back from each payment to ensure that a contractor or subcontractor completes a project. The pitfalls of not recording retention.
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