What is retainage in construction?
Retainage (also called retention) is a percentage of each progress payment, usually 5 to 10 percent, that the payer holds back until the project is substantially complete. It protects the owner or general contractor against unfinished or defective work, and it is released at closeout. Contractors are owed retainage on the work they bill (receivable) and may hold it back from their own subs (payable).
Why retainage exists
On a long project, the owner or general contractor wants assurance the job will be finished correctly. Holding back a slice of every payment gives them leverage until the punch list is done. The trade-off is that the contractor finances that withheld money for months, often after the work is complete.
Receivable vs payable retainage
You are owed retainage on the amounts you bill upstream, and you may withhold retainage downstream from your own subcontractors. Tracking both sides matters: the money owed to you is real cash you must collect at closeout, and the money you hold must be released on time so subs are not left short.
How to track it without losing a dollar
General accounting software usually does not track retainage well. A dedicated retainage ledger shows every dollar held from you, with expected release dates, and every dollar you hold from subs. That is the difference between collecting all your retainage and quietly leaving some on the table at the end of a job.