Understanding Retainage Rules for Contracts

Retainage is the amount of payment that the customer might withhold to ensure satisfactory contract performance. For example, you might agree to a 10 percent retainage on the amount that you bill the customer. If you bill the customer for 100 USD, the customer withholds 10 USD and pays you 90 USD. After your company has completed the work satisfactorily, you release the retained amount and bill the customer for the 10 USD that was retained.

Retainage is based on the percent of work that has been completed. During the billing process, the system uses the retainage rules that you set up for the contract to calculate retained amounts. The retainage percentage is connected to the percent complete of the job. For example, you might have a 10 percent retainage until 50 percent of the job is complete, and then 5 percent retainage until 95 percent of the job is complete.

When you set up retainage rules, you specify the types of billing lines on which the system calculates retainage. You can calculate retainage on cost, fee, award fee, or any combination of these three billing line types.

You also specify whether the retainage amounts are cumulative. If you specify that retainage amounts are cumulative, the system calculates retainage amounts using the prior associated invoice amounts and retained amounts, along with the current invoice amounts.

Finally, you specify the percent through which you calculate retainage (percent complete) and the percentage to retain.

If you select only one billing line type on which to calculate retainage, the system calculates retainage on the invoice amounts for that billing line type until the percent complete exceeds the schedule of values. The system then applies the retainage amount that it calculates to that billing line type. For example, assume you set up a retainage rule, R01, as follows:

• Billing lines to include: cost amounts.

• Percent to retain: 10.

• Percent complete: 85.

Using retainage rule R01, the system calculates 10 percent retainage until the cumulative invoice amounts for cost exceed 85 percent of the schedule of values for cost amounts on the contract. The system applies the retainage amount that it calculates to the cost billing lines on the invoice.

If you select more than one billing line type, the system calculates retainage until the invoice amounts for all selected billing line types exceed the percent complete of the corresponding schedule of value amounts. In other words, the system does not calculate retainage when you exceed the percent complete of each billing line type. For example, assume you set up another retainage rule, R02, as follows:

• Billing lines to include: cost and fee amounts.

• Percent to retain: 10.

• Percent complete: 85.

Using rule R02, the system calculates 10% retainage until the total of the cumulative invoice amounts for costs and fees exceeds 85% of the total of the schedule of values for cost and fees. In this example, the system first calculates the total retainage amount and then allocates a percentage of the total to the cost and fee billing lines on the invoice. The system allocates the retainage amount based on what percentage the cost and fee amounts are of the total amount on which retainage is calculated for the current invoice.

As you manage contracts, the billing terms might require different retainage rules. You can set up retainage rules for the contract master, change orders, or contract billing lines.