Most companies have a variety of projects going on every year. One of the things that is negotiated early in the process of creating a contract for a project is if a retainage will be built into the terms. A retainage refers to a portion of the payment that is withheld until the project is complete. This can be any amount, but typically it results in 5-10% of the overall contract amount. It’s a fairly common practice that many companies elect to include for a variety of reasons including the complexity of the project, the client’s piece of mind that the project will be completed, or even that the client is satisfied with the results.
From an audit perspective, this sneaky liability can escape the balance sheet by hiding itself within projects that carry forward from one year to the next and don’t get captured by the finance team. To help from understating your liabilities, it’s always a good idea to look through all open projects at year end to see if any of these retainages are due for services that were completed within the year. If they were, make sure to get it recorded.