In construction, retainage is when a party employing a contractor for a specific task withholds a portion of the contractor's payment until the entire project is substantially complete. For example, if a contractor is hired to level a foundation at the start of a commercial construction project, they may have to wait years for the substantial completion of the project and receive the rest of their payment. While waiting to collect, contractors typically record retainage in a GL account separate from the rest of their accounts receivable. Then they bill the hiring party for the agreed-upon amount once the project nears completion.
According to a 2019 contractor survey, retainage gets withheld from jobs either "always" or "sometimes" for the majority of respondents. Of those participants, 68% report having to wait more than 30 days to collect funds. So it's not surprising that nearly two-thirds of respondents classify retainage as an issue that inhibits their organization.
The average retainage amounts to 5-10% of the total contract, meaning that any failure to collect those funds on-time or in-full could disrupt cash flow in ways that are difficult (or even impossible) to recover from. Making matters worse, since accountants track retainage separately and according to its own timeline, collecting this debt creates another level of complexity within their accounts receivable. As a result, many companies see retainage as an annoyance at best and a serious financial risk at worst.
Using technology solutions, such as Sage Intacct, can help mitigate retainage issues, by using functionality like multi-entity consolidations and dimensional accounting. Other technology solutions may also mitigate risk; however, ensure such solutions include ways to account for multiple companies or specific transaction tagging.
Using technology also allows you to streamline other functions such as configuring retainage billing within accounts receivable and accounts payable, quickly creating sales or purchase orders and including retainage as part of your financial reporting. Tech solutions can turn persistent hurdles into seamless parts of the accounting routine, so that users avoid mistakes while conducting workflows as efficiently as possible.
The coronavirus pandemic sent the construction industry into a tailspin, and it's unclear when or to what extent it will recover. Financial uncertainty makes it imperative for contractors to collect every cent of retainage owed to them in a timely manner. However, they can't put so much effort into this one workflow that they end up neglecting other accounting aspects during this critical time.
It may be too early to call this an evolve or die moment, but companies need to be agile and adaptive to rise to the occasion. Construction accounting solutions make that possible by improving retainage billing and optimizing construction accounting.
Read more about, ASC 606: A 5-Steps to Keeping Up With New Construction Accounting Rules.
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