What happens
On commercial work the builder does not pay your invoice in full. They hold back retention, usually 10% of each progress claim until it reaches around 5% of the contract value. Half of it is released when the job reaches practical completion. The other half is released at the end of the defects liability period, usually another twelve months after that. So on a $100,000 contract you are paid $95,000, and the last $5,000 turns up in two pieces, the second one perhaps two years after you delivered.
Where it costs you
You invoiced the full $100,000. If you report GST on an accruals basis rather than when the cash arrives, the GST on the whole invoice fell due in that quarter. Your income tax worked the same way. So you have already paid tax on money you have not received, and you will not see that cash for up to two years. If you are on a cash basis, this part does not apply to you.
The version that is worse
That is if you invoiced in full. If you invoice net of retention instead, the held back amount never enters your ledger at all. No invoice, no receivable, nothing in the accounting system. It lives in a spreadsheet or a job management system, and when the release date finally arrives there is nothing to reconcile a claim against. Often the person who built that spreadsheet has left.
One version is sitting in your 90 plus column being ignored. The other is invisible. Neither gets claimed on time.
How common is it
We have been through the books of hundreds of businesses doing commercial work. We can count on one hand the ones that had the retention accounting right. Most of this money is not lost to a dispute. It is lost to a diary.
What Retention Track does about it
It connects to Xero, MYOB and Fergus, finds the invoices where retention was withheld, and puts every contract on one dashboard with its release dates. For contracts billed net, it brings the uninvoiced amount onto the ledger where it can actually be claimed. When a release date arrives it generates the payment claim for the state the job is in.
The most common reaction when a business connects their accounts is how much turns up: retention balances they had stopped tracking, on jobs that finished years ago.
Retention Track is a certified app in the Xero App Store, is listed on New Zealand’s Ministry of Business, Innovation and Employment website as a retention money resource, and works across Australia, New Zealand and the United Kingdom.
Check your own numbers
Go to retentiontrack.com and sign up in the top right. Setup takes about three minutes, and your first three contracts are free with no credit card. After that it is $20 plus GST per contract for the life of that contract. No subscription, no monthly charge.
If you have retention outstanding, or jobs coming up where it will be held, do not wait for the release dates to find you. Or call James Coulson on 0400 736 736 and we will walk through it with you.
The GST question is one for your accountant. Once you know which invoices had retention withheld, we can give them exactly what they need.