QuickBooks Online has no built-in retainage feature. This catches a lot of contractors off guard because retainage is standard in construction, typically 5-10% withheld from each progress billing until the project is substantially complete. Without proper tracking, your books will overstate what you’re owed, understate what you owe subs, and make it nearly impossible to know your true cash position on any given project.

The fix requires two new accounts in your chart of accounts. First, create a current asset account called Retainage Receivable. This tracks the portion of your invoices that customers are holding back. Second, create a current liability account called Retainage Payable. This tracks the portion you’re withholding from subcontractor payments.

For retainage receivable, the cleanest approach in QBO is adding a negative line item on each progress invoice. Bill the customer for the full amount of work completed, then add a line item for the retainage deduction mapped to your Retainage Receivable account. If you completed $50,000 of work and the contract calls for 10% retainage, the invoice shows $50,000 in services and a negative $5,000 line for retainage. The customer pays $45,000 and the $5,000 sits in Retainage Receivable as an asset on your balance sheet. When the project wraps up and retainage is released, you create a final invoice pulling that accumulated balance out of Retainage Receivable and into Accounts Receivable.

For retainage payable, the process works in reverse. When a subcontractor bills you $20,000 and you’re holding 10%, enter the full bill but create a journal entry or bill credit moving $2,000 to the Retainage Payable account. You pay the sub $18,000 now. When you release their retainage at project completion, create a new bill against Retainage Payable and pay it out.

Every retainage entry should be assigned to the specific job or project. This is where construction job costing and retainage tracking overlap. If you’re not tagging retainage entries to the right job, your project-level financial reports won’t reflect the full picture. You might think a job is profitable when there’s still $30,000 in retainage payable sitting out there waiting to be released.

Reconcile your retainage accounts monthly. Pull up the Retainage Receivable balance and make sure it matches what customers actually owe you. Do the same with Retainage Payable against what you’re holding from subs. Stale balances in either account usually mean a project closed out but the retainage entries were never reversed. Over time this creates a mess that’s hard to untangle.

The setup itself takes maybe thirty minutes if you know what you’re doing. The ongoing discipline of applying it correctly at every billing cycle is the harder part. Miss a retainage entry on one invoice and your receivables are overstated until someone catches it. If you’re running multiple projects with different retainage percentages, the tracking gets complicated fast.

Most contractors we work with didn’t set this up themselves. They either skipped retainage tracking entirely and dealt with the confusion, or tried workarounds that broke their reporting. If your books don’t currently reflect retainage accurately, getting that corrected is worth the effort. Knowing exactly how much cash is tied up in retainage across all your active projects changes how you plan and bid future work. Our small business bookkeeping services include setting up these accounts correctly from the start so every progress billing flows through the right places automatically.