How to Correctly Map Retention Moneys Withheld on the Balance Sheet

Retention moneys (often just called retentions) are amounts withheld by an employer from interim payments to a contractor, held back as security against defects and to ensure final completion. Standard contracts (JCT, NEC4) typically retain 3% to 5% of each interim payment, with half released at practical completion and the balance released at the end of the defects liability period (usually 12 months later). The accounting treatment of retentions is straightforward in principle but frequently mishandled in practice.

The principle: revenue when earned, asset when withheld

Retentions are recognised on the same basis as the underlying revenue. Two consequences:

1. 1When a contractor performs work that earns £100,000 of revenue, of which 5% (£5,000) is retained, the full £100,000 is recognised as revenue. The £5,000 is not deferred until release.
2. 2The £5,000 sits as a debtor on the balance sheet (under trade receivables or as a separately disclosed retention asset) until the customer releases it.

Treating retention as deferred revenue (recognising only £95,000 of revenue) is wrong under FRS 102. The earnings event is the work done, not the customer's release of the retention.

Current versus non-current classification

The classification of retention debtors as current (due within 12 months) or non-current (due after 12 months) follows the expected release date, not the contract value. This requires contract-by-contract assessment at year-end:

• Contracts past practical completion with the first half of retention release imminent: current asset.
• Contracts within the 12-month defects liability period: current asset (release expected within 12 months).
• Contracts not yet at practical completion with PC more than 12 months out: non-current asset for the full retention balance.
• Mixed cases: split between current and non-current based on expected release schedule.

When retentions become doubtful

Retention debtors are subject to the same impairment review as ordinary trade receivables. Where there is objective evidence that a retention will not be released in full, an impairment provision is recognised. Common triggers:

• Customer dispute over alleged defects with retention release linked to resolution.
• Customer financial distress (administration, liquidation) raising doubt about ability to release.
• End of defects liability period reached but customer not engaging with release.
• Specific contractual mechanisms allowing the customer to retain or set off retentions against liquidated damages or other claims.

The provision is calculated as the carrying amount of the retention less the recoverable amount. Where the position is uncertain (a defect dispute being negotiated), the provision is based on the weighted expected outcome, not the worst case.

Tax treatment of retentions

Retentions follow the accounting position for corporation tax: they are recognised as part of revenue (and therefore taxable) when earned, not when collected. Where a retention is subsequently impaired and provided for, the provision is generally tax-deductible in the period of the provision (specific bad debt rules apply). The mismatch between cash collection and tax cost is one reason why construction companies often hold deferred tax assets.

Worked example: retention reconciliation

A contractor with three active contracts at year-end:

Contract C straddles the 12-month boundary because part of the retention will release at the imminent first-half PC point and the balance only at end of defects liability period 12+ months later.

Common questions

How do we treat retention bonds in lieu of cash retention?

Where the customer accepts a retention bond from a bank or surety in lieu of withholding cash retention, the contractor receives the cash that would otherwise have been retained. The cash is recognised normally; the bond fee paid to the bank or surety is expensed as incurred. The bond is a contingent liability disclosure rather than a balance sheet liability unless it has been called.

What if the customer goes into administration before retention is released?

The retention becomes an unsecured debt to the contractor in the customer's administration. Recoverability depends on the administration outcome. The retention balance should be reviewed for impairment at the next reporting date and provision recognised based on the expected recovery.

Are retentions subject to CIS deductions?

CIS deductions apply to the gross labour element of the underlying valuation, not to retentions specifically. The CIS treatment is determined at the point of certification or payment, applied to the certified gross labour value. Retentions that are subsequently released are released net of any CIS already deducted on the underlying valuation; no additional CIS deduction applies on release.