What would be the accounting treatment for retention money in construction projects? Should we record retained amount as liability or not?
If;
Yes - What if the contractor doesn't complete the work?
No - What if the cost has already incurred by the contractor and certified by the consultant?
Urgent Response Required
Asad
what ment by accumulated depriciation and where it is write in balance sheet
hi there,
Being on audit of a construction firm ,i evidenced that they treat retention money as liability & rightly so, as the ratio of retention money is decided at the time of binding contract and the construction firm take it as security .on the other side the client retains their bills receivable as their security and only clears on the base of work certified,the client play safe to keep the amount receivable more than the retention money.
Asad
I just checked your e-mail because it some how went to spam maibox.
Brother, treatmeent of retention money in both of scenraios will depend upon the underlying agreement. Typically renetntion money is 10 percent (which can be less or more than it) of the contract value and is dedcuted from all the payments to be made to the contractors against the certified work. Retention money is a credit balance payable to contractor upon finalization of satisfied completion and performance of work. It is normally paid to contractor after one year of completion of contract work. However, this will again depend upon agreed terms.
If the contractor does not complete the work or the work performed by him is not satisfactory, the retention money may not be paid to him depending upon agreed terms. In such case, it can be kept as a liability in some "sundry liabilities" account and added back to profit and loss account as other income. Normally people keep the liability for 3 years and then add it back as income. This is done so that no issue arises in taxation as tax laws require adding back after 3 years. Other recoveries, damages or legal proceedings, or arbitration etc, everything will also depend upon the agreement and then legal rights under the specific circumstances.
If the work done is satisfactory, as per requirement, is certified and completed, the amount retained as retention money will keep on standing as liability in the books of account until the payment date AS PER AGREED TERM arrives. On which date the liability will be paid to the contractor. Remember, amount to be retained, retention period, payment methodologies, all dependd upon agreement with contractor.
If you have some specific question, let us know the terms agreed, then something concrete could be explained.
Regards,
KAMRAN.
I m working service providing company who engage in the business of decoration, kindly let me know about the accounting treatment of Project Retention Money. people may send their opinion on my below my personal ID tariqahmed10@gmail.com
thank you.
Retention money is deduction from the payments made against each IPC. This deduction is recorded as liability and is to be paid after completion of the contract. If work done is not inaccordance to the terms agreed in the contract then this retention money is not paid till the contractor complies with the contract.