How to record a progress bill with retainage, step by step
To record a progress bill with retainage, book the full bill as revenue and split the receivable in two. On a $50,000 bill at 10% retainage, $45,000 goes to accounts receivable and $5,000 to retainage receivable until closeout. When the customer pays, only the $45,000 clears. Retainage you hold from a sub mirrors it as retainage payable.
Here are the steps with one fictional bill, the same one used in the ZeraBooks contractor guide.
How do you record a progress bill with retainage?
Step 1: Read the contract's retainage terms
Find the percentage and when it is released. In this example the customer holds 10% of each progress bill until the punch list is done and the final bill is approved.
Step 2: Send the progress bill
The bill is for $50,000 of work this period. Show the retainage on the bill itself: $50,000 gross, less $5,000 retainage, $45,000 due now. Customers and their lenders expect to see it.
Step 3: Record the bill
| Line | Debit | Credit |
|---|---|---|
| Accounts receivable: due now | 45,000.00 | |
| Retainage receivable: due at closeout | 5,000.00 | |
| Contract revenue | 50,000.00 | |
| Totals | 50,000.00 | 50,000.00 |
Revenue is the full amount, because the work is done.
Step 4: Record the payment
When the $45,000 arrives, debit the bank $45,000 and credit accounts receivable $45,000. Retainage receivable stays at $5,000.
How do you record retainage you hold from a subcontractor?
Step 5: Do the same for the sub
Your sub bills you $12,000 for their work on the same job, and your sub contract holds 10%.
- Debit Subcontractors (job cost), $12,000
- Credit Accounts payable, $10,800
- Credit Retainage payable, $1,200
Pay the $10,800. The $1,200 waits for closeout.
What happens to retainage at closeout?
Step 6: Release it
When the job is finished and the final bill releases retainage, the customer pays the held amount: debit the bank $5,000, credit retainage receivable $5,000. Then you pay the sub, once their final lien waiver is in: debit retainage payable $1,200, credit the bank $1,200.
No revenue or cost moves at closeout. It was all recorded when the work was billed. Closeout only moves cash.
Step 7: Watch the balance
Each month, list retainage receivable by job and check the total matches the account. A balance that keeps growing while jobs keep finishing means closeouts are stalling. Usually it is a punch list, a missing waiver or a final bill nobody sent.
How is retainage handled on cash books?
On cash books, retainage counts as income when the money arrives at closeout, not when billed. If you keep cash books for tax, ask your tax preparer how they want it handled. For running the business, the accrual entries above show what is really owed to you.
Key takeaways
- Record the full bill as revenue and split the receivable: $45,000 due now, $5,000 retainage.
- Retainage you hold from a sub mirrors it as retainage payable: $10,800 now, $1,200 at closeout.
- Closeout moves only cash, never revenue or cost.
- A retainage receivable balance that keeps growing points to stalled closeouts.
FAQ
Is retainage income when I bill it or when I get paid?
On accrual books it is revenue when billed, held in retainage receivable until paid. On cash books it counts when the money arrives at closeout. Your tax preparer decides which method your business uses for tax.
What retainage percentage is common?
Often 5% or 10% of each progress bill. The contract sets it, along with when it is released.
Do I need a 1099-NEC for subs I hold retainage from?
For payments made from 2026, a 1099-NEC is due for each sub that isn't a corporation and was paid $2,000 or more in the year, under the current IRS instructions. Collect a Form W-9 before the first payment.
The full guide, with over and under billing, a chart of accounts and sub paperwork, is at https://www.zerabooks.com/bookkeeping-for-contractors.
Disclosure: I'm the founder of ZeraBooks. ZeraBooks records progress bills and retainage as part of a monthly bookkeeping service, from $150 a month in U.S. dollars, priced after a free call. Job costing stays in your own project tool; ZeraBooks has no job or class tags.
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