What it is
Retainage is the slice of each progress payment the owner or general contractor holds back until the work is complete and accepted. Typically 5 or 10 percent on private work. It exists to give the paying party leverage over punch-list completion, and it is a normal, expected part of commercial and public construction.
It is also, for a subcontractor, the most misunderstood number on the balance sheet. Retainage is simultaneously the profit on the job and the cash you do not have. On a $200,000 contract with 10 percent retainage, $20,000 is held. If the job's margin is 12 percent, then nearly all of the profit on that job is sitting in retainage, unavailable, for months after the crew has moved on.
Why this matters more than it sounds: a contractor who is growing is starting more jobs than they are closing. Every new job adds to the retainage balance. Growth therefore consumes cash even when every single job is profitable, and the books will not show you this if retainage is mixed into ordinary accounts receivable.
South Carolina specifics
There are two different worlds here and contractors routinely assume the rule from one applies to the other.
On construction contracts awarded under South Carolina's Consolidated Procurement Code, retainage is capped. The limit in the Code is 3.5 percent of each progress payment (S.C. Code Ann. § 11-35-3030). If you subcontract on state work and someone is holding 10 percent, that is worth a conversation.
South Carolina does not impose a statutory retainage percentage on private construction contracts. The contract governs. That means the number, the release conditions, and the timeline are whatever you agreed to — which is precisely why the retainage clause deserves to be read before signing rather than discovered at the end of a job.
Flow Bookkeeping Services is a bookkeeping firm, not a law firm, and this is not legal advice. Statutes change and contract language controls. Have your attorney read the retainage and payment terms on anything significant, and confirm current law before relying on a percentage.
The accounting
There is more than one acceptable way to handle retainage, and the right answer depends on your contracts, your size, and what your CPA wants for tax purposes. What is not acceptable is switching between them, or having no policy at all.
The full earned amount is recognized as revenue when the work is performed. The retained portion is moved out of ordinary accounts receivable into a distinct Retainage Receivable account. Revenue is complete and accurate, and the balance sheet shows clearly that a portion of what you are owed is not currently collectible.
The retained portion is not recognized as revenue until it is released. This is the more conservative treatment and the one we apply by default for trade contractors, because it prevents the situation where a profit and loss statement shows earnings that no amount of collection effort can turn into cash this quarter.
| Question | Method A | Method B |
|---|---|---|
| Revenue timing | Recognized when earned | Recognized when released |
| Balance sheet | Separate retainage receivable | Not yet on the books as revenue |
| Best for | Larger contractors, bonded or audited work | Smaller trade contractors managing cash tightly |
| Main risk | Profit appears before cash exists | Understates earned revenue in-period |
Whichever you use, the non-negotiable part is the same: retainage gets its own account. Left inside normal accounts receivable it silently destroys the usefulness of your aging report, because every retainage balance looks like a 90-plus-day delinquency when it is nothing of the kind.
Both directions
General contractors and anyone using subcontractors are usually on both sides of this. Retainage you withhold from your subs is a liability — money you owe but have not paid — and it belongs in a Retainage Payable account, not netted against the sub's ordinary payable.
When retainage payable is not tracked separately, two things go wrong. Your accounts payable aging looks worse than reality, and at release time nobody can reconstruct exactly what was held per sub per job. That reconstruction, done from paper invoices a year later, is one of the more expensive kinds of cleanup there is.
Practical habits
Retainage shows up most often for commercial and new-construction trade work — the kind of jobs common for general contractors, electrical contractors, and crews working subdivisions around Summerville and North Charleston.
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