Retainage definition
/What is Retainage?
Retainage is a portion of a contract’s total price that is withheld until project completion. This withholding is intended to ensure that the quality of the contractor’s work is adequate. If the final inspection finds problems with the contractor’s work, the retainage will continue to be held by the client until the targeted issues have been rectified. Since the amount of retainage (typically 10%) may comprise the entire profit of a contractor, it is considered a powerful incentive to ensure that a project is completed in accordance with the wishes of the client. The retainage amount should not be so large that the contractor is forced to finance a project.
A retainage is more likely to be imposed by a client on a new contractor, since there is more uncertainty about the contractor’s performance. Retainage is less likely to be imposed when the client needs to have a project completed within an unusually short period of time. Waiving the retainage clause in a contract is considered a major incentive to entice a contractor to work for a client.
Disclosure of Retainages
A contractor should disclose in the notes to its financial statements the amount of any receivables billed to customers under contract retainage agreements and which have not yet been paid. They should also note the amounts expected to be collected within one year and the years in which any additional retainage will be collected. For example:
Accounts receivable includes amounts due from clients of $234,000 at December 31, 20X1 that have been retained pending the completion of contracts and customer acceptance of deliverables. The full amount is expected to be collected within one year. Retentions are usually due 30 days following the completion of a project and acceptance by the customer.
Example of Retainage
Uptown Properties hires Smith Construction to build it a new corporate headquarters. In the construction contract, Uptown negotiates a deal under which it pays Smith $200,000 per month for ten months, with a 10% retainage. This means that Uptown actually pays Smith $180,000 in each month, which sums to a $200,000 retainage by the end of the contract period. Once the project is complete, Uptown presents Smith with a list of issues to be corrected. Once Smith completes the issues noted on the list, Uptown pays Smith the full amount of the $200,000 retainage.