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Calculation of Retention
RETENTION CALCULATION
The following example shows the calculation of Subcontractor Retention deductions and the appropriate GST:-
A builder may engage an air-conditioning subcontractor to supply and install a system for a total of $200,000.
The Subcontract Agreement includes a provision requiring the Subcontractor to make Claims (not Tax Invoices and to accept Recipient Created Tax Invoices (RCTI) from the builder. The agreement also quotes a retention rate of "10% to 5%".
The Retention Rate used means that over the Project, a total Retention of 5% or $10,000 with be withheld from monies paid. And to quickly build a Retention pool of funds, Retentions will be deducted at the rate of 10% until the 10,000 target is reached – after which no Retentions will be deducted.
During the installation the subcontractor makes their first progress claim of $50,000 based on an assessment of work to date. The builder disagrees with the assessment of work completed and reduces the approved value of work by $2,000.
Therefore the builders records would show:
Claim Value | $50,000 |
Less disapproved | $ 2,000 |
Approved Claim Value | $48,000 |
Less Retention | $ 4,800 |
Value Approved for Payment | $43,200 |
Plus GST | $ 4,320 |
Direct Deposit/Cheque Amount | $ 47,520 |
Retention Liability on completion | $ 4,800 |
The second Progress Claim made by the subcontractor is for $100,000. Again the Builder disagrees with the assessment of work completed and reduces the approved value by $10,000
The builders records would now show:
Claim Value | $ 100,000 |
Less disapproved | $ 10,000 |
Approved Claim Value | $ 90,000 |
Less Retention | $ 5,200 |
(since Maximum is $10,000 and $4,800 is already withheld)
Value Approved for Payment | $ 84,800 |
Plus GST $ | 8,480 |
Direct Deposit/Cheque Amount $ | 93,280 |
Retention Liability on completion | $ 10,000 |
This Retention will be released to the Subcontractor in two $5000 payments – one at the Practical Completion of the Project and the second at the expiration of the Defects Liability period – typically 12 months later.
GST will be applied to the Retentions at the time of release.
Muli's Construction Accounting Software performs all these calculations automatically.
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