Progress Billing, Retainage and Deposits: Where Contractor Cash Goes

Updated 2026-10

The pattern

The P&L says the company made money. The bank says it did not. Both are telling the truth about different things, and the gap between them is almost always one of four items: a deposit that was counted as income, a progress bill that was never sent, retainage that is owed but not collectible yet, or sub payables that are waiting on a draw. The books should show all four. Most do not.

Deposits are not income

A $15,000 deposit on a $60,000 remodel is a liability on the day it arrives: you owe the customer $15,000 of work. Booking it as income inflates the month it lands and starves the months the work is done in. On the balance sheet it sits in customer deposits and moves to revenue as the job is earned, which in practice means as the percentage of completion rises or as it is applied against progress invoices.

The cash-flow point is the important one. A deposit is working capital for that job, and spending it on another job, or on the truck, is borrowing from a customer. The books will not stop you, but they should at least show the deposit balance so the borrowing is a decision.

Progress billing and the schedule of values

Commercial and larger residential work is billed in stages against a schedule of values: the contract broken into line items with a value each, invoiced by percent complete. The AIA G702 and G703 forms are the standard version; many smaller contracts use a simpler milestone schedule.

The leak is timing. Work gets done, the billing date passes, the invoice goes out two weeks late, the customer’s thirty days start two weeks late, and the company is forty-five days behind its own work. The monthly WIP schedule shows this as under-billing, job by job, and the fix is a billing calendar tied to the contract rather than to when someone remembers.

Change orders, billed or not

A change order is a contract amendment. Approved, it raises the contract value and should be billed on the next progress invoice. Done without approval, it is either a conversation to have now or a gift to the customer. Either way the books should list it: approved change orders against the job so the WIP contract value is right, and unapproved work as a separate line so it is not forgotten. On remodeling and light commercial work this is routinely the largest single leak.

Retainage: earned, not spendable

Five or ten percent of every progress payment withheld until acceptance, on commercial work almost universally and on some residential contracts. By the end of a $400,000 job that is $40,000 you have earned and cannot touch, possibly for months after completion while punch lists and final inspections run.

Carry it as retainage receivable, separate from ordinary receivables, so the ageing report distinguishes "owed and due" from "owed and held". And carry what you withhold from subs as retainage payable, separate from ordinary payables, so it is not paid early by accident. Some states cap retainage or set release deadlines on public work; the rules are yours to confirm, the tracking is the bookkeeper’s.

Pay-when-paid and the payables ageing

Many sub agreements make payment to the sub contingent on payment from the owner. The payables ageing should show which sub invoices are waiting on which receivable, so the cash-flow forecast is built from the actual chain rather than from due dates that will not be met. A sub payables list that ignores the contingency makes the company look further behind than it is; one that hides it makes the subs look paid when they are not.

Construction loans and draws

A draw from a construction lender is a loan, not revenue, and the draw request is usually tied to the same schedule of values as the owner’s progress bills. Reconcile draws to the lender’s statement and to the billing schedule, and carry the loan as the liability it is. Builders who book draws as income have a very good year followed by a very bad one.

The report that shows all of it

The monthly WIP schedule plus the two ageing reports with retainage separated. Together they show, per job, what has been earned, what has been billed, what is held, what is owed to subs and what the subs are waiting on. That is the cash position of a contracting business. The bank balance is a symptom of it.

Where to go next

• Construction accounting 101
• Job costing and the WIP schedule
• Construction bookkeeping services