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Progress billing with retainage, explained
On anything bigger than a few weeks' work, waiting until the end to get paid is a cash-flow risk most small contractors can't carry. Progress billing fixes that: you bill each month for the work completed so far. Retainage is the catch: the client holds back a slice of each payment until the job is finished. Here's how both work, with a full example.
The pieces
- Schedule of values (SOV). Your contract price broken into lines, such as demo, framing, rough-ins, drywall and finishes, each with a dollar value. The lines must add up to the contract sum. Agree it with the client before work starts; it's what every invoice is measured against.
- Percent complete. Each billing period you report how far along each line is. The dollar value of work completed to date is line value × % complete.
- Retainage (or retention). A percentage, often 5% or 10%, held back from each payment as security that you'll finish and fix the punch list. It's your money, earned but not yet paid.
- Previous billings. What you've already been certified for. Each invoice bills only the difference.
The calculation every period
− Retainage (retainage % × work completed to date)
= Earned less retainage
− Previous payments certified
= Current payment due
Calculating on the to-date totals rather than "this period" is the safer habit. If a line was over- or under-reported last month, the to-date method corrects it automatically.
Worked example: a $120,000 remodel with 10% retainage
The agreed schedule of values:
| Line | Scheduled value |
|---|---|
| Mobilization & demo | $8,000 |
| Framing | $22,000 |
| Rough plumbing & electrical | $30,000 |
| Drywall | $15,000 |
| Finishes & fixtures | $35,000 |
| Punch list & closeout | $10,000 |
| Contract sum | $120,000 |
Period 1
Demo is done (100% of $8,000) and framing is half done (50% of $22,000 = $11,000). Work completed to date: $19,000. Retainage at 10%: $1,900. Earned less retainage: $17,100. Nothing billed before, so $17,100 is due.
Period 2
Framing finishes ($22,000) and rough-ins reach 60% ($18,000). Work completed to date: $8,000 + $22,000 + $18,000 = $48,000. Retainage: $4,800. Earned less retainage: $43,200. Less the $17,100 already certified: $26,100 due.
Period 3
Rough-ins and drywall are complete, and finishes reach 40% ($14,000). Work completed to date: $8,000 + $22,000 + $30,000 + $15,000 + $14,000 = $89,000. Retainage: $8,900. Earned less retainage: $80,100. Less $43,200 previous: $36,900 due.
Period 4 (substantial completion)
Every line is at 100%: $120,000. Retainage: $12,000. Earned less retainage: $108,000. Less $80,100 previous: $27,900 due.
Retainage release
Once the punch list is signed off and any closeout paperwork (lien waivers, warranties, manuals) is handed over, you invoice the $12,000 retainage.
| Invoice | Completed to date | Retainage held | Amount due |
|---|---|---|---|
| Period 1 | $19,000 | $1,900 | $17,100 |
| Period 2 | $48,000 | $4,800 | $26,100 |
| Period 3 | $89,000 | $8,900 | $36,900 |
| Period 4 | $120,000 | $12,000 | $27,900 |
| Retainage release | $120,000 | $0 | $12,000 |
| Total | $120,000 |
A quick check: each period's amount due is 90% of that period's new work. In period 2, new work was $29,000 and 90% of that is $26,100.
Change orders
Approved change orders get their own lines on the schedule of values, and the contract sum goes up by the same amount. Bill them by percentage complete like any other line, with the same retainage. Don't bill a change order that hasn't been approved in writing; it's the most common reason a progress invoice gets sent back.
Things that trip people up
- Front-loading the SOV. Putting inflated values on early lines to get paid sooner is tempting, and clients and lenders look for it. A believable SOV gets approved faster every month.
- Forgetting the retainage is owed to you. Track it as money receivable. On a busy year it adds up to a serious sum, and it's easy to forget to invoice once the crew has moved on.
- Retainage on your subs. If your client holds 10% from you, hold the same from your subs (if your subcontracts allow it). Otherwise you are financing their retainage out of your own cash.
- Reductions. Some contracts cut retainage to 5% once the job is half done. Check the contract terms. Retainage rules also vary by state, province and country and by public vs private work, so confirm what applies to you.
- Billing by hope. Report the percentage you could defend on a site walk. Overbilling feels good until the last invoice, when there's nothing left to bill for the hardest work.
Setting it up in a spreadsheet
You need one row per SOV line, a scheduled value column, and a cumulative % complete column for each period. Work completed to date for a period is the sum of value × that period's percentage. Retainage, previous payments and amount due then follow from the formula above. Keep the % complete columns as inputs (yellow) and everything else as formulas so nobody overwrites a calculation by accident.
Before you bill, make sure the contract price itself carries a real margin. The free markup calculator below shows whether it does.