Why Conditional Retainage Left Your Accounts Receivable — And What Controllers Should Disclose Now

Most construction Controllers grew up reading retainage on the same line as trade receivables. The owner held back 5% or 10%, the AR aging showed it, and the surety could see how much cash was still parked behind final completion. That presentation did not survive ASC 606 cleanly — and in 2025 the FASB made clear it is not going back.

If your year-end package still treats every retention balance like ordinary AR, you are probably misstating the balance sheet. If you buried conditional retainage inside a net contract asset or liability and never showed the components, your surety may be guessing. Controllers in real estate development and contracting need both the GAAP classification right and the disclosure useful.

## What ASC 606 actually did to retainage

Under ASC Topic 606, *Revenue from Contracts with Customers*, a receivable is an unconditional right to consideration — generally, a right that depends only on the passage of time. A contract asset is a right to consideration that is conditioned on something other than the passage of time, such as future performance or achievement of a milestone.

Construction retention is usually structured as security: the customer withholds a portion of each progress billing until milestones are met or the project is accepted. EisnerAmper’s construction guidance on contract assets and liabilities under ASC 606 notes that when payment of retainage depends on future obligations under the contract — “conditional retainage” — that amount belongs in the contract asset or contract liability, evaluated at the individual contract level, not automatically in accounts receivable the way many contractors presented it under legacy GAAP.That classification change is not cosmetic. ASC 606 requires contract assets and contract liabilities to be presented on a net basis for each contract. Conditional retainage therefore gets netted with underbillings or overbillings on the same job. Schneider Downs’ May 2025 analysis walks through the arithmetic: an underbilled job with conditional retainage shows a larger contract asset; an overbilled job can show a contract liability that is smaller than the pure overbilling — or even flip sign — once conditional retainage is included. Users who still expect “costs and estimated earnings in excess of billings” and a separate retainage receivable line often cannot reconstruct those legacy views from a single net number.

## FASB’s 2025 answer: education, not a carve-out

Private company stakeholders and sureties told the FASB and the Private Company Council that retainage presentation under Topic 606 was confusing in practice. After deliberation, the PCC did not create a construction carve-out that would undo netting. Instead, on April 1, 2025, the FASB released a Staff Educational Paper on Topic 606 presentation and disclosure of retainage for construction contractors.

Accounting Today and CPA Practice Advisor both reported the same core message from the Board: the paper does **not** change or modify current GAAP. It explains existing presentation and disclosure requirements and provides example voluntary disclosures that remain permissible under Topic 606 — including approaches that give sureties more visibility into how much retainage sits inside contract asset and contract liability balances (for example, parenthetical amounts on the face of the balance sheet or disaggregated components).Schneider Downs summarized the practical takeaway for Controllers: expect to keep evaluating whether retainage is conditional or unconditional, keep netting at the contract level when it is conditional, and use the FASB’s illustrative disclosure patterns — aligned with AICPA example contractor financial statements — so lenders and bonding agents can still see underbillings, overbillings, and retainage separately when they need to.

Unconditional retainage (right to payment depends only on time) can still be a receivable, and ASC Topic 910, *Contractors—Construction*, continues to require specific disclosures when receivables include retainage balances. The Controller’s first job is the facts-and-circumstances test on each contract’s retainage clause — not a one-size spreadsheet mapping every retention line to AR.

## Cash flow is moving even while the balance-sheet debate settled

Presentation is only half the operating story. State retainage reform is changing how much cash gets held back on private work. EC&M’s coverage of 2025 legislation notes that California’s SB 61 capped retainage on private construction contracts entered into after January 1, 2026 at 5% — half the traditional 10% holdback many owners used. New York strengthened its private-project 5% retainage framework by voiding contract provisions that exceed the cap, and Illinois tightened agency-project retention schedules. EC&M also flags related public-works reductions in states such as Iowa and Indiana.Those statutes do not rewrite ASC 606. They do change working capital, borrowing-base conversations, and the size of the retainage balances Controllers must classify and disclose. A contractor bidding 2026 private work in California or New York who still models 10% retention will systematically understate available cash — and may still misclassify whatever *is* retained if the release conditions are performance-based.

