Retainage is the percentage of a contract amount, usually 5% to 10%, that the project owner withholds until the work is substantially complete. It protects the owner, but it creates a real bookkeeping challenge for contractors who need to track what they’re owed and what they owe their subs.

The foundation is setting up dedicated accounts in your chart of accounts. You need a Retainage Receivable account on the asset side for amounts your clients are holding from you, and a Retainage Payable account on the liability side for amounts you’re holding from subcontractors. These are separate from your regular Accounts Receivable and Accounts Payable. Mixing them together makes your financials misleading because retainage doesn’t follow the same collection timeline as normal invoices.

When you bill a client $100,000 and they withhold 10%, you record $90,000 to Accounts Receivable and $10,000 to Retainage Receivable. The full $100,000 still counts as revenue because you earned it. When the retainage is released after project completion, you move it from Retainage Receivable to cash. The same logic applies on the payable side when your subs invoice you and you hold back their retainage portion.

Track retainage by project, not as one lump balance. If you have five active jobs with retainage held on each, you need to know exactly how much is outstanding per project. When jobs close out at different times, a single combined retainage balance is impossible to reconcile. This is where construction job costing becomes essential. Your retainage tracking should tie directly to each project so you can see the full financial picture when evaluating profitability.

In QuickBooks Online, you can set this up using sub-accounts or classes to break retainage down by project. The initial setup takes some thought, but once the structure is in place, recording retainage on each invoice becomes routine.

The cash flow impact is bigger than most contractors realize. If you’re billing $500,000 across several active projects and 10% is retained, that’s $50,000 you’ve earned but can’t touch yet. Seeing that number broken out on your balance sheet changes how you think about bidding, spending, and timing. Many contractors feel cash-strapped without understanding that a significant chunk of their money is sitting in retainage they haven’t collected yet.

On the payable side, track what you owe your subs just as carefully. When the owner releases retainage to you, your subcontractors expect their portion quickly. Clean records mean you know exactly what’s due and to whom without digging through old pay applications.

Review retainage balances monthly. Stale retainage receivable is one of the most common problems in construction accounting. A project finishes, the punch list gets completed, final inspection happens, but nobody sends the invoice for the retained amount. That’s your money sitting in someone else’s account because the follow-up didn’t happen. A monthly review catches these situations before they drag on for months.

Arizona doesn’t cap retainage on private projects the way some states do, so you may see varying retainage rates across different contracts. Make sure each project in your books reflects the actual retainage percentage in the contract, not a default assumption.

If you’re running multiple projects and retainage tracking feels like it’s slipping through the cracks, working with a bookkeeper in Chandler who understands construction accounting can get the accounts set up properly and keep them reconciled. The goal is having a clear picture of what’s held, what’s due, and what’s been released on every active project at any given time.