Understanding Conditional Retainage and Overbillings: A New Option for Construction Companies
In a significant move for the construction industry, the Private Company Council (PCC) has expressed its support for an option that allows construction companies to present conditional retainage and overbillings gross on their balance sheets. This development, announced in June 2024, is poised to streamline financial reporting and enhance transparency for companies operating in this vital sector.
What is Conditional Retainage and Overbillings?
Conditional retainage refers to the portion of a contract payment that is withheld until certain conditions are met, typically related to project completion. It serves as a safeguard for project owners, ensuring that contractors fulfill their obligations before receiving full payment.
Overbillings, sometimes referred to as billings in excess of costs, occur when a contractor invoices more than the actual costs incurred for a project at a given point in time. More than purely an accounting term, overbillings can serve as an operational tool which can influence cash flow and the overall fiscal health of a construction project.
The New Presentation Option
The PCC’s proposal would allow construction companies to present these items gross on their balance sheets. This means that companies can now show conditional retainage and overbillings as separate line items, rather than netting them against other accounts. This option aims to provide a clearer picture of a company’s financial position.
Benefits of the New Approach
- Enhanced Transparency: By presenting retainage and overbillings separately, companies can offer more insight into their financial health. The users of the financial statements will have a clearer understanding of potential cash flow issues.
- Improved Financial Reporting: This change can simplify financial statements, making their analysis much easier. It helps eliminate confusion about the true state of a company’s liabilities stemming from its construction projects.
- Alignment with Industry Practices: This new option aligns financial reporting with common practices within the construction industry, helping firms to better communicate their financial performance to stakeholders.
Moving Forward
As the accounting landscape continues to evolve, it is essential for construction companies to stay informed about regulatory changes and reporting options that could impact their financial statements. Windham Brannon’s Construction Practice is committed to helping you navigate the regulatory requirements for financial reporting, including how changes might affect your business and accounting practices. For more information about conditional retainage and overbillings and how the PCC’s new presentation option can potentially enhance your financial reporting, contact your Windham Brannon advisor today, or contact Bobby Vercoe.