## What a construction Controller should do this close

1. **Read the retainage clause, not just the AIA pay app.** Decide conditional versus unconditional under ASC 606’s receivable definition before you map the GL.

2. **Net at the contract level.** Conditional retainage belongs in that contract’s asset or liability stack with under-/over-billing — not as a free-floating AR subledger that ignores Topic 606.

3. **Disclose for the surety anyway.** FASB’s educational paper and AICPA-style examples make clear that voluntary parenthetical or disaggregated retainage detail is allowed and often expected by users even when private companies are not subject to every public-entity disclosure.

4. **Reconcile GAAP presentation to lender and bonding packs.** If your bank still asks for “retainage receivable” and “billings in excess,” maintain a bridge schedule. Do not force non-GAAP lines onto the face of GAAP statements.

5. **Update cash and covenant models for state caps.** Where SB 61 or New York’s 5% private caps apply, refresh draw and working-capital forecasts; then make sure the accounting classification matches the new economics.

## Where Ultramar and SoFla Prime Consulting fitThis is Controller work: contract reading, ASC 606 classification, disclosure design, and a surety-ready package — not a bookkeeping cleanup. **Ultramar** focuses that fractional CFO and Controller support on real estate and construction platforms — developers, contractors, and operators who live in WIP, draws, retainage, and lender reporting. **SoFla Prime Consulting** provides fractional CFO, Controller, and accounting oversight for growing businesses that need the same rigor locally and across nonprofit and multi-entity environments, including real estate and healthcare operators who still touch construction-period and project accounting.

If your close still drops retainage into AR by habit, or your bonding agent cannot find retainage inside a net contract balance, the issue is presentation and control design — and it is fixable before the next package goes out.

### Sources

FASB news release (April 1, 2025), “FASB Staff Educational Paper Clarifies Guidance on the Presentation and Disclosure of Retainage for Construction Contractors”: https://www.fasb.org/news-and-meetings/in-the-news/fasb-staff-educational-paper-clarifies-guidance-on-the-presentation-and-disclosure-of-retainage-for-construction-contractors-421505

Accounting Today, Michael Cohn, “FASB offers retainage guidance for construction contractors” (April 1, 2025): https://www.accountingtoday.com/news/fasb-offers-retainage-guidance-for-construction-contractors

CPA Practice Advisor, Jason Bramwell, “FASB Staff Paper Provides Revenue Recognition Insights for Construction Contractors” (April 1, 2025): https://www.cpapracticeadvisor.com/2025/04/01/fasb-staff-paper-provides-revenue-recognition-insights-for-construction-contractors/158211/EisnerAmper, “ASC Topic 606: Contract Assets and Liabilities for the Construction Industry” (published Jan 29, 2024): https://www.eisneramper.com/insights/real-estate/contract-assets-liabilities-within-asc-topic-606-construction-industry-0622/

Schneider Downs, Ryan R. Deatrick, “No Relief on the Way for Contractor’s Presentation of Retainage” (May 8, 2025): https://schneiderdowns.com/our-thoughts-on/no-relief-on-the-way-for-contractors-presentation-of-retainage/

EC&M, Tom Zind, “Retainage Reform Puts More Cash in Contractors' Hands” (covering California SB 61 5% private retainage cap for contracts after Jan. 1, 2026, and related New York and Illinois reforms): https://www.ecmweb.com/construction/article/55401643/retainage-reform-puts-more-cash-in-contractors-hands

FASB Accounting Standards Codification Topic 606 (receivables vs. contract assets; contract-level presentation of contract assets and liabilities) and Topic 910 disclosure requirements for retainage included in receivables, as described in the sources above.

Ultramar provides fractional CFO and controller support for real estate developers, contractors, and property operators. SoFla Prime Consulting provides fractional CFO, controller, and accounting support for growing businesses, including real estate, healthcare, and nonprofit organizations. This post is for general information and is not accounting, tax, or legal advice.