How retainage works
Retainage terms are set in the construction contract and usually apply to both the general contractor and its subcontractors, flowing down the same percentage at each tier. The withheld amount is billed on every progress invoice as a separate line, so the contractor is paid the net amount while the retainage balance accumulates as a receivable.
Contractors track retainage separately from regular accounts receivable because it is collected much later, often months after the related work, and some states set legal limits or release schedules for it. Releasing retainage typically requires substantial completion, a punch list sign-off, or a set number of days after final inspection, depending on the contract. Some contracts include a reduced retainage rate once a project reaches 50% completion, and a handful of states cap how long retainage can legally be held after substantial completion, so contract terms should be checked project by project.
Example
A subcontractor bills $50,000 for framing work completed this month under a contract with 10% retainage. The contractor pays $45,000 now and withholds $5,000, recorded as retainage receivable rather than regular accounts receivable. That $5,000, along with retainage from earlier invoices, is collected once the project reaches substantial completion and the punch list is signed off. If the project later reaches substantial completion with a clean punch list, the subcontractor invoices for the full accumulated retainage balance in one final billing, separate from its regular monthly progress invoices.
Retainage in QuickBooks Online vs Xero
In QuickBooks Online, retainage is usually tracked with a dedicated retainage receivable other-current-asset account and a retainage line item on each progress invoice. Xero does not have a built-in retainage field, so contractors typically use a tracking category or a manual retainage line and a separate current asset account to get the same visibility.
Related terms
How LedgerBPO handles retainage
We set up your chart of accounts to track retainage separately by job, apply the correct percentage on progress invoices, and keep an aging schedule of retainage owed by project. This gives you a clear view of cash tied up in retainage across active jobs instead of it disappearing into a general receivables balance.
Bookkeeping and billing for construction companies & contractors