Retention or retainage is usually a specific percentage, for example 10%, of the total contract that is held back by the project owner in reserve to protect the owners interest. Retention is not held in a lump sum, but rather held at the stated percentage for the amount requested on each application for payment. Your contract should set the terms, including the percentage and when the hold-back will be paid.
Contractors using QuickBooks often run into difficulties when handling retainage/retention; simply because the software doesn’t have a means to automatically deal with it.
Because QuickBooks doesn’t have a built-in retention function, like many of the more expensive construction specific software program, QuickBooks users must initiate work-arounds and make QuickBooks track retainage that is held on each progress invoice.
Over the years, I’ve seen several work arounds that various contractors, their bookkeepers, and even their accountants have implemented, such as:
- Simply leaving the retention amount of each invoice sitting in their open A/R (not recommended as this throws off your aging schedules and makes it look like people are past due).
- Billing for just the amounts on each line item that they will be paid for.
- Creating a Customer called Retentions Receivable and then making some fancy Journal Entries each billing period to move the retainage from the originating customer to the Retentions Receivable customer.
- Using a QuickBooks Discount Item to deduct retainage on individual invoices and mapping it to the Chart of Accounts as either an Income Account or Expense Account.
- Creating an Other Current Asset Account, called Retainage (Retention) Receivable and through the use of “Items” automatically move the money to this account on each invoice that is generated. This is what I recommend. Then when you are done with the project, you can invoice the retainage and that is the amount owed. This keeps the aging accurate.
- Creating a Sub-Account of Accounts Receivable called Retainage (Retention) Receivable and then through the use of Items and additional invoices move the retainage amounts into this newly created Accounts Receivable sub-account. Though dealing with multiple AR and AP accounts can create a lot of issues for people so I don’t recommend this unless you are really savvy with accounting.
Each of these methods has their own drawbacks, however, the first three (4) methods described cause the most problems with the contractors accounting records and are methods that I highly recommend that you avoid.
The easiest method that I know of, is tracking Retainage as an Other Current Asset Account on your Chart of Accounts – Balance Sheet section; however, you need to understand how to properly set up the item and then invoice for the retainage at the end of the project.
To implement this system:
- Add an Other Current Asset account to your Chart of Accounts called Retainage or Retention Receivable.
- Create an Other Charge OR Service item in your Item List called “Retainage”, map this to the account you created in Step 1, and in the Rate box enter -10.0%.
- Make sure that you have a Subtotal item in your Item List.
- Create your Invoice or Progress Invoice billing for the full amount before any retainage is withheld. On the first blank line at the bottom of the Invoice, select your Subtotal item and then your Retainage item – the balance on the invoice that goes to A/R is now the amount after retainage, and the retainage dollars are moved to the Other Current Asset Account.
- You can generate Reports on the Retainage Receivable account showing who owes you what by going to your Chart of Accounts, click on the account created in Step 1 to highlight it, click the Report button at the bottom of the window and choosing QuickReport.
- When you are ready to bill for retainage, create a “normal or regular” invoice using the Retainage item and entering the appropriate dollar amount from the report.
Retainage can easily be handled in programs like QuickBooks, it is just understanding how to best utilize the tool to work for you. Need help setting up retainage in your company? Reach out any time for assistance!In conclusion, RPPC, Inc. assists entrepreneurial, forward-thinking, business and association managers/owners in Realizing Profitable Potential through Change by providing training and services in the areas of Accounting and Financial Management, specializing in QuickBooks® as the tool of choice. Give us a call at 1.888.536.9690 to see how we can help you improve your bottom line!