Make July your Retention Month Review
Many businesses in the Building & Construction industry are subject to retention’s as part of the project they deliver on. This can impact on the profitability of a project and up to 5% can be retained. Bank guarantees are often used and these are also expensive and needs to be monitored.
In our experience, some small construction businesses don’t tract their retention’s and fail to collect 12 months later. Or worse still disputes means it can be hard work getting that final 5% and many walk away as it is too hard.
Smart construction operators in their small business accounting system will set up a liability account call Retentions and corresponding Asset Account as well. You can raise an invoice but the ATO allows you to NT on the invoice until the retention becomes due. At the end of the period you can re invoice the amount out of the Retentions account and recognise the GST. Keep a record of retentions and use July as your month to reconcile your retentions. The point is recognise these amounts on your Balance Sheet!
Tips for keeping an eye on your retentions as a small business construction business:
• Advise as per the construction contract the date of practical completion of your part of the works as soon you believe they have been complete to trigger the retention period
• Your accounting system should record the date of completion and remind you that you have reached the end of the defects liability period.
• Request in writing to release retention. Don’t expect the customer to do this automatically. This is usually in the form of a “claim for practical completion” and, after defects remediation, a “claim for final completion.”
• If retention is not released within 7 days of the date then immediate inquire why! Commence legal action if appropriate
• Keep good records and copies of all correspondence both sent and received at completion of the project. Many try to avoid paying you’re the last 5% finding as many defects as possible. Don’t let this happen to you.