Retention in Construction AP

Retention (or retainage) in construction is a percentage of each progress payment that is withheld by the principal contractor or owner to provide security against defects or incomplete work until the project reaches practical completion or a defined defects liability period expires. Retention is typically 5 to 10 percent of each progress payment, up to a maximum of 5 to 10 percent of the contract value, and is released -- usually in two tranches at practical completion and end of defects liability period -- provided no defects or outstanding obligations remain.

For the AP team processing subcontractor progress claims, retention means that the invoice amount and the payment amount are different. A subcontractor invoicing AU$100,000 for a progress claim under a contract with 5 percent retention will receive AU$95,000. The AP system must correctly record both the full invoice value (as the liability to the subcontractor) and the withheld retention (as a separate creditor balance) to ensure both the expense and the future obligation are accurately captured.

Accounting treatment of retention

Retention withheld from subcontractor payments is a liability to the subcontractor -- the principal contractor owes it, subject to the defects and completion conditions. It should be recorded as a separate creditor balance in the AP sub-ledger, distinct from normal trade payables. When retention is withheld, the accounting entry is: debit subcontractor expense (full contract amount), credit trade creditors (amount paid), credit retention payable (amount withheld). When retention is released at practical completion or end of defects liability, the entry is: debit retention payable, credit bank.

Failure to correctly separate retention from trade payables results in an understated current liability (the retention is not due now but is owed in the future) and an overstated payables balance if retention is netted off rather than shown separately. For businesses with large construction programs, the retention payable balance can be material -- in the hundreds of thousands of dollars -- and incorrect accounting treatment affects both balance sheet accuracy and cash flow forecasting.

Retention trust accounts

Queensland's Building Industry Fairness (Security of Payment) Act 2017 introduced mandatory project trust accounts and retention trust accounts for certain construction projects. Retention withheld from subcontractors must be held in a separate, dedicated trust account that cannot be commingled with the principal contractor's general funds. This requirement extends to head contractors and subcontractors above defined project value thresholds. Victoria and other jurisdictions are implementing similar trust account frameworks.

For AP teams in businesses subject to these trust account requirements, this creates additional process obligations: opening and maintaining project trust accounts, recording all retention deposits and withdrawals through those accounts, and providing statements to subcontractors showing their retention balance. Non-compliance with trust account obligations carries serious penalties including criminal liability for trust account misuse in Queensland. AP teams in construction businesses should confirm whether trust account obligations apply to their projects before processing retention through normal AP channels.