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:

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:

(since Maximum is $10,000 and $4,800 is already withheld)

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.