Contractor Finance Glossary
What is Retainage?
Also called: retention
Retainage is the portion of each progress payment (commonly 5 to 10 percent) that a customer withholds until the project is substantially complete, as a guarantee of finished work.
Retainage is contractually earned revenue you are not allowed to collect yet. On a large project the accumulated retainage can exceed a contractor's entire profit on the job, which means the margin is locked up in the customer's account until closeout.
The danger is treating retainage like normal receivables. It ages differently, it releases on milestones rather than invoice terms, and it is a leading cause of the gap between a profitable P&L and an empty bank account. Tracking retainage receivable and retainage payable separately is the fix.
How it is calculated
Retainage withheld = progress billing amount times the retainage rate in the contract (often 5% to 10%). Retainage receivable accumulates across all progress billings and releases at substantial completion or on the schedule the contract sets.
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