Retainage is the percentage of a contract amount, usually 5% to 10%, that gets held back until a project reaches substantial completion. It protects the property owner, but it creates a bookkeeping challenge because you’ve earned the money and haven’t received it yet. Tracking it correctly matters for cash flow visibility and accurate financial statements.

Start by creating two dedicated accounts in your chart of accounts. Retainage Receivable is an asset account for amounts your clients are holding from you. Retainage Payable is a liability account for amounts you’re holding from your subcontractors. Don’t lump these into regular accounts receivable or accounts payable. Keeping them separate lets you see exactly how much retainage is outstanding at any point.

When you invoice a client for a progress payment, record the full amount you’ve earned as revenue. Then split the receivable into two pieces. The portion the client actually pays goes against accounts receivable as normal. The withheld percentage goes to retainage receivable. Your income statement reflects the full amount earned, while your balance sheet shows the retainage sitting as an asset you haven’t collected yet.

On the payable side, do the same thing in reverse. When a sub invoices you for $10,000 and your contract holds back 10%, you record the full $10,000 as a job cost. You pay $9,000 and move $1,000 to retainage payable. That liability sits on your books until the sub completes their scope and you release payment.

Track retainage by job, not just as a lump total. You need to know how much is outstanding on each project so you can bill for it at the right time. Most contracts specify when retainage gets released, whether that’s at substantial completion, final inspection, or a set number of days after. Missing that billing window means money sits out there longer than it needs to. This is where proper construction job costing makes a real difference, because retainage tracking at the project level only works when everything else is organized by job too.

Review your retainage receivable balance monthly. It’s easy for released retainage to fall through the cracks, especially when you’re juggling multiple active projects. If a project finished two months ago and you haven’t invoiced for the retainage, that’s cash you’re leaving on the table.

Cash flow planning should account for retainage timing. On a $500,000 project with 10% retainage, that’s $50,000 you won’t see until the end. If you’re also holding retainage from your subs, the payable side partially offsets this, but the timing rarely lines up perfectly. Understanding these gaps helps you avoid cash crunches near project completion.

In QuickBooks Online, you can handle retainage with manual journal entries or by using progress invoicing features with some workarounds. QuickBooks Desktop’s contractor editions handle retainage more natively. Either way, the accounting logic is the same. Record the full amount earned, split the withheld portion into a retainage account, and reverse it when payment is released.

If your books currently dump everything into regular AR and AP with no retainage tracking, cleaning that up is worth the effort. Knowing your true retainage position by project gives you better cash flow forecasts and prevents you from losing track of money you’ve already earned. If you need help getting this set up or straightening out past retainage records, our bookkeeping services in Jacksonville, FL include working with contractors to build systems that actually reflect how construction accounting works.