Retention payments and how to account for them


Retention payments and how to account for them

Whilst retention payments are very common in the building and construction industry we continually see them being incorrectly accounted for, or not accounted for, and therefore often overlooked, resulting in advance payment of taxes and/or lost income.

What are Retention Payments

Retention payments involve the customer retaining a portion of the contract amount until a time after completion of the project based on the terms in the contract, which can often be 6, 12 or in some cases 24 months. The retention acts as a “security” that the project is completed and free of any defects. Once the retention period has passed, the retained funds are paid to the builder. 

If the project has retentions, this will be disclosed in the contract, so it is important you read all contracts prior to signing as many builders have been caught out when they did not realise there was a retention in the contract. This can cause unexpected cashflow challenges as often the retentions are where the profit for the project is. The contract should outline:

  • The amount that will be retained (often shown as a %),
  • What is expected for release of the retention, and
  • Timing of when the retention will be paid.

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