Retentions and the financing component

Retentions can tie up a large share of a contractor's cash for years after a project is finished. The accounting questions are where they sit in the balance sheet, whether they need discounting, and whether they are at risk. This guide works through retentions on a project, explains why IFRS 15 does not treat them as financing, and covers credit losses and the retentions a contractor withholds from its own subcontractors.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. 3 minute read.

Short answer

Construction retentions are amounts the client withholds from each payment, typically 5% to 10%, until the work is complete and the defects period has ended. Under IFRS 15, they are part of the contract price already earned, recognised as revenue with the work; the right to them is usually conditional on completing the work and remedying defects, so they often remain contract assets rather than receivables until those conditions are met. Because retentions protect the client rather than finance it, they do not usually create a significant financing component. In this guide's example, 200,000 is retained from 2,000,000 of certified work.

At a glance

Typical rate
5% to 10% of certified work
Revenue
Recognised with the work
Usually
Contract asset until conditions met
Financing component
Usually not significant
Credit risk
ECL under IFRS 9
Subcontractors
Retentions payable are liabilities
Retentions and the financing componentTypical rate: 5% to 10% of certified work; Revenue: Recognised with the work; Usually: Contract asset until conditions met; Financing component: Usually not significant; Credit risk: ECL under IFRS 9; Subcontractors: Retentions payable are liabilities.KEY FACTS AT A GLANCERetentions and the financing componentTypical rate5% to 10% of certifiedworkRevenueRecognised with the workUsuallyContract asset untilconditions metFinancing componentUsually not significantCredit riskECL under IFRS 9SubcontractorsRetentions payable areliabilitiesTax BakersRetentions and the financing componentTypical rate: 5% to 10% of certified work; Revenue: Recognised with the work; Usually: Contract asset until conditions met; Financing component: Usually not significant; Credit risk: ECL under IFRS 9; Subcontractors: Retentions payable are liabilities.KEY FACTS AT A GLANCERetentions and the financingcomponentTypical rate5% to 10% of certified workRevenueRecognised with the workUsuallyContract asset until conditions metFinancing componentUsually not significantCredit riskECL under IFRS 9SubcontractorsRetentions payable are liabilitiesTax Bakers
Key facts at a glance, as set out in this guide.

Construction retentions: an example

A contractor's work certified during the year is 2,000,000. The client withholds 10%, 200,000, under the contract: half is released at practical completion and half at the end of a 12-month defects liability period.

Cash received as the retention is releasedCash received as the retention is released1,800,000During construction100,000Practical completion100,000End of defects periodCash received
Revenue was earned up front; the last cash arrives a year after completion.
StageCash receivedRetention outstandingPresented as
During construction1,800,000200,000Contract asset
At practical completion100,000100,000Contract asset until defects period ends
End of defects period100,000Nil

Revenue of 2,000,000 was recognised as the work was done; the retention changes when the cash arrives, not when the revenue is earned. Once a condition is met and only the passage of time remains, for example after the completion certificate is issued and the release date fixed, that part becomes a receivable.

Why is there usually no significant financing component?

IFRS 15 says a difference between the promised consideration and the cash price does not indicate a financing component if it arises for reasons other than financing, such as protection against the other party failing to complete its obligations. Construction retentions are the classic example: they give the client security that defects will be fixed, so contractors do not normally discount them. A retention period far longer than needed for that purpose could suggest a financing element.

Do retentions carry credit risk?

Yes. Contract assets are within the IFRS 9 impairment rules, usually through the simplified approach with lifetime expected credit losses. Retentions are long-dated and depend on the client still being solvent when they are released, and when a client or main contractor fails, retentions are often lost. Contractors working for financially weak developers should reflect that risk. See ECL on contract assets.

What if the client disputes defects?

If the client withholds retention to cover defects the contractor disputes, the expected cost of remedying defects is provided for under IAS 37 as part of the defects liability, and any amount the contractor does not expect to recover is a reduction in the transaction price or an impairment of the contract asset, depending on the reason.

What is a retention bond?

Some clients accept a bank guarantee, a retention bond, instead of withholding cash. The contractor is then paid in full, so there is no retention asset; it pays the bank a fee, expensed over the bond's term, and discloses its obligation to reimburse the bank if the client calls the bond.

How do retentions show in the cash flow statement?

Within operating cash flows, as part of the working capital movement on contract assets and receivables. A growing retention balance absorbs cash even when profits are steady and every certificate is paid on time, which is why contractors and their lenders track it separately.

How are retentions withheld from subcontractors treated?

A main contractor usually withholds retentions from its own subcontractors. Amounts withheld are financial liabilities, presented within trade and other payables, with those due after more than a year shown as non-current where material. They are not netted against retentions the client owes the contractor.

How are retentions presented and disclosed?

Within contract assets, or receivables once unconditional, often with a separate note of retentions and their expected release dates. See contract assets and liabilities and construction accounting.

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Questions people ask

How are construction retentions accounted for under IFRS 15?

As part of the revenue earned with the work, usually held as a contract asset until the conditions for release are met, then as a receivable.

Do retentions create a significant financing component?

Usually not, because they protect the client against defects rather than providing finance.

Are retentions subject to expected credit losses?

Yes. Contract assets and receivables are within the IFRS 9 impairment rules.

How are retentions withheld from subcontractors presented?

As financial liabilities within trade and other payables, not netted against retentions receivable.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 15 Revenue from Contracts with Customers

Rules and fees change. If you are reading this long after October 7, 2026, confirm the figures with the source before you rely on them.

ConstructionContract assets and liabilities in constructionECLECL on contract assetsConstructionConstruction accounting: the key IFRS issues

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