Presenting a contractor's retention receivables
How a building client presents and discloses the amounts customers hold back as retention until a project is accepted, and when it may be a contract asset.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A building contractor invoices its client monthly as the work progresses. Each payment certificate deducts a slice of the amount as retention, held back by the customer until the project is complete and the defects period has passed. By year end, the contractor may have a large sum sitting with customers across several projects, earned but not yet paid.
In the trial balance, that money often hides inside trade receivables, or worse, has been written off by a bookkeeper who saw an invoice "short-paid". For the firm preparing the statements, retention needs its own line of thinking: what it is, where it sits, how long it will take to collect, and what the notes should say about it.
What retention is
AccountingTools defines retainage, the term used in some markets for retention, as a portion of a contract's total price that is withheld until project completion to ensure the contractor's work is of adequate quality. The customer is protecting itself against defects; the contractor has done the work and is waiting for acceptance.
That combination, earned but not yet collected, is why retention needs separate treatment. It is not a bad debt and it is not unearned. It is a right to be paid later, usually on conditions.
A separate receivable, and sometimes a long-term one
AccountingTools states that contractors must record retainage as a separate receivable, since it has been earned but not yet collected. It adds that retainage may be classified as a long-term receivable if the customer can hold it for more than a year.
For a South African, Nigerian or Kenyan contractor on a long project, that last point often applies. Retention on a multi-year building contract, or one with a long defects liability period, may not be collectable within twelve months of year end. Splitting the balance between current and non-current gives a truer picture of the contractor's liquidity than lumping it all into current receivables.
To do the split, the firm needs for each project:
- the retention held at year end;
- the expected practical completion date;
- the defects period and when the final release is due;
- any amounts released in part at completion and the remainder later.
What the notes should show about timing
AccountingTools' guidance on retainage states that a contractor should disclose in its notes the billed but unpaid receivables held under retainage agreements, the amount expected to be collected within one year, and the years in which any further retainage will be collected.
That is a practical guide to what readers need, whatever the framework. A lender looking at a contractor's statements wants to know how much cash is tied up in retention and when it will come back. A note that gives the total, the part due within a year and the rough timing of the rest answers that directly.
Where retention is significant, also consider saying how the client assesses whether it will be collected. A project in dispute, a customer in financial difficulty or a long-running defects claim all affect recoverability.
Retention receivable or contract asset?
Under IFRS 15, the label depends on the contract. ACCA quotes IFRS 15's definition of a contract asset as a right to consideration for goods or services transferred when that right is conditioned on something other than the passage of time, such as the entity's future performance. ACCA's article on contract assets and liabilities also explains that contract assets and contract liabilities must be accounted for separately from trade receivables, which arise when an invoice has been issued.
So the firm should read the contract:
- If retention is released simply on a date once the work is done, with nothing further required from the contractor, the right looks unconditional apart from time, which points towards a receivable, shown separately.
- If release depends on the contractor completing the remaining work, remedying defects or obtaining a completion certificate, the right is conditioned on future performance, which points towards a contract asset.
Many building contracts sit between the two, so record the reasoning on the file and apply it consistently across projects. Whichever label applies, retention should not be mixed into ordinary trade receivables.
Adding the line and note in the Studio
In Achekam's Studio, a firm can add its own statement lines and groups and change the wording of any row title, and later builds keep those choices. A "Retention receivables" or "Contract assets" line can be set up once for a construction client and will stay in place in future builds. Each custom line still totals into a standard line, so the notes, cash flow and iXBRL tags stay consistent.
Notes take their figures from the mapped trial balance, so the retention balances should sit in their own accounts in the trial balance, current and non-current if the split is made there. Facts the trial balance does not hold, such as the expected collection years, are left as "[to be completed]" for the preparer to fill in from the project schedule.
The Studio's standard policy wording is based on IFRS for SMEs and labelled for review before issue; staff can write their own policies. For a contractor, a short policy that says how retention is recognised, classified and assessed for recoverability is worth writing specifically.
A year-end routine for contractors
- Obtain a schedule of retention by project, agreed to payment certificates.
- Check that short-paid invoices have not been written off when the shortfall is retention.
- Split the balance by expected collection timing.
- Decide, contract by contract, whether retention is a receivable or a contract asset.
- Draft the note: total held, amount due within a year, timing of the rest.
Why contractors should track retention separately from overdue debt is explained for business owners in retention that is not chased as overdue. Construction contracts after IAS 11 covers how revenue on these projects is recognised, and auditors will find the related procedures in auditing construction contracts. Ask every construction client for its retention schedule with the year-end pack; most keep one for their own cash planning.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
