Presentation and Disclosure of Retainage for Construction Contractors

Introduction

Retainage provisions are a common practice in the construction industry. Retainage refers to a portion of the contract price withheld by the customer until the project reaches substantial completion or meets other specified milestones. The amount held is typically defined in the contract and usually ranges between 5% and 10%, although it may be higher in certain arrangements. Retainage is intended to create a financial incentive for contractors to complete the project and to provide protection for owners if issues arise during construction or within a specified period after completion.

From an accounting perspective, retainage is not a separate category under ASC 606. Instead, it is classified based on the nature of the entity’s right to consideration—either as a receivable if the right is unconditional, or as part of a contract asset or contract liability if the right is conditional. The key distinction is whether the entity’s right to payment depends only on the passage of time (unconditional) or on future performance or other conditions (conditional).

If the right to retained consideration is unconditional, the retainage should be classified as a receivable. If not, it should be recorded as a contract asset, representing the entity’s right to consideration for goods or services already transferred when that right depends on something other than the passage of time, such as future performance.

Retainage may also be recorded as a reduction of a contract liability, which represents the entity’s obligation to transfer goods or services for which consideration has already been received or is due from the customer.

Beyond classification, however, lies another challenge: how to present and disclose retainage on financial statements. The lack of explicit guidance on retainage disclosures under Topic 606 led to inconsistent interpretations among private company stakeholders in the construction industry.

To address this issue, the Financial Accounting Standards Board (FASB) staff issued an educational paper, Topic 606: Presentation and Disclosure of Retainage for Construction Contractors, to address these challenges. This paper aims to clarify how retainage should be presented and disclosed under current Generally Accepted Accounting Principles (GAAP).

FASB’s Educational Paper

Required Disclosures

In accordance with Accounting Standards Codification (ASC) 606-10-50-11, private companies may elect certain disclosure relief under ASC 606, but they are still required to provide key disclosures, including information about revenue contracts in their financial statements. However, if they decide not to make these detailed disclosures, they still need to provide the disclosure in ASC 606-10-50-8(a): “The opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed.”

However, the staff emphasized that private construction companies are permitted to provide all disclosures outlined in ASC 606-10-50-8 through 50-10. These voluntary disclosures would provide increased granularity of contract assets and liabilities, which would include relevant information related to retainage.

For retainage included in receivables, the FASB notes that ASC 910-10-50-7 (Topic 910, Contractors—Construction) requires disclosure—either on the balance sheet or in the notes to the financial statements—of the following:

The amounts
The portion, if any, that is expected to be collected after one year
If practicable, disclose the expected timing of collection, by year, for any unconditional retainage amounts classified as receivables.

Additional Disclosures Permissible under GAAP

Topic 606 requires that when an entity enters a contract with a customer, the remaining rights and performance obligations of that contract should be accounted for and presented on a net basis as either a contract asset or a contract liability. While this approach simplifies the presentation of the balance sheet, it can unintentionally obscure the impact of retainage, which is often embedded within larger contract asset or liability totals. This lack of visibility poses issues for users like sureties and lenders. For example, a $500,000 contract asset might include $200,000 of retainage, an important detail for assessing liquidity, bonding capacity, or compliance with loan covenants. Stakeholders argued that the existing disclosure requirements failed to provide sufficient transparency, leaving financial statement users without the granular data needed to evaluate these risks.

In response to this challenge, the FASB provided several examples of voluntary presentation methods that private construction companies may adopt to enhance transparency related to retainage:

(1) Parenthetical disclosures on the face of the balance sheet — Entities may disclose the amount of retainage included within contract assets and liabilities directly on the balance sheet. For example: Contract assets, including conditional retainage of $[ ] and $[ ] at December 31, 20X1 and 20X0, respectively; contract liabilities, net of conditional retainage of $[ ] and $[ ] at December 31, 20X1 and 20X0, respectively.

(2) Use of subtotals — Entities may include subtotals within contract assets and liabilities to provide greater granularity, including separate line items that reflect amounts attributable to conditional retainage.

(3) Alternative account descriptions — Entities may use alternative terminology in place of “contract asset” and “contract liability,” such as “revenue in excess of billings” or “billings in excess of revenue.” When doing so, sufficient disclosure must be provided to enable users to distinguish between receivables and contract assets.

(4) Additional note disclosures — Entities may provide further disaggregation of contract assets and liabilities within the notes to the financial statements. However, this disaggregation should not extend to the level of individual contracts.

This discussion highlights that while ASC 606 standardizes balance sheet presentation by requiring contract assets and liabilities to be reported on a net basis, it can also reduce transparency—particularly for items like retainage that are meaningful to financial statement users. The FASB’s response makes clear that entities are not restricted to the minimum presentation requirements and may provide additional, voluntary disclosures to improve clarity. These enhancements—such as parenthetical disclosures, subtotals, alternative labeling, or expanded note disclosures—can help users better assess liquidity, risk, and contractual rights. The key takeaway is that entities should consider whether supplemental disclosure is necessary to ensure their financial statements remain decision-useful, especially in industries where retainage is significant.

How can other industries interpret this paper?

The FASB pointed out that while this educational paper is focused on private construction companies, the discussion of permissible additional disclosures and examples provided above may apply to all entities and industries.

Conclusion

The FASB’s guidance ultimately served as a pragmatic compromise; it reaffirmed the core principles of Topic 606 but acknowledged the construction industry’s unique needs by endorsing flexible, user-friendly disclosures. By doing so, the paper bridged the gap between strict adherence to GAAP and the practical realities faced by contractors and their financial partners.

Editor’s Note

This article was reviewed in 2026 for consistency and correctness in accordance with present guidance. This article reflects guidance, and the concepts discussed remain relevant as the FASB’s guidance has not undergone substantive changes regarding retainage for construction contracts.

Resources:

ASC 606-10-50-8 through 50-10
ASC 910-10-50-7
Financial Accounting Standards Board (FASB). “FASB Staff Educational Paper Clarifies Guidance on the Presentation and Disclosure of Retainage for Construction Contractors.” April 1, 2025.