What does retention payable mean?

Retention payable is retention you have withheld from your own subcontractors: you are holding their money and expect to hand it back, so it is a liability. Retention receivable is the mirror image, retention withheld from you by your customer, which you expect back and which is therefore an asset.

It is the same mechanism seen from opposite ends of a contract, and most contracting businesses of any size have both at once. The two never net off. They sit on opposite sides of the balance sheet and are released on unrelated events.

Accounting systems also call these retentions receivable and retentions payable, or retention debtors and retention creditors. This page is about the bookkeeping vocabulary; retention is the pillar it sits under and explains the underlying entitlement, which is the page to read if the question is when the money comes back rather than where it sits.

Why it does not belong in trade debtors

The most common treatment, and the one that causes the most trouble, is leaving retention in ordinary trade receivables because that is where the claim was invoiced.

Three things go wrong.

Debtor days become meaningless. Retention is not overdue, it is not late, and nobody is going to chase it. Left in trade debtors it ages quietly through every bucket until the aged receivables report shows a large balance more than ninety days overdue, which is untrue and which is the report a bank or a surety asks to see.

Collections chase the wrong money. Whoever runs the debtor calls is now chasing an amount that is not due and that the other side is entitled to hold.

It disappears at the wrong moment. Retention comes back on the events the contract names, sometimes a year or more after the claim it came from. If it was never separated out, nobody is watching for it, and unclaimed retention is money that quietly stops being collected.

The usual answer is a separate ledger account for retention receivable, with the retention on each claim journalled out of trade debtors and into it at the point of claiming, and the mirror-image treatment for retention payable.

When it is current, and when it is not

Retention receivable is normally split by when it is expected back rather than by which contract it came from.

The first tranche typically comes back at practical completion and the balance once the defects liability period has run, so on a job whose defects period runs a year past completion part of the balance is a current asset and part is not, and the split moves as jobs progress. Getting it back sets out the two conditions gating each release.

Two features make a forecast harder than it looks.

Retention is capped. It accrues at the contract's rate on each claim only until the total held reaches the ceiling, then stops, and the claim that would cross the cap is trimmed to land exactly on it. Applying the rate to every remaining claim overstates the balance. How much is withheld has the mechanics, including how variations are retained.

Scope taken off the contract lowers the cap. Where the cap is a percentage of contract value, omitting scope lowers the ceiling with it. Retention already held does not come back at that point, but nothing further accrues.

The GST timing

Retention comes off the claimed value before GST. A line claimed at $10,000 with $500 retention is invoiced at $9,500 plus GST, not $10,000 plus GST less $500.

The consequence in the accounts is that GST on the retained portion is deferred rather than lost. It is accounted for when the retention is released, because the release line is claimed at its full value and carries no retention of its own. Across the claim that withheld the money and the claim that released it, the whole supply is accounted for once. Retention comes off before GST covers it from the claiming side, including retention taken from a GST-free line.

A related source of confusion in the ledger: a payment claim showing GST is not a tax invoice. The invoice is a separate document, which is why the claim served and the invoice raised commonly carry different totals. Why a payment claim is not a tax invoice.

Why your balance and theirs disagree

Almost every long-running contract eventually produces two different retention balances, and the cause is nearly always the same.

Retention is withheld from what is certified, not from what is claimed. A payment schedule certifying a line at less than claimed produces less retention on that line than the books recorded when the claim was raised. Unreconciled, the difference compounds quietly across every claim for the life of the contract and surfaces only at release, when the other side's figure is thousands lower.

The fix is to treat claimed retention and accepted retention as two separate figures and to look at the variance every month rather than at the end. When the numbers do not match goes into it.

The second cause is less common and more expensive: retention withheld at a rate or past a cap the contract does not provide for. That is not a reconciliation problem, it is a claim, and it is visible only if retention variance is watched as its own number.

Retention payable, on your side of the chain

Everything above runs in reverse for retention held from your own subcontractors, with one addition.

In New Zealand, retention money is held on trust. Since the Construction Contracts (Retention Money) Amendment Act 2023, retention withheld on a New Zealand construction contract must be held on trust for the subcontractor and kept separately, with reporting obligations on the party holding it. That is a real obligation on the holder rather than a presentation choice, and it changes how the liability is administered and not merely how it is disclosed.

The terms themselves, alongside what contracts and the acts call each of them, are in the glossary.