Retainage in Construction: What It Is and How AP Handles It
Retainage is a percentage of each progress payment that’s held back until the work’s finished and accepted. It’s usually 5 or 10 percent. You’ll carry it as retainage payable on what you owe subcontractors, and on the other side as a contract asset or a receivable depending on whether your right to the money is conditional. On the payable side, the retained amount is recorded on the subcontractor’s bill, not when you pay. Several states changed their retainage rules in 2025 and 2026, so check the rate in your contract against the statute for the state the job’s in.
Introduction
Every contractor’s carrying money they’ve earned and haven’t collected. A lot of it’s retainage. It’s sitting in a spreadsheet somewhere, or in a column nobody reconciles, and it surfaces when a job closes and someone asks where the last $80,000 went. Here’s the part that doesn’t get said often enough. The National Electrical Contractors Association says construction profit margins average less than 5 percent. At 10 percent retainage, the holdback can be bigger than everything you stand to make. You’re funding someone else’s risk out of your own margin. Retainage in construction isn’t complicated. It’s just badly tracked, and several states have changed the rules since 2025. Here’s what it is, how it’s booked, and where it goes wrong.
What is retainage?
Retainage is a percentage of each progress payment that’s withheld until the work’s complete and accepted. It’s normally 5 or 10 percent. The point of it is protection. It gives the paying party something to hold if the contractor walks, fails inspection or leaves a punch list unfinished. You’ll hear it called retention, and on some contracts holdback. It’s the same thing. Retainage runs down the whole chain. The owner’s holding it from the general contractor. The GC’s holding it from the subs. Each sub holds it from their suppliers if the contract lets them. That chain’s why it hurts. You’ve already paid for the labor and the materials. The money sits with someone else for months, and you’re financing the gap.
How does retainage work on a subcontract?
On a subcontract, retainage is deducted from each progress payment and accrued to a liability account. The subcontractor bills the full amount earned. You post the full cost, withhold the retainage percentage, and pay the net. The withheld balance builds up until release. Here’s how that looks on a $500,000 electrical subcontract at 10 percent.
Stage
Earned
Retainage held
Net paid
Running balance
Month 1 billing
$100,000
$10,000
$90,000
$10,000
Month 2 billing
$150,000
$15,000
$135,000
$25,000
Month 3 billing
$150,000
$15,000
$135,000
$40,000
Final billing
$100,000
$10,000
$90,000
$50,000
Release after sign-off
–
-$50,000
$50,000
$0
The sub’s done $500,000 of work and been paid $450,000. That last $50,000 shows up once the punch list clears, the final lien waiver’s in and the owner releases down the chain. Look at the bottom row. Release often comes with a retainage bill, but it isn’t new cost. The cost hit the job when the work was billed. A system that books the release as new job cost will double-count it.
How is retainage accounted for?
On the payable side retainage is a liability. On the receivable side it’s usually a contract asset rather than a trade receivable, because your right to the money is conditional on finishing the work. Under ASC 606 a receivable is an unconditional right to payment. If anything other than the passage of time stands between you and the cash, it’s a contract asset.
That distinction catches people out. Think about what has to happen before the money’s released. Punch list cleared. Final inspection passed. Lien waivers collected. Those are performance conditions, not the passage of time. Under ASC 606, a right that depends on anything beyond time isn’t a receivable. So retainage you can’t collect until the work is accepted is a contract asset. If only time stands between you and the cash, it’s a receivable. Check your contract terms. A contract asset gets netted against the underbillings and overbillings on that contract and presented as one figure per job. The FASB staff published an educational paper on retainage in April 2025, because companies were applying the rules in different ways.
There’s an exception worth knowing. Where a subcontract’s pay-when-paid clause leaves no further obligation, the right can be unconditional, and it goes back to being a receivable. The payable side’s simpler. Debit the full job cost. Credit accounts payable for the net. Credit retainage payable for what’s withheld. Nothing’s expensed later, because the cost already hit the job in month one. Most contractors get the entries right and the reporting wrong. The balance exists. Nobody can say which jobs it’s on, or how old it’s getting, without opening a spreadsheet. Proper construction accounting ages retainage the way you’d age AR.
Where do AP teams get retainage wrong?
Five mistakes cause most retainage problems in construction AP. Releasing before the lien waiver arrives, coding it to the wrong job, booking release as new job cost, missing a statutory deadline, and losing the balance when a subcontract changes.
Releasing before the final lien waiver
Once that money’s gone you’ve got nothing left to hold, and you’re exposed to any lien the sub’s own suppliers file. That waiver’s the whole point.
Wrong job or cost code
It misstates two jobs at once. Worse, the balance becomes unreleasable, because nobody can find it when the sub asks for it.
Booking release as new job cost
The release bill pays out money you already owe. Book it as fresh cost and you’ll double the cost on that job.
Missing a statutory release deadline
Most states set a window, and some will attach interest when you blow through it. Your contract doesn’t override the statute.
Losing the balance on a change order
The subcontract value moves, the percentage applies to the new number, and the accrued balance needs recalculating. Plenty of systems don’t bother, which is a decent argument for workflow automation across the approval chain.
How much retainage can legally be withheld?
