Quick answer: Retainage is the slice of every progress payment — capped at 5% on most New York private jobs — that an owner or general contractor holds back until the work is substantially complete. Track it in dedicated retainage receivable and retainage payable accounts (never buried in regular A/R or A/P), bill it correctly on AIA forms G702 and G703, and manage the release date so the cash you already earned doesn’t quietly fund everyone else’s job.
What retainage is — and why it quietly drains contractor cash flow
Retainage (also called retention) is money withheld from each payment as security that you’ll finish the job and fix punch-list items. On a $1,000,000 contract with 5% retainage, you can complete and invoice 100% of the work and still be sitting $50,000 short until final release. That $50,000 is not a discount and not a bad debt — it’s revenue you have already earned and, in most cases, already recognized. It just hasn’t been paid.
For a contractor running several jobs at once, retainage stacks. Five jobs each holding 5% can tie up six figures of working capital for months after the crews have moved on. Meanwhile you’re still paying your own subs, suppliers, and payroll on the next project. This is why retainage that isn’t tracked and chased on its own line is one of the most common reasons a profitable contractor runs out of cash.
New York’s 5% retainage cap: what changed and why it matters
New York has tightened its Prompt Payment Act twice in recent years, and both changes work in the contractor’s favor.
Effective November 17, 2023, Senate Bill S3539 amended Section 756-c of the General Business Law to cap retainage at 5% of the contract sum on private construction contracts of $150,000 or more. Then, effective December 19, 2025, Senate Bill S5655 went further: any provision in a covered private contract that requires more than 5% retainage is now void. In plain terms, an owner or GC cannot contractually force you to accept 8% or 10% retention on these jobs — you can agree to less than 5%, but not more.
Two other points every New York contractor should know. First, once you reach substantial completion and submit a proper final invoice, retainage must be released on the statute’s timeline; late release exposes the withholding party to interest of 1% per month on the amount owed. Second, these rules apply to private work — public and prevailing-wage jobs follow their own retention and release schedules, so read each contract. If you’d like the underlying statute language, it lives in GBL Article 35-E.
How to set up retainage in your books
The single biggest accounting mistake is letting retainage sit inside ordinary accounts receivable and payable, where it hides from your aging reports and your cash forecast. Instead, create separate general-ledger accounts:
- Retainage Receivable (a current asset) — retainage owners and GCs are holding back from you.
- Retainage Payable (a current liability) — retainage you are withholding from your own subcontractors.
When you bill a progress payment, split the invoice: post the payable-now portion to standard A/R and the withheld portion to Retainage Receivable. Mirror this on the payable side for your subs. This keeps your true A/R aging honest, gives you a running total of every dollar in retention across all jobs, and lets you generate a retainage schedule you can actually collect from.
If you report on the percentage-of-completion method, remember that retainage receivable is part of your earned, unbilled or billed revenue — the withholding does not reduce the revenue you recognize, only the cash you’ve collected. That distinction is exactly why retainage-heavy contractors can look profitable on paper and still be cash-starved.
Retainage is your money, held, and it is where contractor cash flow quietly dies
Five or ten percent withheld across every open job adds up to a number most contractors cannot state from memory. It also sits on the balance sheet in a way that changes how a surety reads your working capital, and under current guidance conditional retainage may not belong in receivables at all.
We track it by job and present it correctly on the financials. Call 631-349-1661 or send us the details and we will give you a straight answer.
How to bill retainage on AIA G702 and G703
On the standard AIA G702 Application for Payment, retainage is calculated on the continuation sheet (G703) and summarized on the G702. Line 5 of the G702 captures total retainage — typically split between completed work and stored materials — and it flows into the “Total Earned Less Retainage” figure that drives the current payment due. To bill retainage for release at the end of the job, you reduce the retainage percentage (often to 0%) on a later application so the previously withheld amount becomes part of “Current Payment Due.” Getting this line right is what separates contractors who get paid on time from those who leave a final application sitting in dispute.
