Retainage
A portion of each payment, often 10%, that a customer holds back until a contract is complete, common in construction.
In short
- It protects the customer if the work is unfinished or defective.
- The supplier records retained amounts as a separate receivable; the customer as a separate payable.
- Several Canadian provinces set statutory holdback rules for construction.
Retainage, called holdback in Canada and retention in the UK, is money a customer withholds from each progress payment on a contract. It is released after the work is complete, inspected and any lien or warranty period has passed.
How it works
A contractor bills $100,000 for work done this month. With 10% retainage, the owner pays $90,000 now and holds $10,000. The same happens on every progress bill. At the end of the project, the accumulated holdback is released, often after a set period during which subcontractors and suppliers can register liens.
In Canada
Construction holdbacks are set by provincial legislation in several provinces. Ontario's Construction Act, for example, requires a 10% holdback and sets rules for when it must be released. Quebec does not have a statutory holdback in the same way, but contractual retentions are common. Contractors working across provinces need to track each project's rules.
Accounting for it
For the contractor, retained amounts are a receivable, recorded separately from ordinary receivables because they are not collectible until conditions are met. For the owner, they are a payable, often called retainage payable. Sales tax generally applies to the full contract amount, but the timing of when tax becomes payable on holdbacks can differ. It is worth confirming the rules for each jurisdiction.
Worked example
Three progress bills
A subcontractor bills $60,000, $80,000 and $40,000 over three months on a job with 10% holdback. The general contractor pays $54,000, $72,000 and $36,000, and holds $18,000 in total. Sixty days after the job is certified complete and no liens are registered, the $18,000 is released.