It depends on the state and on whether the work’s public or private. Where states cap retainage, 5 percent is a common limit, and some public-work rules now go lower: 3 percent in Iowa, and 4 percent of labor in Ohio. Federal fixed-price construction allows up to 10 percent, only where progress is unsatisfactory. California, New York, Iowa, Indiana and Ohio changed their rules in 2025 or 2026. Illinois passed a change that starts in June 2027. The federal rule’s narrow. Under FAR 52.232-5, a contracting officer may retain a maximum of 10 percent of a progress payment, and only if satisfactory progress hasn’t been made. It isn’t automatic, and plenty of people assume it is. Several states have changed their retainage rules across 2025 and 2026.
State
What changed
Applies to
California
SB 61 caps private retention at 5 percent
Private contracts entered into on or after 1 Jan 2026 (some residential projects are excepted)
New York
Voids any term above 5 percent on private construction projects costing $150,000 or more
Signed 19 Dec 2025 as Chapter 654 (A5405/S5655)
Illinois
10 percent to halfway, then 5 percent
State agency projects (not the Department of Transportation), from 1 June 2027. Signed Aug 2025
Iowa
Public retainage cut from 5 to 3 percent
Public work, from 1 July 2025
Indiana
Two options, not a sequence: at most 6 percent until half done, or at most 3 percent until substantial completion (old maximums 10 and 5)
Certain state and local public works
Ohio
Public-work retainage changed in 2025: 4 percent of labor held through the whole job, instead of 8 percent on the first half
Public work
New York’s is worth reading closely. Senate Bill S5655 was signed on 19 December 2025 as Chapter 654. A 5 percent cap had existed since 2023, but owners were working around it. The new law makes any term above 5 percent void rather than negotiable. California’s change carries a second rule that matters operationally. A general contractor can’t hold back a higher percentage from a subcontractor than the owner’s holding from the GC. If your standard subcontract says 10 percent and the owner’s holding 5, that clause doesn’t work in California any more. None of this is legal advice and the rules keep moving. Check the statute for the state the job’s in before you set a rate, and check it again on renewals.
How should an ERP track retainage?
Retainage should be tracked per commitment, not per invoice. The ERP holds the subcontract value, the percentage and the accrued balance together, then releases it in one transaction against the commitment rather than as a new payable.
Here’s the test to run on any system you’re looking at. Can it show total retainage held by job, by subcontractor and by age, without an export?
Plenty can’t. Retainage lives as a flag on the invoice rather than a balance on the commitment, and you’re rebuilding the position in Excel every month.
Acumatica, NetSuite, Sage Intacct, Business Central, Sage 300 CRE and CMiC all handle it differently. Procore tracks it on the project side. Getting the two to agree is usually where the real work sits, and it’s what ERP consulting is for.
There’s a reporting consequence too. If retainage is a contract asset rather than a receivable, your balance sheet presentation depends on netting it per contract, which you can’t do from an invoice flag. That’s a data model problem, and it’s why retainage aging belongs in your enterprise reporting alongside WIP.
Why work with Proxsoft?
Proxsoft is a multi-ERP construction technology specialist. We work in construction data, so nobody has to explain what a lien waiver is on the first call. Proxsoft works across the main construction ERPs, including Acumatica, NetSuite, Sage Intacct, Business Central, QuickBooks, Procore, Sage 300 CRE, CMiC and Primavera P6. We don’t resell any of them, so no commission steers the advice. Where retainage tracking’s the problem, the fix is usually configuration and reporting rather than a new system. Sometimes it’s an AP workflow change. Our Foremind work sits in exactly that space.
Frequently Asked Questions
What is retainage in construction?
It’s a percentage of each progress payment that’s held back until the work’s finished and accepted. That’s usually 5 or 10 percent. It’s there to protect the paying party if the contractor doesn’t finish.
Is retainage an asset or a receivable?
Usually a contract asset. Under ASC 606 a receivable means an unconditional right to payment. Retainage normally depends on completing the work, which is a condition, so it’s a contract asset netted against under and overbillings on that job.
Is retainage the same as retention?
Yes. Retention’s the commoner term outside the US, and some contracts say holdback. The mechanics don’t change.
What is retainage payable and retainage receivable?
Retainage payable is what you hold back from your subcontractors, so it sits with your liabilities. Retainage receivable is what your customer holds back from you. Check whether that second one is really a receivable or a contract asset, because the test is whether your right to the money is unconditional.
When does retainage get released?
It’s after substantial or final completion, depending on the contract. In practice it’s once the punch list clears and the final lien waivers are in. Most states set a statutory deadline too.
Do you pay tax on retainage before you receive it?
It depends on your tax accounting method. Under the percentage-of-completion method, retainage counts toward income as the job progresses. Under the completed-contract method, it counts when the contract is complete. On the accrual method without percentage of completion, you can elect to leave retainage out of income until it’s billable. Ask your tax adviser which applies to you.
Can a contract require more retainage than the state allows?
It can say so, but that term’s usually unenforceable. New York made it explicit in December 2025 and California followed on 1 January 2026. Check the statute for the state the job’s in.
How do you track retainage across multiple jobs?
You track it per commitment in the ERP, aged by job and by subcontractor, and report it beside your WIP. If you’re rebuilding it in Excel each month, the system isn’t set up for construction.
Conclusion
Retainage isn’t hard to understand. It’s hard to keep track of, and that’s a systems problem rather than an accounting one. Get the entries right on both sides, and check whether yours is really a receivable or a contract asset. Age the balance like you’d age AR. Don’t release before the waiver’s in. And check the statute, because several states have moved since 2025. If retainage is living in a spreadsheet at your place, talk to us and we’ll look at what your ERP could be doing instead.
