How does retainage work in construction?

How does retainage work in construction?

Retainage is the withholding of a portion of the funds that are due to a contractor or subcontractor until the construction project is finished. It is meant to serve as a financial incentive and an assurance that the contractor will complete the project in a satisfactory manner.

What is typical retainage?

The basics of retainage Retainage, also called retention, is an amount withheld from the contractor until a later date. It’s fairly common, especially on commercial and public construction projects, and typically ranges from 5 – 10% of the total contract price.

How do you record construction retainage?

The client, who owes retainage to the contractor, records retainage as a liability. For example, if a contractor works on a $100,000 project with a ten percent retainage, then they will record $90,000 as accounts receivable and $10,000 as retainage due.

How much is retention fee in construction?

Progress payments are subject to retention of ten percent (10%) referred to as the “retention money.” Such retention shall be based on the total amount due to the contractor prior to any deduction and shall be retained from every progress payment until fifty percent (50%) of the value of works, as determined by the …

How do you calculate construction retention?

In most of the construction contracts, the amount of Retention Money to hold in each progress claim is 10% of the work done and up to 5% of the contract sum.

Why do contractors hold retention?

Retention payments are a percentage of milestone payments owed to a subcontractor or vendor. They are withheld pending full practical completion and resolution of any defects. Many project owners or end clients also hold retention payments from monies due to the head contractor at the agreed project milestones.

What is the retention period in construction?

Retention is a percentage of payment held back typically by a client or main contractor under a construction contract to act as security, or an assurance that the project works will be completed and that defects which may subsequently develop are remedied.

When the retention money will be paid to contractor?

1. RETENTION AMOUNT; Retention of money as held by client is a safeguard against defects which may subsequently develop and which the contractor may fail to rectify. It is to ensure that contractor complete the contract within stipulated time and according to the prescribed manner.

Is construction retention taxable?

Since most construction contracts include retainage in the amount of 5 percent to 10 percent of the contract revenue, this can result in a substantial tax deferral.

How do you book a retainage payable?

Let me show you how:

  1. Go to the Accounting page, then Chart of Accounts.
  2. Click New.
  3. Under the Account Type drop-down menu, select Other Current Liabilities.
  4. On the Detail Type drop-down menu, choose Other Current Liabilities.
  5. In the Name field, enter Retainage Payable.
  6. Click Save and Close.

What is the difference between retention and retainage?

Retainage, also called “retention,” is an amount of money “held back” from a contractor or subcontractor during the term of a construction project. This is a very unique practice specific to the construction industry, but within the industry, it’s extremely popular.