Retention payments create both opportunity and headache for Australian builders because they protect principals while straining cash flow. The key takeaway is that under AASB 15 revenue is recognised when performance obligations are satisfied, even if cash is held back as retention. Until that cash is released the amount sits on the balance sheet as a contract asset or a receivable rather than an unconditional bank balance. Correct classification, journal entries, GST timing and ongoing reconciliation keep financial reports compliant and help construction businesses avoid nasty surprises.
What retention payments mean for Australian projects
In an ordinary building contract the principal or head contractor withholds a small percentage of every progress claim, most often five per cent, as security that the builder will finish the work and fix any defects. Half of the retained amount is normally released at practical completion while the remaining half follows at the end of the defects liability period, usually twelve months later. This discipline gives the payer leverage if workmanship problems emerge after hand-over, yet for the payee it effectively becomes an interest-free loan to the client.
State based Security of Payment Acts limit how much can be held and for how long. Western Australia, New South Wales and Queensland now require larger projects to keep retention money inside dedicated trust accounts so subcontractors are insulated from upstream insolvency. From an accounting viewpoint the trust obligation does not alter revenue timing under AASB 15 but it does impose strict segregation of cash and extra disclosure of bank details and audit confirmations.
The accounting foundation under AASB 15
AASB 15 applies to all contracts with customers and replaced the older construction standard AASB 111. It uses a five-step model that focuses on performance obligations and transfer of control. For most build contracts control passes to the customer over time because the customer owns the work in progress on their land or can direct its use as the job proceeds. That outcome is usually supported by either paragraph 35(b) or 35(c) of the standard.
When a contractor satisfies performance obligations over time they measure progress using an input or output method such as percentage of cost incurred or surveys of work performed. The transaction price includes fixed progress payments, variations, claims and also the retention amount even though it will not be paid until later. Retention therefore counts as variable consideration subject to the constraint in paragraphs 56 to 58 that revenue can be recognised only when it is highly probable that a significant reversal will not occur. In most routine Australian projects that probability hurdle is cleared once the work covered by the progress claim is complete and no dispute exists.
Revenue therefore equals the entire certified claim including the portion withheld. The financial statements reflect that the builder has earned the money but not yet collected it. The build entity then shows either a contract asset or a receivable on the balance sheet.
Contract asset or receivable understanding the balance sheet position
A contract asset arises when the right to consideration is conditional on something other than time passage, for example completion of a defect rectification obligation. A trade receivable exists when the builder has an unconditional right to payment because only the passing of time stands between them and the cash.
Retention money is often conditional because the payer can refuse release if defects are not repaired. In that case the amount is a contract asset. If the contract wording states that retention becomes payable automatically after a fixed date regardless of defect status then it tips into receivable territory. Builders must read each contract carefully and apply that distinction project by project.
Some finance teams initially post retention into a generic debtors control account then reclassify at year-end. A clearer approach is to use dedicated sub-ledgers to separate trade receivables and contract assets from day one, improving transparency and easing audit pressure. Impairment testing under AASB 9 also differs. Receivables follow a simplified expected credit loss model that requires lifetime loss rates, while contract assets use either lifetime or twelve-month expected loss based on credit risk movement.
Timely classification matters because banks and surety providers look closely at ageing and collectability when extending working capital facilities.
Step by step journal entries for a typical project
Consider a subcontractor that submits a progress claim for one million dollars on a project where the head contractor withholds five per cent retention. The claim is certified and tax invoice raised on 30 June. Cash for the approved ninety-five per cent arrives on 31 July. Half of the retention is released on practical completion eight months later and the balance after the twelve-month defects period.
| Date | Account | Debit | Credit | Description |
|---|---|---|---|---|
| 30 Jun | Contract asset | 50 000 | Recognition of retention component | |
| 30 Jun | Trade receivable | 950 000 | Remaining claim amount | |
| 30 Jun | Revenue | 1 000 000 | Revenue for full claim in line with AASB 15 | |
| 31 Jul | Cash at bank | 950 000 | Receipt of ninety-five per cent | |
| 31 Jul | Trade receivable | 950 000 | Clear receivable | |
| 15 Feb | Cash at bank | 25 000 | Release of first half retention | |
| 15 Feb | Contract asset | 25 000 | Reduce contract asset | |
| 30 Jun (next year) | Cash at bank | 25 000 | Final release | |
| 30 Jun (next year) | Contract asset | 25 000 | Clear remaining contract asset |
A head contractor would mirror this logic for amounts it withholds from subcontractors, recording a contract liability until release. The same concept applies to tier one principals that hold retention from the head contractor.
