Quick answer: The payment amount on an AIA G702 is not your revenue. The pay application bills the owner; ASC 606 measures revenue by progress toward completion. The gap between those two numbers, plus retainage, is what creates the contract asset or contract liability sitting on your balance sheet every month.

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What a progress billing does to your books

The chain from schedule of values through retainage to WIP, why revenue is not what you billed, and the 2025 reversal on retainage classification.

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Where the pay application and your income statement stop agreeing

Take a $2,400,000 contract with estimated costs of $2,040,000, so an estimated gross profit of $360,000, or 15%. At the end of month six you have incurred $1,020,000 of cost, exactly half the estimate.

Under ASC 606 the contractor recognizes revenue over time using a measure of progress. Cost-to-cost is the input method most construction contractors use. At 50% cost incurred, earned revenue is 50% of $2,400,000, or $1,200,000, and gross profit to date is $180,000.

Now look at the pay application. Front-loaded general conditions and an aggressive early schedule of values put your total completed and stored to date at $1,392,000 — 58% of the contract. With 10% retainage, the certificates issued to date total $1,252,800.

You have billed $1,392,000 of contract value and earned $1,200,000. The $192,000 difference is not profit. It is a contract liability: the customer has paid ahead of your performance. Most contractors still label it billings in excess of costs and estimated earnings, and that caption is what your surety and your bank will look for, though the CFMA now recommends the ASC 606 terms because the legacy arithmetic is not identical. Either way, the number belongs on the balance sheet, and it will reverse. Every dollar of it is revenue you have already collected and still have to go earn.

Flip the same job the other way and you get the opposite problem. If your schedule of values is back-loaded, or the architect is slow to certify change orders, you earn faster than you bill and carry a contract asset instead. That is a cash flow problem wearing an accounting costume, and it is the pattern behind most of the overbilling and underbilling swings we see on contractor work-in-progress schedules.

Retainage is the classification most contractors get backwards

Before ASC 606, retainage generally sat in accounts receivable. That is no longer the default answer. A FASB staff educational paper on presentation of retainage for construction contractors puts the test plainly: classification depends on whether the right to payment is unconditional.

If the retainage is contingent on completing future work, hitting a milestone, or satisfying a performance requirement — which describes most long-term construction retainage — the right is conditional, and the amount is included in the contract asset or contract liability, netted at the individual contract level. Only when nothing but the passage of time stands between you and the money does retainage become a receivable.

This has a practical consequence you will feel at renewal time. Netting conditional retainage into the contract position changes what your working capital looks like to a surety. If retainage is material, the presentation choices available to you — a parenthetical on the face of the balance sheet, a subtotal, or note disaggregation — are worth deciding deliberately rather than by accident. How retainage is tracked and released is a separate discipline from how it is presented.

Common mistakes we find in pay-application-driven books

Booking the certified payment as revenue. The certificate is a billing event. Revenue follows progress, not the architect’s signature.
Stored materials counted as work completed. Materials properly stored belong in their own column for a reason. They are billable, but they have not been installed and they have not consumed labor.
Change orders billed before they are approved. If the change order is not in the contract sum to date, the cost sitting against it inflates your percent complete and understates your margin.
A schedule of values that cannot be tied to cost codes. Without that link, percent complete is a guess and the work-in-progress schedule cannot be audited.
Retainage left in receivables by habit. See above. It is a conclusion you have to reach, not a default you inherit.

Frequently asked questions

What is an AIA G702 and G703?

They are a matched pair of standard construction payment forms. G702, the Application and Certificate for Payment, is the one-page summary a contractor signs and the architect certifies. G703, the Continuation Sheet, carries the line-by-line detail from the contractor’s schedule of values that supports the summary total.

What is an AIA document G702?

G702 is the contractor’s formal request for progress payment on a construction project. It reconciles the original contract sum, approved change orders, work completed and stored to date, retainage withheld, and prior payments, and ends in a current payment due figure that the architect certifies separately.

What is an AIA document G703?

G703 is the continuation sheet attached to G702. It breaks the contract sum into the portions of work set out in the contractor’s schedule of values and tracks, per line, scheduled value, prior and current period completion, stored materials, total completed to date, percent complete, balance to finish, and variable retainage.

Does AIA G702 need to be notarized?

The form provides a notary block and AIA’s own instructions direct the contractor to have it notarized. Whether notarization is actually required is set by the contract documents, not by the form — the A201 general conditions call for the application to be notarized if required by the owner or architect.

Is the payment on a G702 the same as revenue?

No. The pay application measures what you may bill. ASC 606 measures what you have earned by progress toward completion. The difference between the two, netted per contract and including conditional retainage, is reported as a contract asset or a contract liability on the balance sheet.

Where this becomes an accounting problem worth paying for

A pay application is only as honest as the schedule of values behind it, and a schedule of values is only useful if it reconciles to job cost. When those three things line up, the monthly work-in-progress schedule tells a contractor which jobs are actually making money while there is still time to do something about it. When they do not, the contractor finds out at year end, from the accountant, after the job is closed.

That reconciliation — schedule of values to cost codes, pay application to earned revenue, retainage to contract position — is not bookkeeping. It requires someone who understands both the contract and the accounting standard. This is general information, not advice on your specific contracts. If you want it looked at properly, our construction accounting and CPA services for contractors and our construction job costing services are built around exactly this chain.

None of this is how the numbers reach the tax return either. the tax treatment of long-term contracts covers the Section 460 thresholds, the exceptions available to smaller contractors, and the 2025 change that reopened the completed contract method for multifamily work.

The gap between what you billed and what you earned lands on the balance sheet. We cover contract assets, contract liabilities and retainage in full, including why conditional retainage no longer sits in receivables.

Talk to an accountant who works in your industry

Precision Accounting & Consulting works with contractors, law firms, medical practices and property owners across the country. If something on this page raised a question about your own books, send it over and we will give you a straight answer.