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what is retention in construction accounting

The issue of a small percentage of a contract from last year becomes less important as time goes on. Sometimes this can be because the contractor is badly organised and doesn’t get around to paying back the sub-contractors. There are even cases in which contractors have made the absorption of sub-contractors’ retention’s into their own profits part of their usual operating procedure. The usual practice is for the works to be inspected at the end of the defects liability period, unless there is an urgent need for more immediate rectification.

  • The proposed deposit scheme would also importantly ringfence the money from bankruptcy, to avoid a “Carillion” happening again.
  • Retentionpayments are a percentage of milestone payments owed to a subcontractor or vendor.
  • If you use a standard accounts package like Sage or do not use accounts software, then Payment Applications and Retentions can be a headache.
  • So now is a great time to focus on making sure you get your retention money back.
  • Typically this may be for a 12-month period between a Certificate of Completion being given and the issue of a Maintenance Certificate.
  • Problems commonly arise in construction during the time it takes to complete jobs.

So I believe that, in the first instance, it should be recognised as turnover. For example, where retentions are only recognised on receipt but, in practice, a large proportion is in fact consistently paid over to the builder and there is a significant real estate bookkeeping tax effect . In such cases you should seek advice from an HMRC Advisory Accountant. If you have achieved the necessary stage that triggers the release of the first moiety, the contractor is in breach of contract if he does not release it.

Setting the Framework Using Construction Accounts Payable Software

Assuming you have unpaid retentions and have been unable to gain an acceptable resolution with the company that contracted you, then you will most likely need legal support – this is where Escalate can help. In our experience, too many contractors simply accept the terms and conditions of the contract that they are given. Most of the contracts that we see are vague in terms of when a retention will be paid.

What is construction retention?

A construction retention payment (also called retainage) is the amount of money held back until the project is complete. Retainage is usually a percentage of the total project cost. It typically sits at 5% or 10%.

It calculates your revenue and costs based on the number of units you deliver to the customer. It gets compared to the total number of units that got specified in the terms of the contract. Even though construction accounting varies, it still follows the Generally Accepted Accounting Principles. Any business that’s publicly traded or releases financial statements use these principles.

Effective accounting for construction projects

The collection of retention money is not usually on most Specialist Sub-Contractors’ list of priorities. Any contracts entered into after 1 October 2011 that continue to link the release of retention to another contract will not be compliant with the Act and the release of retention will be governed by the Scheme for Construction Contracts. Take the stress and hassle out of the process and use our expert team. Our specialist retention collections team take the hassle out of collecting retention owed to you and we will provide you with aproposal for a no collection no fee commission on retention cases where appropriate. Retentions are another niche requirement of construction accounting.