Construction Bookkeeping: Managing Retentions

Retentions are a necessary evil in construction. The head contractor holds back 5% - 10% of your progress claim to ensure you fix any defects. But if you don't track this money, you'll never see it again.

Accounting for Retentions

Retentions are NOT an expense. They are an Asset (Accounts Receivable).
You have earned the money; you just haven't been paid it yet.
The Mistake: Many bookkeepers write off the 5% short payment as "Bank Fees" or "Discount." This is wrong and costs you thousands.

Tracking the "Defects Liability Period"

You typically get 50% of the retention back on Practical Completion, and the remaining 50% after 12 months. You need a system that alerts you on that 12-month anniversary to invoice the final amount.