How to Track Construction Retainage for Cash Flow and Taxes

Suppose you bill $100,000 on a job with 5% retainage. The customer approves the bill and pays $95,000. The remaining $5,000 stays outstanding until you meet the release conditions. If the same rate applies to all $600,000 billed over the life of the job, up to $30,000 could be held back before any releases.

You still have to pay crews, buy materials, and cover equipment and overhead while you wait. A profitable project can leave you short on cash if those bills come due before the customer pays. Review your retainage schedule alongside your construction work in progress (WIP) report so you can compare projected job profit with expected collections.

Keep a schedule by job and a separate record of what you owe each subcontractor. Use the customer’s contract and each subcontract to confirm the terms, since the two release dates can differ.

Put expected retainage receipts in the week you realistically expect the cash to arrive. If substantial completion triggers the release process, allow for any required closeout paperwork, approval, and payment processing. Enter subcontractor retainage as a separate cash outflow in the week it’s due.

Run a second forecast with the customer’s payment pushed back a few weeks. If you expect to collect $30,000 in week four and owe $12,000 to subcontractors in week five, see what happens if the receipt slips to week eight and the payment due date stays the same. That second forecast shows whether you can still cover payroll, materials, and taxes while you wait.

Valor’s fractional CFO services include a rolling 13-week cash-flow forecast for businesses that need to see those shortfalls before payments come due.

It can be. Under the cash method, income is generally reported when it’s actually or constructively received. Under the general accrual rules in IRS Publication 538, income can be reportable once your right to payment is fixed and you can determine the amount with reasonable accuracy. If final acceptance is a condition of your right to payment, that can affect the timing. The IRS construction industry audit guide explains how these rules apply to retainage.

Special rules apply to long-term construction contracts. Under the percentage-of-completion method, contract income can reflect retainage before you receive the cash. Federal law also expanded the exception to the required use of that method for qualifying residential construction contracts entered into in tax years beginning after July 4, 2025. IRS Revenue Procedure 2026-32 explains the change and provides procedures for certain accounting-method changes.

Give your CPA the contract, any release conditions, and the year-end retainage schedule. Ask which method applies to each contract and whether any uncollected retainage affects your tax estimate. A change in how you’ve consistently reported retainage can require an accounting-method change.

Kansas generally limits retainage on covered private contracts or subcontracts to 5% of their value unless a higher rate is needed to protect performance, with a 10% maximum. The Kansas retainage statute generally requires owners to release undisputed retainage within 30 days of substantial completion and allows them to hold the portion tied to work still underway.

For covered Missouri private projects, the Missouri retainage statute generally caps owner retainage at 10% of a payment and allows the contract to provide for additional withholding if performance falls short. Missouri’s release rules generally require owners to release retainage within 30 days of substantial completion, less 150% of the cost to finish remaining items. The statute’s coverage exclusions include single-family construction and other residential projects with four or fewer units.

Public projects can follow different rules. Have a construction attorney review the applicable law and contract when a deadline, payment right, or dispute is in question.

Bring your retainage schedule, current WIP report, accounts receivable aging, subcontractor balances, and cash forecast. Flag jobs that cross tax years, balances in dispute, and any payments you expect after an estimated tax deadline.

Kansas City contractors can discuss how outstanding payments and job profit affect their estimates with Dan Marlow, CPA and CMA, through Valor’s contractor tax strategy services.