I get a lot of questions about retention—how it works; releasing versus billing; impact to Over/Under billing (WIP); how to manage in Sage 100 Contractor.
First of all, retention is designed to give the owner or general contractor some leverage to make sure the subcontractor has an incentive to finish the job. If you’ve been paid all but $1,000 let’s say, and they need you back to do a couple of days’ of punch list items, you might just walk away from the $1,000. If you’re still owed 10%, or maybe 5% of the contract value, you’re more likely to be incentivized to come back and finish up so you can get the remaining money.
When you setup a job, you have a budget—the amount of money you expect to spend in order to fulfill the scope of work in the contract. When you use 25% of the budget, you expect to have finished 25% of the project. That means you’ve earned 25% of the contract, so you bill it. The GC/Owner accepts the invoice from you and books that you’ve completed 25% of the contract, then they ‘short pay’ you, less the retention, leaving an open balance on their books (they owe you) and on your books (you’ve earned it and it’s coming, but not yet).
Retention is presented in its own category on an aging report. When you present your AR to the bank as part of your borrowing base, they often exclude anything over 90 days (sometimes over 60 days). They’re interested in making sure they don’t extend credit against money you may never receive, and the older it gets, the harder it may be to collect. However, anything in the retention column is not held against you since it is not aging yet. Maintaining accurate information about your retention is critical if you secure your Line of Credit with the AR Aging.
OK, let’s move on. In the Over/Under billing report or any project management report, your billing should reflect how much of the contract you’ve earned—this is not a cash conversation, it’s an ‘earned’ conversation. When the scope of work is complete, you’ve earned 100% of the contract and you should have billed 100% of the contract. That does not mean you’ve received 100% of the cash yet and often it’s the retention that’s still owed.
Each time you present the G702/703 style of billing, you show how much of the contract is complete, then you show how much they are holding back (retention) and the difference is how much they owe or have paid so far. At the end, everything is billed, so you can’t ‘bill’ retention—everything is already billed. However, you can release the retention. Releasing it moves it from the Retention column to the Current Due column. Let’s say you send the final progress bill and it’s for the retention balance. This moves the dollars from the Retention field to the Current Due field—it doesn’t change the Completed Contract amount. If you release it on the February progress bill, the due date for the retention is now March 31st if the terms are 30 days. On your aging report, the released retention begins to age. It’s important to stay on top of your collection efforts so the retention doesn’t make it to the 90+ column, putting your borrowing base in jeopardy.
Retention provides a mechanism for a GC or Owner to hold back part of the payment for the work you truly have completed, so there is an incentive for you to finish the job. It is related to when you receive cash, NOT whether you’ve billed it. In Sage 100 Contractor, you’ll have several (or many) invoices that have retention. Rather than drill down to each one to release retention, use the Options feature in the 3-5 screen to release retention, either in full (down to 0%) or to reduce (10% down to 5%, for example). Using this feature also updates the Due Date as well as taking care of all the open invoices at the same time. Strongly recommended! —CMW