Construction projects involve many moving parts—labor, materials, subcontractors, permits, and timelines. One of the most complex areas within accounting for construction companies is managing retention and progress payments. Without proper accounting controls, these payments can lead to cash flow problems, disputes, and audit risks.
In this blog, we will explain accounting for construction companies and how it helps handle retention and progress payments effectively. You will learn the key concepts, best practices, and how accurate accounting can protect your business.
Construction accounting uses construction accounting basics to align payments with actual project progress. The right system helps contractors stay organized, reduce financial stress, and maintain healthy cash flow.
What You Will Learn From This Blog
This blog will help you understand:
- What retention and progress payments are
- Why they matter in construction accounting
- How accounting for construction companies manage these payments
- Best practices for tracking retention and progress payments
- How software can simplify construction accounting
- How accurate accounting reduces financial risk
Understanding Accounting for Construction Companies
Construction accounting is different from regular business accounting and requires strong construction accounting basics to manage project-based finances. Construction companies often work on multiple projects at once, each with its own costs, invoices, and timelines.
Accounting for construction companies must track costs by project and match payments with the right work completed. One major reason accounting for construction companies is complex is the handling of retention and progress payments.
These are common in construction contracts, and if they are not managed correctly, they can cause serious financial issues.
To manage these payments successfully, contractors need clear visibility into each project’s financial status. Accurate tracking helps avoid mistakes such as billing errors, missed deadlines, or incorrect retention amounts. This is why strong construction accounting practices are essential for project success.
What Are Retention and Progress Payments in Construction?
Progress Payments
Progress payments are partial payments made by the client as the project moves forward. They are usually based on completed work or project milestones.
For example:
- 20% after foundation completion
- 30% after framing
- 50% after project completion
Progress payments help contractors stay funded during long projects when supported by proper construction accounting basics.
Retention Payments
Retention is a portion of payment held back by the client to ensure the contractor completes the work properly. It is usually released after final inspection or after a set period (like 12 months).
Retention is typically:
- 5% to 10% of the contract value
- Held until project completion
- Released after defects are fixed
Retention helps protect clients, but without proper accounting for construction companies, it can cause cash flow issues for contractors.
Construction Accounting Basics Every Contractor Should Understand
Every contractor should understand construction accounting basics to maintain financial control and long-term stability.
Job Costing
Job costing tracks expenses by project. This includes labor, materials, subcontractor costs, and equipment. Without job costing, you cannot know if a project is profitable.
Percentage of Completion
This method recognizes revenue based on the project’s completion percentage. It helps match income with costs accurately.
Accounts Receivable & Payable
Tracking who owes you and who you owe is essential in accounting for construction companies, where multiple parties are involved. Construction projects often involve multiple invoices, making this tracking crucial.
Retention and Progress Tracking
Retention and progress payments must be tracked separately. Mixing them up can cause accounting errors and payment disputes.
Cash Flow Management
Cash flow management helps contractors plan payments and avoid money shortages during projects. It ensures you have enough funds for labor, materials, and other expenses on time.
These construction accounting basics help contractors manage finances with clarity and control.
Importance of Retention and Progress Payments in Construction Accounting
Retention and progress payments are important elements of accounting for construction companies because they directly affect:
Cash Flow
If retention is not released on time, contractors may face cash shortages. Progress payments help maintain cash flow, but only if invoices are submitted correctly and on time.
Project Profitability
Without tracking progress and retention, you may not know the real profit margin. This can lead to project losses.
Compliance
Construction contracts often include strict rules for payments. Missing deadlines or incorrect invoices can lead to penalties or disputes.
Risk Management
Retention and progress payments involve risk. If not managed properly, contractors may face payment delays or financial loss.
How Accounting for Construction Companies Handles Progress Payments Efficiently
Proper accounting for construction companies helps manage progress payments in several ways:
Clear Invoice Tracking
Accounting systems track all invoices sent to clients and received from suppliers. This ensures progress payments are recorded correctly.
Matching Payments to Work
Progress payments must match the work completed. Construction accounting ensures the payment is recorded under the correct project milestone.
Project-Based Reporting
Accounting systems generate project-based reports showing:
- Work completed
- Payments received
- Remaining balance
This helps contractors know their project status at all times.
