Retainage and change orders: the two line items that hide contractor profit

Retainage is the portion of each progress billing your customer holds back until the job is finished, often 5 to 10 percent. Change orders are approved changes to scope and price. Both are real money that is easy to lose track of, and when either is tracked loosely, jobs look less profitable than they are or more profitable than they will be.

Why retainage gets lost

Retainage is earned but not yet collectible. If it is not recorded as its own receivable, it either disappears from view or sits mixed into regular receivables where nobody chases it. At the end of a job, it can be the difference between a profitable project and a break-even one.

• Track retainage receivable separately from regular receivables, by job.

• Track retainage payable to your subs the same way.

• Review what is held on closed jobs every month, and bill for release as soon as the job qualifies.

Why change orders get lost

Field crews do the extra work first and the paperwork later, if at all. Unbilled change orders show up as cost with no matching revenue, so the job's margin appears to fade. Pending change orders that are counted as if already approved do the opposite and overstate profit.

• Log every change order the day it is agreed, with an approved, pending or rejected status.

• Code change order costs to the job so they can be matched to the billing.

• Include only approved change orders in contract value on your WIP schedule.

Where both show up

On a well-kept WIP schedule, retainage and change orders are visible for every open job. If yours does not show them, or you do not have a WIP schedule yet, that is the place to start.

If you want a second set of eyes on your own numbers, book a free 20 minute call with Julia at calendly.com/juliaspahiu.

Edi & Sienna Group provides bookkeeping, accounting and fractional CFO services. We are not a licensed public accounting firm and this post is general information, not tax, legal or accounting advice for your specific situation.