What Is Retainage and How Should Contractors Track It?

If you're a contractor working on commercial projects, government work, or larger residential jobs, you've almost certainly dealt with retainage. But many contractors don't track it correctly — which means they're underestimating their true accounts receivable, missing release dates, and sometimes leaving money on the table entirely.

What Is Retainage?

Retainage (also called retention) is a percentage of each invoice that the customer holds back until the project is substantially complete. It's standard in construction as a way for owners to ensure contractors finish the job and address any deficiencies before full payment is released.

Typical retainage rates are 5-10% of each progress billing. On a $1,000,000 project with 10% retainage you could have $100,000 sitting in retainage by the time you're done — money you've earned but haven't collected yet.

How Retainage Affects Your Cash Flow

Retainage is essentially a forced loan you're giving your customer. Every time you invoice, a portion gets held back. Your labor and materials costs are fully paid out, but you're waiting to collect a piece of every billing.

On multiple simultaneous projects this can mean you have $200,000-500,000 or more tied up in retainage. That's real cash that could be funding your business or sitting in an interest-bearing account.

The Accounting Treatment

Retainage should be tracked separately from your regular accounts receivable. The correct accounting treatment is:

• Retainage Receivable — an asset on your balance sheet representing amounts earned but held by customers

• Regular AR — the net invoice amount after retainage is deducted

Many contractors lump retainage into their regular AR which overstates collectible AR and understates the aging of their actual retainage balances.

How to Invoice for Retainage Release

Most contracts specify when retainage is released — typically at substantial completion, final inspection, or after a defined warranty period. When that milestone is reached, submit a retainage invoice separate from your regular progress billings.

Make sure your contract specifies the exact retainage release conditions and follow up proactively. Customers don't always volunteer to release retainage — you need to ask for it.

Lien Waivers and Retainage

Many customers will require a lien waiver before releasing retainage. Make sure you understand whether it's a conditional or unconditional waiver and what rights you're releasing before you sign. When in doubt consult with a construction attorney.

Our contractor financial toolkits include an AR and Invoice Log tab with retainage tracked separately on every invoice, aging calculated automatically, and a retainage balance summary — so you always know exactly how much is out there and when it should be released.

Make sure you're tracking every dollar you're owed. Download the contractor toolkit for your trade at HilkeyFinancial.com or schedule a free consultation at chris@hilkeyfinancial.com.