Calculating and displaying retainage on an AIA G-702/G-703 form can be confusing – this short tutorial is designed to discuss different ways that retainage (or retention) can be held, calculated, and displayed.
Retainage is a portion of the agreed upon contract price deliberately withheld until the work is substantially complete to assure that contractor or subcontractor will satisfy its obligations and complete a construction project.
- a fixed percentage of the contract – such as 10% of the value of the contract
- a variable rate – such as 10% of the contract until the contract is 50% complete; at which time it is then reduced to 5%
- a variable rate – such as retainage is held at 10% on labor and 0% on materials
Retainage clauses are usually found within the contract terms outlining the procedure for submitting payment applications. A typical retainage clause parallels the following language: “Owner shall pay the amount due on the Payment Application less retainage of [a specific percentage].
The amount of retention that is held quite often signifies a portion of the contractors overall profit on the construction project.
Some accounting professionals, who don’t understand construction or the whole retainage/retention process often recommend that a contractor either:
- delay holding the retainage until the project is completed, OR
- hold the full amount of retainage on the initial billing
Nether of these methods is correct.
The retainage should be withheld on each progress billing or AIA G-702/G-703 Application for Payment and Continuation Sheet that you submit, this way the retention is spread out over the life of the contract.
Calculating a fixed or flat 10% retention
Let’s assume that you have a contract with a total value of $10,000.00 with retention held at 10%. The first progress invoice or AIA Billing that you create is for 25% of the job or $2,500.00. You would indicate that you were billing for the FULL $2,500.00 LESS the 10% retainage ($250.00) and that you were requesting a payment of $2, 250.00.
The G-702 Contractors Application for Payment would display the billing data as shown in the screenshot below:
Calculating and displaying retainage/retention on an AIA G-702/G-703 can be complex, especially if you are doing them manually. If you use QuickBooks and need to produce the AIA G-702/G-703 and are currently doing your billing using Excel spreadsheets – look into automating this process through the use of Construction Application for Payment Solution, find out more and request a free, no obligation 30-day trial.
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