Your pay application for the month was $50,000.00. The general contractor's check is for $45,000.00, because 10% is held back as retainage until the job is finished, and the remittance lists the job number and pay app number but not your invoice number. In QuickBooks Online the invoice now shows $5,000.00 overdue, it will keep aging for months, and anyone reading the AR report will think the GC is behind on paying you when it's doing exactly what the contract says. The fix is a negative Retainage line on each progress invoice, so the invoice totals what the GC pays and the retained amount sits in its own receivable until it's released.
Why retainage breaks your AR report
Retainage, also called retention, is money you've earned but can't collect yet. The contract lets the GC hold back a percentage of each progress payment, often 5% or 10%, until substantial completion or final acceptance. Whether a percentage is allowed, and how much, depends on the contract and on your state's rules, which differ for public and private work.
QuickBooks Online has no built-in retainage feature. If you invoice the full pay app and apply the net check, the retained amount stays on the invoice as an open balance. That puts collectible and not-yet-collectible money in the same aging bucket, so you can't see which open balances to chase, and a job with a year of retainage on it looks like a bad debtor.
The fix is to keep retainage out of ordinary receivables from the start, so the invoice the GC pays matches the check, and retainage sits in its own account until the release.
Set up a retainage receivable account and item
The common workaround takes two pieces of setup.
- A Retainage Receivable account. An Other Current Asset account in your chart of accounts. Your accountant may prefer a different name or type, so check before you create it.
- A Retainage item. A service item whose income account is Retainage Receivable rather than sales.
On each progress invoice, add the Retainage item as a negative line for the retained amount. QuickBooks won't work out the percentage for you, so calculate it from the pay app. The invoice total is now the amount the GC will actually pay this month, and the retained amount is recorded in Retainage Receivable instead of accounts receivable.
If you bill from an estimate with progress invoicing, available on some QuickBooks Online plans, add the retainage line to each progress invoice in the same way. Put the GC's job number and pay app number in the invoice message, because that's what the remittance will quote back to you.
Applying a GC payment less retainage
With retainage taken off on the invoice, the check should match the invoice to the cent. In Receive Payment, choose the GC, or the project if you track each job as a sub-customer, and tick the invoices the remittance names. Put the check number in Reference no. and attach the remittance or check stub to the payment.
GCs often pay several jobs in one check, and the remittance groups them by job number. Tick each job's invoice at the amount paid against it, and check the total equals the check. Checks usually go to Undeposited Funds, also called Payments to deposit, and onto a bank deposit with the rest of the day's checks. Our guide to reconciling a batch of customer checks in QuickBooks Online covers that step.
When the GC approves less than you billed
A check short of the invoice, after retainage, usually means the GC's approval didn't match your pay app. The common reasons are a change order that's been agreed on site but not yet approved on paper, a line on your schedule of values the GC thinks is less complete than you do, or a backcharge for cleanup, damage or a missed inspection.
Apply what was paid and leave the difference open on the invoice. An unapproved change order stays open until it's approved, and you rebill it on the next pay app if that's how the GC wants it. A backcharge you accept is closed with a credit memo to its own account, so the cost shows up by job. Our guide to short-paid invoices in QuickBooks Online has the credit memo steps.
Joint checks with your supplier
On larger jobs a GC sometimes pays with a joint check, made out to you and one of your material suppliers, so the supplier gets paid and has no reason to file a lien of its own. Both of you have to endorse it, and the money is split according to a joint check agreement.
In QuickBooks, the check still pays your invoice in full. Record the whole amount as a payment from the GC against your invoice, so your receivable closes and the deposit matches the check. Then pay the supplier its share as an ordinary bill payment against its bill, by check or ACH, on the day you agreed. Keep the joint check agreement attached to the GC's payment, because the remittance shows the full amount and nothing about the split.
Tell whoever applies payments which jobs have a joint check agreement, with a note on the customer or project record. A joint check can't be deposited until both of you have endorsed it, so one nobody expected tends to sit in a drawer while the supplier waits, and a supplier waiting on its money is the fastest way to find a lien on a job you thought was clean.
Lien waivers and the payment
Most GCs want a lien waiver with every pay app and another once you're paid. A conditional waiver releases your lien rights only once the payment clears, and an unconditional one releases them outright. Sign the unconditional waiver for a payment once the funds have cleared your bank, not when the check arrives.
A handful of states, including California and Texas, prescribe the exact wording of statutory waiver forms, and a waiver that doesn't follow the form may not be valid there. Check your state's rules, and keep a copy of each signed waiver attached to the payment it covers in QuickBooks, so the waiver, the remittance and the check are in one place if there's ever a dispute.
Billing and tracking the retainage release
At the release point the contract names, invoice the retainage. Create an invoice using the Retainage item as a positive line for the amount held, which moves it out of Retainage Receivable and into accounts receivable, and reference the job and the final pay app so the GC's payables team can match it. The release check is then applied to that invoice like any other payment.
Review the Retainage Receivable balance by job at every month end, next to each job's expected completion date. A balance report filtered to that account, by customer or project, shows how much is held on each job and how long it's been there. Many states have prompt payment rules that set deadlines for releasing retainage after completion, so an old balance is worth a call to the GC, and your attorney or accountant can tell you what applies to your jobs.
Where RemitClear fits
RemitClear reads the GC's remittance, whether it's a check stub, a PDF payment advice or an email, and matches each line against your open QuickBooks invoices. Matching handles exact, partial, and prefix-based invoice numbers, and it can find an invoice through the reference in its message field. With retainage taken off on the invoice, a check paying the net amount matches its invoice to the cent, and the retainage release invoice matches on its own number when that check comes. Payments go into Undeposited Funds or the bank account you choose, one payment per customer, with the remittance attached.
Once you switch automatic posting on, a payment posts by itself only when every line matches its own invoice number, the total agrees to the cent and every invoice settles exactly. A short-paid pay app, a line found only through its message reference or a possible duplicate waits in a review queue with the original document beside the match. See how it works for trades and specialty contractors.
