General Inquiries

Outstanding Retainage

  • 1.  Outstanding Retainage

    Posted 02-18-2020 17:16
    Hello everyone.  As it pertains to outstanding cash retainage, what percentage of this balance is outside the scope of forced warranty work or audit, or said another way, how much isn't getting paid simply because an owner isn't paying you?  Is this even an issue? Thank you!

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    Brad Anderson
    IMA - US
    972.759.3719
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  • 2.  RE: Outstanding Retainage

    Posted 02-19-2020 14:02
    ​Hi Brad,

    Regarding your question about "outstanding cash retainage" I am not familiar with that as a term. However, as far as retainage is concerned  I would start with the contract for guidance. Retainage ultimately impacts cash weather it is a receivable or payable. As to when you get it or have to pay it depends again on the contract. If your customer isn't paying you because the contract has a "pay when paid" or a "pay if paid" clause, you generally won't receive the retainage until your customer receives their money/cash.

    Again, read the contract because it should spell out the terms of when you should be entitled to receive your retainage. Another potential obstacle could be they are demanding your company do something additional like provide the "as built drawings", complete  punch list items, completion of a cost audit or something else before releasing the retainage. Keep in mind that customers sometimes use retainage as something to hold over a contractors head to get something whether warranted or not.

    I hope this helps but if I didn't address the question you were trying to ask please feel free to reach out to me.

    Tony



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    Anthony Stagliano CPA, CCIFP
    National Managing Director of A/E/C Services
    CBIZ, Inc. and Mayer Hoffman McCann P.C.
    Plymouth Meeting PA
    (610) 862-2420
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  • 3.  RE: Outstanding Retainage

    Posted 02-20-2020 14:46
    Brad,
    I would definitely consult the contract regarding retention.  I have seen owners try to hold $250k retention over $5k of punch list items.  Many contracts stipulate holding two times the value of any remaining work.  All good contracts will provide an answer for this situation.  Communication is the next big issue here.  Many owners will look for any excuse to avoid paying complete.  Talk to them to make sure there are no barriers (real or perceived) preventing satisfactory final payment.
    Good Luck
    Wes

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    John Cochran CCIFP
    Director of Accounting - Construction Group
    Ergon, Inc.
    Flowood MS
    (601) 933-3278
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  • 4.  RE: Outstanding Retainage

    Posted 02-21-2020 10:37

    Thank you gentlemen for reaching out and helping me to better understand.

    Here is my original thought: A contractor may have as much as 10M sitting out there for the non-received revenue that's being held in retainage.  Isn't this a universal issue for contractors? Is there a trade credit play for this scenario? So my thought is this...I believe this would be a receivable only when the contractor hits a milestone and/or it is agreed work was completed as expected (per the contract).  Once they hit the milestone, it's a receivable. If the non-payment is due to a contract dispute (forced warranty work or audit), that would fall outside of the scope of insurance.  However, if they can prove in court that money is owed and wasn't paid - it's insurable. 

    For the contractors out there...How often do contractors run up against non-payment when NOT connected to a contract dispute?




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    Brad Anderson
    IMA
    (316) 655-9944
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  • 5.  RE: Outstanding Retainage

    Posted 02-25-2020 10:37
    Brad
    Here is how I understand it.  If a contractor bills for $100k for work performed but $5k is withheld as retention due to how the contract is written, then the $100k is still earned (exclusive of percentage of completion adjustments).  So, if the work is performed then the revenue can be recognized, the cash just will not be received until other contract obligations are met.  In my experience, there have been very few non-payments due to contract disputes.  At my previous employer I think we had one write-off over about 15 years.  There is usually some middle ground that can be reached.

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    John Cochran CCIFP
    Director of Accounting - Construction Group
    Ergon, Inc.
    Flowood MS
    (601) 933-3278
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  • 6.  RE: Outstanding Retainage

    Posted 02-26-2020 09:35
    Brad,
    Under the new revenue standards, the retainage is considered a contract asset as the rest of the contract must be completed for it to become a receivable that is actually due.  Previously, we included retention in our A/R, but it must now be disclosed in a separate category.  This does not impact revenue recognition, revenue is still earned at the same pace, and the retention value is still earned, it is just not a true receivable yet, but a contract asset.

    Retention is a pretty universal issue for contractors.  Banks typically exclude retention from A/R when considering credit as the cash is not a true receivable yet.  Retention becomes a receivable when your contract allows you to actually bill the retention.  It is revenue the moment it is earned, but it is a contract asset until billed and then it becomes a receivable.  If you have trouble collecting, say past 90 days, the bank will exclude it as well.

    In my experience, a client may withhold payment of retention until they feel all terms of the contract are met.  You must review your contract to see what is permissible.  On the insurance question, I am assuming you insure your receivables.  If so, the retention would not be considered an insurable A/R until you have met the terms of the contract and can clearly claim the receivable.  Insurance will balk at any contract dispute as proof that the retention was not earned.  If the contract is clearly completed and retention billed, warranty claims could hamper the legitimacy of that billing.

    Retention can be a big bill and it can be hard to collect for a longer period of time than your normal A/R, but I believe it is typically paid without too much fanfare unless there is a contract dispute.

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    Mark Smith
    Controller
    Saulsbury Industries
    Odessa TX
    (432) 214-0701
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  • 7.  RE: Outstanding Retainage

    Posted 02-26-2020 18:19
    John and Mark - thank you for your feedback.  Especially helpful and exactly what I was looking for.

    Much appreciated!
    BA

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    Brad Anderson
    IMA
    (316) 655-9944
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