Worked example
Say you complete $200,000 of work in a billing period on a job with 5% retainage:
- Work completed this period: $200,000
- Retainage withheld (5%): $10,000 → posted to Retainage Receivable
- Current payment due: $190,000 → posted to standard A/R
You recognize the full $200,000 as revenue (assuming it’s earned under your method), but only $190,000 hits cash when paid. At substantial completion you submit a final application releasing the accumulated retainage — say $50,000 across the whole job — moving it from Retainage Receivable into a collectible current payment. If it isn’t released on schedule, that’s when New York’s 1%-per-month interest clock starts.
Retainage and taxes: the timing trap
How retainage hits your tax return depends on your method of accounting. Under the accrual/percentage-of-completion approach most larger contractors use, retainage receivable is generally included in income as the work is earned — meaning you can owe tax on money you haven’t yet collected. Retainage payable to your subs is generally deductible as the related cost is incurred. Under a cash method (available to smaller contractors), retainage receivable isn’t taxed until you actually receive it, and retainage payable isn’t deducted until paid. Choosing and applying the right method — and planning around the mismatch between earned revenue and collected cash — can meaningfully change your year-end tax bill. This is worth a conversation before December, not after.
Common retainage mistakes contractors make
- Burying retainage in regular A/R/A/P, so no one ever runs a report of what’s outstanding.
- Never billing for release. Retainage doesn’t come automatically — you have to submit the final application that reduces the withholding to zero.
- Accepting more than 5% on a covered New York private job when the law now voids that requirement.
- Ignoring the interest remedy when an owner sits on your money past the statutory release date.
- Forgetting the tax timing — owing tax on accrued retainage you haven’t collected, with no cash set aside for it.
- Not matching sub retention to owner retention, so you release your subs before you’ve been released and eat the float.
Frequently asked questions
What is retainage in construction?
Retainage is a percentage of each progress payment — commonly up to 5% in New York — that an owner or general contractor withholds until the project is substantially complete and punch-list items are finished, as security for performance.
What is the maximum retainage allowed in New York?
For private construction contracts of $150,000 or more, New York caps retainage at 5% of the contract sum, and as of December 19, 2025, any contract term requiring more than 5% is void.
How do you record retainage in accounting?
Post withheld amounts to a separate Retainage Receivable asset account (money owed to you) and Retainage Payable liability account (money you withhold from subs), keeping them out of ordinary accounts receivable and payable so your cash forecast stays accurate.
Is retainage taxable before I collect it?
Under the accrual/percentage-of-completion method, retainage receivable is generally included in taxable income as the work is earned — before you collect it. Under the cash method, it’s taxed when received. Your accounting method determines the timing.
How do I bill retainage for release on an AIA form?
On a later AIA G702/G703 application, reduce the retainage percentage (typically to 0%) so the previously withheld amount is added back into “Current Payment Due,” then submit it as part of your final or substantial-completion application.
Retainage is your money — track it like it. Precision Accounting & Consulting helps New York contractors set up retainage receivable and payable accounts, build collectible retention schedules, and plan for the tax timing so withheld cash never blindsides you. See our construction accounting services for New York contractors or contact our team for a review of your open retainage. For a deeper look at tracking true job profitability, read our guide to construction job costing.
See the reports: Our Construction Reporting Package shows sample job costing, WIP, labor efficiency and burden reports we build for contractor clients.
Retainage is not the only thing that ties up contractor cash in New York. Sales tax paid on materials for capital improvement jobs is unrecoverable, and it is often mis-estimated at bid time. See sales tax on construction in New York for how the ST-124 rules affect what a job actually costs.
On most commercial projects the retainage you are tracking is withheld through the monthly pay application, so it is worth understanding how retainage is withheld line by line on the AIA G703 continuation sheet and why conditional retainage now nets into the contract asset rather than sitting in receivables.
Tracking retainage is one thing; presenting it correctly is another, and the default answer reversed under ASC 606. We set out where conditional retainage belongs on the balance sheet and why netting it into the contract position changes what a surety sees.
The FASB staff paper of April 2025 reversed the default classification of conditional retainage — see the progress billing reference sheet.
Retainage is only visible if someone tracks it separately on both sides of the ledger every close — one of the reasons contractors move to construction-specific bookkeeping once jobs get large enough to matter.
Retainage classification is one of three presentation choices that can move the underbilled column without a single job changing — set out in our WIP schedule and bonding review reference.
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.