Retainage means a portion of each invoice, usually 5% to 10%, gets withheld by the project owner or GC until the work is complete or certain milestones are hit. You’ve earned that money, but you won’t collect it for weeks or months. Your invoices and your books both need to reflect that difference.

On each progress invoice, show the full amount of work completed, then subtract retainage as a separate line item. If you completed $20,000 of work and the contract calls for 10% retainage, your invoice shows $20,000 earned and $2,000 withheld, with $18,000 due now. The client sees exactly what they owe today and what’s being held back. Don’t just invoice for $18,000 and try to remember the rest. That’s how retainage gets lost.

In your accounting software, create an asset account called Retainage Receivable. When you record an invoice with retainage, the $18,000 goes to Accounts Receivable and the $2,000 goes to Retainage Receivable. Revenue still reflects the full $20,000 because you earned it, even though you haven’t collected all of it yet. This is important for accurate job costing and for understanding your real profitability on each project.

QuickBooks Online doesn’t have a built-in retainage feature, so you’ll need a workaround. Set up a service item linked to your Retainage Receivable account and add it as a negative line on each progress invoice. This reduces the invoice total to the net amount while tracking what’s being held. It takes a few minutes to set up correctly the first time, but once it’s in place the process is straightforward.

When the project wraps up and retainage is released, create a new invoice for the total retainage amount. This moves the balance from Retainage Receivable into Accounts Receivable, and when the client pays, it clears like any normal payment.

Track retainage by project. Across a few active jobs, you might have $20,000 or $40,000 sitting in retainage at any given time. That’s real money affecting your cash flow, and you need to know exactly how much is outstanding and when you can expect to collect it. A lot of construction and contractor businesses run into cash crunches not because the work isn’t profitable but because retainage ties up a big chunk of what they’ve earned.

If you’re a sub working under a GC, make sure your invoicing matches the retainage terms in your subcontract. Some contracts reduce retainage after the project hits 50% completion. Others hold the full percentage until final sign-off. Your invoices and books should reflect whatever the contract actually says.

Getting this right from the start saves headaches down the line. If your retainage tracking is messy or nonexistent, it’s easy to forget about money owed to you or lose track of which projects still have outstanding balances. A Long Beach bookkeeper familiar with construction billing can set up the accounts and invoice templates so retainage gets tracked automatically on every job.