Quick Reference Guide for Retainage

Introduction

Retainage represents a portion of an agreed upon contract price temporarily withheld until work is substantially complete, or other milestones specified within the contract are reached. This is used to ensure that contractors or subcontractors satisfy their obligations to complete a project as outlined in the contract. Retainage may also be referenced as Hold Back or Retention.

Under GASB Interpretation No. 6, retainage does not meet the definition of a current liability in governmental funds until it becomes due and payable (e.g., satisfactory completion of the work). As such, the only time this liability would be shown as a current liability on the governmental financial statements would be if the contractor is owed the retainage at year-end and the payment has not yet been made. In proprietary funds, liabilities are recognized when they are incurred and do not need to meet the due and payable criteria established for governmental funds.

Retainage is considered a long-term liability for the purpose of Financial Reporting and should only be recorded within Financial Records when the payout of the retainage is due. For example, if an invoice is received and $500 of the invoice amount is to be retained (held back from the payment to the vendor) that $500 is not required to be recorded in the state’s financial system. However, Florida PALM offers two methods to record this information for tracking purpose.

Tracking Retainage Governmental Funds (does not need a liability)

Retainage can be tracked through Encumbrances or Projects depending on agency need.

Figure 1: Tracking Retainage Governmental Funds

Recording via Encumbrance

Agencies with retainage that will be paid out within the current fiscal year should record the retainage due via an encumbrance. The encumbrance COMMITS budget and will reduce Appropriation Balance; however, there is not an accounting impact.

Agencies may choose any of the following methods to record retainage on an encumbrance:

1. Add an encumbrance line for each invoice received and a separate line for each invoice specific retainage.
2. Create a single encumbrance line to represent the retainage and use an estimate based on the terms of the agreement.
3. Create a separate encumbrance where all retainage related commitments are recorded and paid from.

This would require agencies to reduce the original encumbrance by the amount recorded on the corresponding contract encumbrance to ensure appropriations are not over committed, which is prohibited in Florida PALM.

Warning: A distribution line may not be updated once a payment has been disbursed against it. The distribution line will have to be closed and a new line created to reflect the new information.

Please note, when agencies are creating a voucher from an existing encumbrance, they should use the same ChartFields from the encumbrance. If agencies need to use a different ChartField or provide an additional ChartField on the voucher, then they will need to update the encumbrance (PO), prior to submitting the voucher. Refer to Appendix D on Business Process Model 30.3 Enter and Process Vouchers.

Recording via Project

Agencies with retainage that will not be paid out within the current fiscal year should record the retainage due via a Project. Recording retainage within a Project OBLIGATES funding within the Project budget to be used for retainage. This method does not impact Appropriations and will not reduce Appropriation Balances.

This method allows agencies to track obligated amount of retainage by a Project, funding source, or by contract, based on the agency’s reporting needs.

Agencies may record retainage in a Project Budget using one of the following methods.

1. Assign the Retainage activity to the Project.
   1. Record the funding source(s) to be utilized for disbursement of the retainage, including the specific contract value.
2. Create a Project specific ChartField value (PC Source Type, PC Category, PC Subcategory) that represents retainage.
   1. Within the budget line of an existing activity, record a new budget item line that includes the retainage identifying value within the Project Detail tab.

Retainage may be paid at any time during the Fiscal Year based on contract terms and conditions. However, depending on the timing of the payout, agencies may need to record an Accrual Receipt instead of regular voucher.

Disbursement Processing of Retainage

Invoices, or an official request for retainage payout, will be received from the vendor per the terms of the contract. The invoice is processed through regular vouchering processes as other invoices. However, should the retainage become due and payable at the end of a fiscal year, but an invoice has not yet been received, the retainage disbursement should be recorded through the Accrual Receipt process.

Figure 2: Disbursement Processing of Retainage

Payout using Regular Voucher Process

Retainage that becomes due and payable during a fiscal year on an received invoice where terms and conditions of the contract have been met, will be paid using a regular voucher. If the retainage was being tracked via an encumbrance, the regular voucher should include the encumbrance number (PO Number).

The voucher disbursement lines must match the encumbrance distribution lines exactly. If a change to the ChartFields is needed, the encumbrance must be adjusted prior to creating the voucher.

Payout using Accrual Receipt Process

Retainage that becomes due and payable during the fiscal year, in which an invoice has not been received by June 30^th but terms and conditions of the contract have been met, must be processed through the Accrual Receipt Process.

The Accrual Receipt process will record accounting entries to reflect the retainage as a liability due to the vendor, but not yet paid, as required for Financial Reporting Purposes.

Retainage paid from governmental funds are required to be reported as a liability once the retainage becomes payable and due to the vendor (when it the debt is payable, not incurred).

In proprietary funds liabilities are recognized when they are incurred, and do not need to meet the due and payable criteria established for governmental funds.