Avoiding Payment Delays
Accurate records and timely invoices reduce delays. Contractors can submit invoices based on completed work and follow up quickly.
Monitoring Cash Flow
Progress payments are part of cash flow planning. Accounting for construction companies helps forecast cash flow based on expected progress payments.
Best Practices for Managing Retention Payments in Construction
Managing retention requires careful planning and a solid understanding of construction accounting basics.
Record Retention Separately
Retention should be tracked separately from other receivables. This ensures clarity and prevents confusion.
Monitor Retention Release Dates
Retention is released after completion or after a defect liability period. Track these dates to avoid missing payments.
Maintain Retention Ledger
A retention ledger keeps a record of:
- Retention amounts
- Retention due dates
- Retention released
- Retention outstanding
Communicate With Clients
Clear communication with clients helps avoid misunderstandings about retention amounts and release conditions.
Include Retention in Cash Flow Forecast
Since retention is withheld, include it in cash flow planning. This prevents unexpected cash shortages.
How to Track Retention and Progress Payments Using Construction Accounting Software
Construction accounting software supports accounting for construction companies by simplifying progress and retention tracking.
Job Costing Automation
Software automatically assigns expenses to projects. This helps track progress payments accurately.
Progress Invoice Generation
Software generates progress invoices based on project milestones. This reduces errors and saves time.
Retention Tracking
Retention amounts are tracked automatically. The system can alert you when retention is due for release.
Real-Time Project Reports
You can generate real-time reports for each project, including:
- Revenue recognized
- Costs incurred
- Retention outstanding
- Progress payments received
Audit-Friendly Records
Software maintains accurate records, making audits easier and reducing risk.
How Accurate Accounting for Construction Companies Reduces Financial Risks
Accurate accounting for construction companies reduces risks in several ways:
Prevents Cash Flow Problems
With clear tracking of progress and retention payments, contractors can avoid cash shortages.
Reduces Payment Disputes
Accurate records prove what work was completed and what payments are due. This helps resolve disputes quickly.
Improves Profitability
Tracking costs and revenue correctly helps identify profitable and loss-making projects.
Ensures Compliance
Proper accounting helps contractors meet contract requirements and avoid penalties.
Helps With Tax and Reporting
Accurate records make tax filing easier and reduce audit risk.
Why Choose Meru Accounting for Your Construction Accounting Needs?
At Meru Accounting, we specialize in accounting for construction companies and understand the financial challenges contractors face, especially when dealing with retention and progress payments.
Our construction accounting services include:
Project-Based Bookkeeping and Accounting
Accurate tracking of income and expenses for each construction project.
Job Costing and Progress Tracking
Clear visibility into labor, material, and subcontractor costs to measure project profitability.
Retention Management and Reporting
Proper tracking of retained amounts and timely follow-up for retention release.
Cash Flow Forecasting
Better planning of incoming and outgoing funds to avoid cash shortages.
Tax Compliance and Filing
Timely and accurate tax filings while meeting construction-specific tax requirements.
Construction Accounting Software Setup and Support
Assistance with selecting, setting up, and managing construction accounting software.
With Meru Accounting, contractors receive accurate financial records, easy-to-understand reports, and dependable support. Our services help you stay organized, reduce financial risk, and maintain healthy project profitability.
Contact Meru Accounting today to strengthen your project finances and support long-term business growth.
Key Takeaways
- Retention and progress payments are critical in construction contracts.
- Proper accounting for construction companies ensures accurate tracking of these payments.
- Contractors should follow construction accounting basics like job costing and project reporting.
- Using accounting software helps manage progress invoices and retention amounts.
- Accurate accounting reduces cash flow issues, disputes, and financial risk.
FAQs
Retention is the money the client holds back until the project is finished. It helps ensure the contractor completes the work properly.
Progress payments are partial payments made during the project based on work completed.
If retention is not tracked, you may miss payment release dates and face cash flow issues.
Accounting helps match payments to the right project and keeps accurate records of invoices and work completed.
Meru Accounting provides expert manufacturing accountants who manage costs, analyze efficiency, implement cost-saving measures, and help businesses improve profitability.