How GST fits into the picture
Goods and services tax applies to the full progress claim including the retention portion. For entities reporting on an accrual basis GST is attributable in the tax period in which the invoice is issued or the payment is received, whichever occurs first. In practice the invoice date dominates. The builder therefore remits GST on the withheld amount well before the cash is collected.
Entities on the cash method attribute GST only when they receive payment, yet most construction companies exceed the ten million dollar turnover threshold and must use accrual. This upfront GST outflow deepens the working capital gap. To ease strain some businesses lodge monthly BAS so input credits flow more quickly although that increases compliance workload.
When retention is finally released no additional GST is recognised because it was already dealt with. Incorrectly adding GST a second time is a common bookkeeping mistake flagged during audits.
Cash flow realities for builders and subcontractors
Matched against razor thin margins the delay between revenue recognition and cash collection can stretch a builder’s solvency, especially when multiple projects finish simultaneously and several million dollars sit locked in retentions. Lenders often adjust covenants to strip contract assets out of current receivables which inflates reported debtor days and can breach loan terms.
Proactive project managers forecast retention release profiles alongside cost-to-complete curves. Software such as Jobpac, Muli or Procore integrates progress claims and retention schedules so finance teams can monitor monthly movements and run scenarios on expected completion dates. Early negotiations with principals may swap bank guarantees for cash retentions which has a funding cost but frees immediate liquidity.
At year-end the audit partner will examine whether the probability constraint for variable consideration remains satisfied. If defects are likely or disputes exist the builder must reverse previously recognised revenue. That reversal flows straight to profit and can convert an apparent surplus into a loss, further underlining why disciplined defect management is more than a site matter.
Frequent mistakes and how to avoid them
A first trap is treating retention as revenue only when cash is received. That approach understates revenue and profit during construction then spikes earnings when retention is released. It mismatches cost and income and breaches AASB 15.
A second trap is forgetting impairment once a contract runs into trouble. Retention tied to a dispute may never be collected yet remains parked as an asset unless someone challenges it. Under AASB 9 management must apply expected credit losses, factoring in past experience of disputed retentions, counterparty credit profile and security of payment rights.
Builders also stumble with GST when switching between cash and accrual BAS or when retention is released in a different percentage split than anticipated. Accurate contract registers avoided through disciplined use of project based sub-ledgers keep those missteps at bay.
Finally, many finance teams rely on spreadsheet schedules that are not reconciled to the general ledger each month. Automated integration means any adjustment to retention in the project system posts ledgers instantly, protecting both management accounts and statutory reports from manual error.
Retention trusts and security of payment context
Recent insolvency waves prompted several states to require retention money be banked into statutory trust accounts where it is protected from general creditors. Western Australia rolled out the retention trust scheme for contracts over twenty thousand dollars. Queensland already mandates project trusts for larger private and public jobs. New South Wales follows a phased threshold approach linked to project value.
Although these laws influence how cash is held they do not override accounting rules. The builder still recognises revenue when earned and still books a contract asset or liability. Additional disclosures may be needed to explain cash held in trust, restrictions on use and related contingent liabilities if the company also acts as trustee. Auditors usually request independent confirmations from the trust bank to verify balances at year-end.
Best practice checklist for finance teams
Sustainable construction finance demands that contract administration and accounting speak the same language. Each new contract should be set up in the job costing system with retention percentage, expected release milestones and whether security is cash or a bank guarantee.
