Retention (Retainer or Retainage) on Jobs
How to Setup and Invoice (Bill) for Job Retention (Retainage)
In this knowledgebase article, you will learn how to setup Total Office Manager for retaining money on jobs. You will learn how to track that money and how to invoice your customer for that amount of retention. This article deals with money held in retention which is often referred to as retainage.
What is Job Retainage?
Retainage is money withheld from the contractor until specified terms are met. At that point, the contractor can invoice the customer for the amount of retainage.
Retainage: The withholding of a portion of the final payment for a defined period to assure a contractor or subcontractor has finished a construction project completely and correctly.
A Detailed Explanation of Job Retainage
For certain types of construction projects, customers might require you to hold back a certain percent of your total invoice or of each invoice (invoicing only for only a portion of the contract price) until you’ve completed the job satisfactorily. After the job is complete and it’s agreed that you can collect the remaining percentage, you then create an invoice to the customer for the balance.
The procedure described here for handling retainage in Total Office Manager will not only help you track who owes your for retention, but also track how much they owe. In addition, it helps to track the retention on your books as an asset until the customer pays the balance.
How Job Retainage Affects Financial Reports
Retainage appears on your company’s balance sheet as an asset. The account might be called “Accounts Receivable – Retainage”. This amount will eventually appear on your Income Statement as income, even if it has not been collected. Retainage is a portion of the total amount of the job. Once you have invoiced the entire amount, retainage is part of the income recorded for that invoice. Retainage is a “hold-back”.
Many construction related Total Office Manager users don’t record the income associated with the retention until it is billed. This is incorrect accounting since the income reported for any period should equal both the Net Due Balance on the invoice plus the Retention amount.
Retainage versus Down-Payments
Please don’t confuse retention for down payments on jobs. Down payments are up-front initial payments made prior to the work starting. Retention is money withheld from you until the expiration of a certain time frame.
Quick Take on Setting Up Retainage or Retention for Jobs
This is a quick look at how to record & track retainage in Total Office Manager from Aptora:
- Add Retainage Receivable to the QuickBooks Chart of Accounts
- Create a Retainage product
- Add Retainage to an Invoice
- Track Retained Amounts
- Bill for Retainage
The details are below.
Retainage can be handled many ways. Here is a quick narrative on retainage that may answer your question. If not, we have detailed steps blow.
- Retainage is a portion of the retail price of the job held by the general contractor. It is paid when certain conditions are met and those vary. Retainage is an asset and appears on your balance sheet. That never varies. This finer details of how this is managed depends on your company and differs from one company to another.
- You create a new account in your chart of accounts. It is a “Other Current Asset” type. This account is commonly called Retainage Receivable, Retention Receivable, or Accounts Receivable — Retainage. You can name your accounts however you like, but make sure it’s recognizable to everyone on the accounting team.
- Now that you have an account for recording the transaction in Total Office Manager, you need to create an Invoice Item for Retainage. This will allow you to add a line item to an invoice for retainage. It will have a negative amount.
- If you want to see what retainage you have outstanding, you can run the Transaction Detail by Account report for that account. You can also look at the history of the Retainage item you created. There are other ways to see detail about the retainage amount since it is an invoice item. You may create a customer report for Retainage items grouped by Customer:Job.
- When the project is substantially complete or you are otherwise entitled to bill for retainage, you can create a separate invoice to bill your customer for retention on the project. The process to create a retainage invoice is the same as creating any other, except that in this case you will enter the Rate as a positive number. You can enter a Reminder in TOM to remind one or more people about retainage invoice deadlines.
Setting Up For Job Retention
- Add a new account to your Chart of Accounts. Create an Other Current Asset Account named “Accounts Receivable – Retainage” (or your choice).
- Create an Other Charge type item named Retention, in the description field enter “Amount Deducted for Retention”. In the Amount field enter -10% (negative 10%) or an amount appropriate for you. Select the % radio button. In the Account field select the Retention Receivables Account you created.
- Note: You may also use the amount type ($). In that case, you will enter the appropriate dollar amount. The program will not calculate the amount for you.
- For AIA Payment Applications, you must use the % option. You cannot use the $ type.
Invoicing the Customer and Deducting Retention
Consider the following example:
Customer has agreed to a $50,000 job, with 10% retention to be held until the job is completed. If I am billing the customer 50% complete I would do the following:
- Create an invoice for the customer for the $25,000 amount, if you have created an estimate you can generate the invoice from the estimate.
- On the following line on the same invoice enter the Retention Item. The customer invoice now shows a negative $2,500 on this line, with a net due from customer of $22,500.
Note: If you have some invoice items not subject to retention (such as mobilization charges): Enter all items subject to retention, enter a sub-total line, then enter your Retention item. Follow with the remaining items that will not be subject to retention.
Reviewing Customer Retention Balance
When nearing the end of the job you will want to review your Retention Receivables account for that client.
- Go to Reports | Accounting | General Ledger and select the Transactions Details by Account report.
- Select the account you just create called Retention.
- Select an appropriate date range.
- Select correct Customer:Job.
Invoicing (Billing) for Final Retention
- After reviewing the retention balances in the Retentions Receivable Report, create an invoice to the client.
- Select the Retention item, remove the -10% (negative) item price and place a positive amount equal to the retention withheld from prior invoices in the amount column.
- Your company now has a reduction in your retentions receivable account and an increase in the aging Accounts Receivable. Additionally, you now have an invoice to send to your customer.
- Now your company has the correct amount of revenue in the correct accounting period and we haven’t lost track of the amounts withheld from prior invoices.
Reporting and Viewing History
- You can run reports on the “Accounts Receivable – Retainage” account as you normally would for customer A/R.
- Since retainage is just an item, you have all of the same reports available to you as any other item.
- Since retainage is just an item, you can use the Item History form to view complete details about that item.
Tips on Job Retainage
- Retainage amounts withheld from project payments can be a financial challenge. That’s because they often account for a contractor’s entire net profit margin on a job.
- Why you can’t record retainage in your regular Accounts Receivable account? The timing of retention payments is different from regular invoices. If retainage is withheld on any of your projects, you need to track it separately from Accounts Receivable.
- A mechanics lien is the most powerful tool in a contractor’s collection toolkit, but it has an expiration date. Every state has a specific deadline by which contractors must file a lien claim for retainage, often based on the day it was due.