Retainage

Definition

Retainage, also called retention, is a percentage of each progress payment that an owner or general contractor holds back under the contract until completion, inspection, or final acceptance. The same mechanism runs down the chain: a general contractor holds retainage from subcontractors while the owner holds it from the general contractor. The holder records a retainage payable. The performing party records a receivable or a contract asset, depending on whether the right to payment depends on anything other than the passage of time.

Why it matters in an audit or review

Retainage can be a large balance on a contractor's balance sheet, and it often sits outstanding for longer than normal trade receivables. Auditors confirm retainage with owners, read the contract for release terms, and test collectibility, especially on disputed or delayed jobs. They also check classification: under ASC 606-10-45, a right that is conditional on completion is a contract asset, not a receivable. Retainage that will not be collected within the operating cycle raises a current versus noncurrent question.

Example

Illustrative: a contractor bills $200,000 on a job with 10% retainage. The owner pays $180,000 and withholds $20,000. If release depends on final acceptance, the $20,000 is reported as a contract asset until the condition is met.

Common mistakes

• Treating all retainage as a current trade receivable without reading the release conditions.
• Ignoring retainage payable to subcontractors, which understates liabilities.
• Skipping confirmation of retainage balances on jobs with change-order disputes.

Sources

• FASB ASC 606-10-45-1 through 45-4, Revenue from Contracts with Customers (contract assets and receivables)
• AICPA Audit and Accounting Guide, Construction Contractors (retainage and operating cycle classification; paid publication)
• AICPA, AU-C Section 505, External Confirmations