Every progress claim needs a clear split between gross claim, retention withheld, GST and net amount receivable. As work proceeds project managers review the cost-to-complete calculation while finance reconciles the general ledger contract asset to the project ageing. Any variation in retention terms because of supplementary deeds or head contract amendments must trigger an immediate ledger update.
At month end aged retention balances are circulated to construction, commercial and finance leaders who challenge items older than agreed timelines. That meeting also assesses whether any contract assets should migrate to receivables because conditions for payment are now purely time based. Throughout the financial year impairment provisioning is refreshed using weighted probability matrices that consider dispute status, credit ratings and past loss history.
Preparation for audit includes drafting disclosures that explain revenue recognised from contracts, how variable consideration constraints are applied and the impact of retention on current assets. Separate disclosure of cash restricted in trust accounts and any breaches of statutory trust requirements strengthens governance credibility.
FAQ
What is retention money in construction contracts
Retention money is a portion of each progress payment, usually five per cent, held back by the client as security that the contractor will finish the job and fix defects. Half is normally released at practical completion with the balance paid at the end of the defects liability period.
How does AASB 15 treat retention payments
Under AASB 15 the retention amount forms part of the transaction price. Revenue is recognised as work is performed, provided it is highly probable there will be no significant reversal. Retention therefore does not delay revenue recognition even though cash is withheld.
Is retention a contract asset or trade receivable
If release depends on events beyond the passage of time, such as defect rectification, the amount is a contract asset. If only time must pass before payment, the amount is a trade receivable. Each contract must be assessed on its specific terms.
When do you recognise retention revenue under AASB 15
Revenue is recognised when the performance obligation is satisfied, generally measured by percentage of completion. This is the same moment revenue from the progress claim is taken to profit regardless of whether retention cash is unpaid.
Do you charge GST on retention amounts
Yes. GST applies to the full value of the taxable supply, including the retention portion. For accrual reporters GST is payable when the tax invoice for the progress claim is issued, not when the retention cash is eventually received.
How do retention payments affect BAS reporting
Entities on the accrual method include the GST and revenue from retention in the BAS for the period of the invoice. Cash method reporters include the GST only when retention is received. Most construction businesses must use accrual because their turnover exceeds the threshold.
What journal entry records retention receivable
Credit revenue and debit contract asset or receivable for the retention component. When cash is later collected debit cash and credit the contract asset or receivable. A table in the earlier section shows a full worked example.
Does retention money affect cash flow
Yes. Retention withholds part of each progress claim, reducing inflows during construction. Builders fund labour and materials now but wait many months for the retained cash. Tight cash forecasting and alternate security such as bank guarantees help manage this gap.
Is retention money taxable income
Income tax follows accounting under ATO guidance. Once revenue is recognised under AASB 15 the amount including retention is assessable. The tax obligation arises even though the cash is still in the client’s account or trust.
What happens if retention is not released on time
The contractor can pursue payment through Security of Payment legislation, contract dispute mechanisms or legal action. Delayed release may signal defects or insolvency risk and forces impairment review of the related contract asset or receivable under AASB 9.
Do retention trust account rules change the accounting treatment
No. Trust requirements dictate how cash is held but they do not alter when revenue is recognised or how assets and liabilities are classified. Additional disclosure of restricted cash and trustee obligations may be needed.
How should builders track retention across multiple projects
Maintain a project based register that records original retention, amounts released, remaining balance, expected release dates and any disputes. Integrate the register with the general ledger so that ageing, impairment and cash flow forecasting remain accurate.
Conclusion
Retention money is a double edged sword. It reassures principals and head contractors yet puts heavy strain on subcontractor liquidity. AASB 15 requires revenue recognition based on performance rather than payment which means builders show profit long before receiving cash. Accurate classification between contract assets and receivables, correct GST attribution, timely impairment testing and strict reconciliation routines keep financial statements compliant and trustworthy. Overlaying those accounting disciplines with proactive contract management, robust retention registers and clear communication with principals ensures that retention does its job as security without crippling a construction business’s working capital.
