By Andrew Eiler, CPA, CCIFP, Senior Manager at Blue & Co.

Retainage: Track It Like the Cash It Is

Retainage is intended to protect project owners and encourage project completion, not to become a disregarded balance on the aging report.

For contractors, retainage represents amounts withheld from project billings that are unavailable for payroll, materials, equipment, debt service, and the next project. When retainage is not observed and evaluated, it can remain uncollected long after the contractor’s work is complete and constrain available cash flow.

Why retainage deserves focused attention

Consistent and frequent monitoring of retainage balances helps contractors:

• Protect cash flow. As retainage often amounts to a significant portion of a contractor’s profit on the job, monitoring and reducing it as soon as possible aids in cash flow from operations.
• Improve collection discipline. Tracking substantial completion, punch-list status, closeout documents, and lien waivers allows for management to better understand steps needed for full retainage release and potentially predict the timing of collection.
• Identify issues early. Aging retainage by customer, project status, or project manager can reveal disputes, gaps in documentation, or stalled closeouts before balances become difficult to collect.
• Support stronger financial reporting. Consistent monitoring and tracking gives management, lenders, and sureties a more accurate picture of projected cash flow to make decisions.
• Create accountability. Including retainage in job status and creating benchmarks that are reviewed consistently creates accountability for the team to work toward collection as soon as possible.

Two KPIs to monitor

1. Retainage Receivables as a Percentage of Total Receivable

Retainage / (Trade Receivables + Retainage)

This metric shows how much of reported receivables are not immediately available for operations.

2. Aging of Retainage by Job Completion Stage

Management needs to review retainage aging on a regular basis and based on job completion status to gain a better insight into possible collection issues, job issues, or where an ask could be made to collect on retainage to improve cash flow.

Indiana update: House Bill 1033 

Indiana construction clients should also be aware of an important 2025 change to Indiana retainage law affecting certain public works contracts.

Indiana enacted HB 1033 / Public Law 28, which reduces the amount of retainage that may be withheld on covered public projects. Previously, public works retainage could generally be set at six percent to 10 percent until 50 percent completion or three percent to five percent until substantial completion. Under the new law, the retainage limits are reduced to no more than six percent until 50 percent completion or no more than three percent until substantial completion.

This is a meaningful cash-flow change for contractors and subcontractors. Less money should be tied up in retainage, which can improve working capital and reduce the amount of profit effectively held until late in the job.

This law is limited to certain state and local public works projects and does not create a general retainage cap for private construction contracts. This is an important distinction as not all contracts are impacted by this law. Even if your contracts may not be directly impacted by the law change, this could create opportunities to negotiate a potentially lower retainage percent withheld.

What should you do now?

• Establish or review KPIs surrounding retainage.
• Include retainage discussions in project or WIP review meetings to determine:
  • What is preventing release of retainage?
    • Have we made the ask to have retainage released?
    • Have we completed the final closeout documentation?
    • Are there deficiencies or other punch-list items left to be completed?
  • Who owns the next action?
  • Is there a defined collection date and escalation plan?
  • Review your public project contracts and subcontracts for retainage language.
  • Update payment and billing procedures to comply with the new statutory caps.
  • Confirm whether a project falls within the law’s scope, especially for local public work and excluded roadway/bridge projects.
  • Consider whether your closeout, punch-list, bond, and dispute provisions need revision now that less retainage may be withheld.

For more information, see:

• Indiana General Assembly HB 1033
• TrackBill action history
• Levelset Indiana retainage summary

Retainage may be customary in construction, but it should never become invisible. A disciplined process can help convert completed work into cash faster.

If retainage is creating pressure on your cash flow, contact your Blue & Co. advisor. Our Construction team can help you evaluate your retainage tracking, reporting processes, and working capital strategy.