What You Need to Know About Retention Payments in Construction

what is retention in construction accounting

Because production can be less predictable, contractors often aren’t able to retain large amounts of inventory. As a result, the cost and availability of production inputs can fluctuate and require special, careful tracking and planning. These state the percentage of completion on the project, the payment due for that level of completion, expected construction bookkeeping date to the next invoice or benchmark, and other details. Her projects, pieces of art in their own right, have continuously pleased customers. Maggie, over time, has become well versed in the process of accounting for her projects. Gross Amount DuefromCustomer represents the amount of revenue earned on a contract but yet billed to the customer .

what is retention in construction accounting

Ben Conry is the Co-Founder and Head of Customer Success at Flashtract. He has worked diligently in all areas of the company, helping to turn Flashtract into the fastest growing construction billing platform in the US. Ben has been a part of the team driving Flashtract’s membership in the ABC Tech Alliance, as well as being a member of the CFMA Microlearning Task Force. There’s another trend the enhancement mirrors—the growing digitisation of every aspect of the construction lifecycle.

What Are Progress Billings?

Finally, retention strategies affect financial reporting because they dictate how much money is spent on personnel expenses such as recruitment fees and bonuses for high performers. Accountants must consider these when setting up accounts to maintain accurate records over time. Accountants must also consider a company’s successful retention efforts if it has a good year to give shareholders and investors an accurate picture of its performance.

What is construction retention?

A construction retention payment (also called retainage) is the amount of money held back until the project is complete. Retainage is usually a percentage of the total project cost. It typically sits at 5% or 10%.

There is even such a thing as a “retainage bond.” This type of negotiation is probably going to be difficult, but it never hurts to ask, and your company’s goodwill has value. Explore alternatives that will make the other parties on the project comfortable with the risks. However, in most cases, including the retainage withheld in the lien claim is the wise move. It appears that the laws on retainage and the laws on mechanic’s lien rights were written in 2 different universes and 2 different eras.

705-1 Financial and cost accounting records.

(10% is the standard on public projects.) They can also be scalably defined by the contract with varying percentages withheld for different construction stages. The defects notification period, is the period after completion in which the contractor is obligated to rectify any material defects. The model uses flags to calculate the timing of the retention releases.

The rate of retention is stipulated in the construction contract and can often be negotiated. Some states even have a statutory limit on retention for projects within the state boundaries. Before figuring out an appropriate records retention policy, first understand that there are two distinct time periods from which a retention timeframe is based.

Gross Amount Due to / From Customers

Progress billings prevent the client from having to fund the project upfront. The contractor also benefits by getting paid at regular intervals and can also pay for expenses such as raw materials during the project by invoicing at various stages. If the information described in paragraph of this section is maintained on a computer, contractors shall retain the computer data on a reliable medium for the time periods prescribed.

However, most of these alternate solutions look to remedy the perceived disruption of cash flow from the withheld resources and effectively eliminate the financial incentive for project completion. In construction, production contracts can last years and have multiple, extended payments over that time. Contract terms commonly allow 30, 60, even 90 days or more to pay invoices. As a result, revenue recognition and cash management in construction both carry special considerations.






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