Understanding “Retainage” from Techies Mind

This kind of business normally you will find in Project intensive companies, where retainage refers to a portion of the payment that is withheld until the completion of a project.

In that case the client doesn't pay the contractor/party the retainage until all work on the project is complete.

Retainage is negotiated upfront and is stated as a percentage or amount of the overall cost of the project.

There is no limit for retainage.

Example

Example 1

For example, a lets you company may hire a IT contractor for a $100,000 project. The contract stipulates 10% retainage. Over the course of the project, the client pays the contractor $90,000 for the work. But 10% of the total cost, $10,000, is withheld until the completion of the project. Once the project is completed, all the final details have been wrapped up, and the client is satisfied with the results, the client will pay the contractor the retainage amount.

Example 2

There may be other case you can have this way , the contract can specify that you will retain 20 percent from all payments until 25 percent of work is complete. Therefore, whenever the contractor sends you an invoice, you retain 20 percent of each payment until the overall progress reaches 25 percent.

Accounting Treatment

Retainage is recorded on the balance sheet.

When the voucher is processed, the following accounting transaction is generated:
DR) Expenditure(Expense)
CR) Voucher payable (Liability)
CR) Retainage payable (Retainage)

When the voucher is released by audit for payment, the following transaction is generated:
DR) Vouchers payable(Liability)
CR) Cash

To release the retainage after successful completion of the contract the following transaction is generated:
DR) Retainage payable (Retainage)
CR) Cash

Payables retainage @Oracle R12

These are two mandatory set up required in R12 to get retainage Function.

1)Retainage Account Setup
You need to first define the retainage account for the operating unit in the GL Accounts region on the Accounting tab of the Financials Options.

Setup > Options > Financials Options> Accounting tab

Oracle Payables uses this account to record the distribution on progress invoices and subsequent retainage release invoices for funds withheld from suppliers.

2)Supplier Terms and Controls Setup
You need to do Set up for your supplier's terms and control defaults using the Suppliers page.

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