Handling retentions is a critical aspect of construction projects, yet it’s often frustrating for many in the industry. But why is it so important, and how can you manage it to ensure your projects remain financially stable?
What is Retention Handling?
In the construction world, handling retentions refers to a portion of an invoice that a client holds back as a form of warranty against future defects. Typically, a client might pay only 90% of an invoice, keeping the remaining 10% as retention. This can create significant challenges in managing accounts receivable and cash flow, especially when you’re working with large sums of money.
For instance, you might issue a $100,000 invoice, but the client only pays $90,000, withholding $10,000 as retention. This withheld amount remains on your books as a receivable, even though you won’t be able to collect it for possibly 12 months or more.
The
BEIS report shows that 71% of global contractors, nearly three out of four construction businesses, have experienced delays in receiving retention payments. That's a lot of companies waiting to get their money back!
Without proper management of retention, financial reports can become distorted, impacting the accuracy of cash flow and overall financial health.
The Challenges of Retention Handling
Retention handling varies widely across projects, clients, and countries. Each contract may have different terms, including sliding scales where the retention percentage changes depending on the project value. This variability makes it essential to have a robust system for tracking and managing these amounts.
The main challenge is keeping retention amounts separated from your regular accounts receivable.
Without this clarity, you might mistakenly believe you have more cash on hand than you do, leading to poor cash flow management and potential liquidity issues.
Moreover, poor retention handling can cause you to miss out on claiming money that’s rightfully yours. If you forget to claim retention on time, you could leave substantial amounts of money uncollected, directly impacting your profitability.
How Retentions Impact Cash Flow
Retentions often represent 5-10% of a project’s total value, which, in many cases, can be the entirety of your profit margin.
For example, if a client holds back 10% of a $1,000,000 project, that’s $100,000 of your profit tied up in retention.
You’ve already paid for labour, materials, and overheads, so it’s crucial to claim this retention as soon as you’re legally entitled to it. Failing to do so can severely impact your business’s liquidity and financial stability.
Managing retention effectively involves keeping track of when you can claim it and ensuring that your financial records accurately reflect what’s owed to you. This means setting up custom project stages or tasks to remind you when to claim retention, whether at practical completion or after a warranty period.
Common Mistakes in Retention Handling
One of the most common mistakes is leaving retentions sitting in accounts receivable as overdue amounts. This practice distorts your financial data, making it appear as though you have uncollected revenue when, in reality, it’s simply retention that hasn’t yet been claimed. Misrepresentation can lead to incorrect financial reports and poor decision-making.
Another mistake is overestimating your profit by accounting for retention as earned income before it’s payable. According to contract law and accounting standards, money from retention isn’t considered earned until it’s paid. Overstating profit in this way can create a false sense of financial security and lead to issues down the line.
Best Practices for Retention Management
WorkGuru makes handling project payments a breeze, giving you peace of mind and making financial management a walk in the park. Here's how we do it:
Track and Manage Retentions Easily
Quick Fact: Typically, 5-10% of your project's total value could be locked in retentions, which could tie up significant funds.
Technology like WorkGuru helps you automate tracking retentions, ensuring they're accurately recorded on your balance sheet. A clear financial situation can help you avoid surprises and keep your cash flow running smoothly.
Example: On a $1 million project, $100,000 might be held as retention. WorkGuru simplifies cash flow management and provides easy fund access.
Automate and Alert
Let WorkGuru keep an eye on your cash flow so you can focus on growing your business.
- Mark milestones with easy custom project stages. Pin down key tasks or to-do lists, like 'Claim Practical Completion' or 'End of Warranty Completion Period'. These are your cues to get ready to claim retained money.
- Set alerts. WorkGuru sends you reminders before each retention milestone approaches. You'll never miss a payment because it slipped your mind.
- Update easily. Change project plans? No problem. Adjust your project timelines and reminder settings in WorkGuru to stay up-to-date with the real-world pace of your work.
Watch the video below to see how to handle retentions instantly with WorkGuru, ensuring smooth project management and better cash flow.
Retention management is all about keeping your cash flow predictable. WorkGuru will nudge you when it's time to
claim money and sync with your financial planning. This keeps you prepared, avoids surprises, and keeps your project's finances in check from start to finish.
Wrapping Up: Handling Retentions in Construction
We covered retentions in construction and their implications when handled poorly, as well as the role of implementing new technology like WorkGuru to improve your overall business success.
Ensure your business has all the right knowledge and
tools to handle retention effectively. This will help make your projects profitable and stress-free, allowing you to focus on what you do best: building stuff.
Ready to step up the game?
Get started with WorkGuru today—try it for free and see how it can help you master retention management and more.
