How to calculate retainage in Dynamics 365 Business Central

You finish the work. You send the invoice. But the payment that comes back is short — on purpose. That’s retainage. And if your construction firm uses Business Central, you’ve probably already noticed something: the system doesn’t handle it automatically.

Business Central does not include native retainage management functionality. Construction firms that need retainage calculations, holdback tracking, and release workflows must extend the platform with purpose-built tools.

What is retainage, and why does it matter in construction?

Retainage (sometimes called a holdback) is a portion of the contract value that a project owner withholds from a contractor or subcontractor. It’s typically released only after the work is verified complete and accepted.

In most construction contracts, the retainage rate is between 5% and 10%. It applies on both sides of the transaction. General contractors hold back payment from their subs. Project owners hold back payment from the GC. That means retainage affects accounts payable and accounts receivable at the same time.

How retainage is calculated

The formula is straightforward:

Retainage amount = Invoice amount × Retainage percentage

Example: A $100,000 invoice with a 10% retainage rate results in $10,000 withheld. The contractor receives $90,000.

Simple math on one invoice is easy. The problem is scale. A construction firm managing dozens of jobs, hundreds of invoices, and varying retainage rates across different contracts needs a system, not a formula.

When retainage isn’t tracked properly, the consequences are real. Cash flow projections become unreliable. Retainage balances go unreleased. Disputes arise with no audit trail to fall back on. For a growing construction business, those problems compound quickly.

Does Dynamics 365 Business Central include native retainage functionality?

The direct answer is no. Dynamics 365 Business Central is a capable ERP system. It handles job costing, accounts payable, accounts receivable, project accounting, and financial reporting well. Many construction firms rely on it as their financial backbone.

But retainage is a gap. Out of the box, Business Central does not:

• Automatically withhold retainage on customer invoices
• Apply holdback amounts on vendor or subcontractor bills
• Track outstanding retainage balances by project or contract
• Provide reporting showing what’s been held, what’s been released, and what’s still pending
• Enforce release workflows tied to project milestones or completion approvals

This isn’t a criticism of Business Central. The platform is built for broad ERP use across many industries. Construction-specific financial workflows — like retainage — require purpose-built extensions. The good news is that those extensions exist. Before we get to the solution, though, it’s worth understanding what happens when firms try to manage retainage manually inside Business Central.

The manual workaround — and why it creates risk

Most Business Central users who lack a retainage solution end up doing some version of the same thing. They build a parallel system outside of Business Central.

That usually means:

• Tracking retainage balances in Excel spreadsheets
• Creating manual journal entries or credit memos to approximate holdback amounts
• Relying on project managers or account managers to flag when retainage should be released
• Reconciling between the ERP and the spreadsheet at month-end or close

This approach works, until it doesn’t. The risks accumulate over time. Manual calculations introduce errors. An invoice gets processed at the wrong retainage rate. A retainage balance sits unreleased for months because no one flagged it. A vendor dispute surfaces and there’s no reliable audit trail in the ERP to support your position.

As job volume increases, the administrative burden grows too. What takes one person several hours per month at 20 jobs becomes a full-time task at 100. And when staff turns over, institutional knowledge about the retainage tracking process leaves with them. The core problem is that retainage lives outside the system. That disconnect creates risk at every stage: calculation, tracking, reporting, and release.

Manual retainage tracking vs. Retainage Manager

Managing retainage manually means working outside Business Central. Most firms rely on spreadsheets, manual calculations, and informal processes that create risk as job volume grows. The table below shows how Retainage Manager compares to a manual approach.                                                                                            

How to calculate and track retainage in Business Central with the Retainage Manager app

The Retainage Manager app by Rand Group fills the native gap in Business Central. It doesn’t replace any part of the system. Instead, it extends Business Central so that retainage becomes part of your existing AP and AR workflows. Here’s how the process works from setup through release.

Step 1: Configure retainage rates

First, you configure default retainage settings in the Retainage Setup page inside Business Central. You can enable retainage for Accounts Receivable, Accounts Payable, or both. From there, you set default retainage percentages and assign the G/L accounts used for retainage and release.

One of the most useful features is the configuration hierarchy. Retainage settings follow this order: System Setup → Customer/Vendor → Project → Invoice. That means you set defaults at the system level, and they flow down automatically. You can override them at the customer or vendor card, then again at the project level, and again on the individual invoice if needed. This flexibility matters because retainage rates often vary across contracts.

Step 2: Set up retainage release terms

Before you start processing invoices, you also define Retainage Release Terms. These tell the system when retained amounts are expected to be released. You enter a date formula — for example, 30D means 30 days after the posting date — and the system uses that to calculate suggested retainage due dates. These terms are used for tracking, reporting, and release processing throughout the project lifecycle.

Step 3: Automatic calculation on invoices

When you create a sales or purchase invoice, the Retainage % and Retainage Release Terms fields on the invoice header automatically populate based on your setup. You enter your invoice lines as normal. Then, on the invoice header, you select Create Retainage Lines.

The system calculates the retainage amount and creates one or more retainage lines automatically. These appear as negative G/L Account lines that reduce the total invoice amount by the calculated retainage. The Calculated Retainage Amount field on the header shows the total retainage applied to that transaction.

Retainage can also be applied individually by line when partial retainage is required. This covers both customer invoices on the AR side and vendor bills on the AP side.

Step 4: Track retainage across the project

For project-based work, you can set Customer Retainage % and Vendor Retainage % directly on the Project Card. These values default to all related sales and purchase transactions for that project and can still be overridden at the transaction level when needed.

On the reporting side, once retainage lines are created, the Retainage Applies field on the invoice is automatically set to Yes. You can drill down from the Calculated Retainage Amount field into the Customer Retainage Ledger Entries or Vendor Retainage Ledger Entries. From posted documents, you can use Find Entries to access those same ledger entries, including detailed views that show retained amounts, release status, due dates, and related project information.

Step 5: Release retainage through a controlled process

When it’s time to release retainage, you open the Sales Retainage or Purchase Retainage page, select the entry, and select Release Retainage. You enter a posting date and external document number, then confirm. The system automatically creates and posts a reversing invoice to offset the outstanding retainage amount.

One important note: the current release process is one-to-one. The full retainage amount tied to that entry is released at once. Partial releases are not supported at this time. Released transactions remain linked to the original for tracking and audit purposes.

Real-world results: How construction firms scale with Business Central

Knowing how the technology works is one thing. Seeing what it enables in practice is another.

Subs for Pools, LLC is a pool construction subcontractor that performs all trades in-house, from excavation through plaster. As the business grew rapidly, QuickBooks and manual processes couldn’t keep pace. The volume of transactions, the complexity of job-level tracking, and the need for real financial control all pointed in the same direction: the company needed a better ERP foundation.

Subs for Pools transitioned from QuickBooks to Dynamics 365 Business Central with support from Rand Group. The results were significant:

Beyond the numbers, the team gained real-time job and phase-level margin visibility. They could identify and recover margin leakage faster. They made better pricing decisions based on material cost data that previously wasn’t accessible.

That kind of operational control starts with the right ERP foundation. Retainage management is one piece of that foundation.

Why use Retainage Manager by Rand Group?

Construction firms choose Retainage Manager because it handles retainage directly inside Business Central. There’s no need for spreadsheets or manual workarounds.

The app supports retainage on both customer invoices and vendor bills. You configure default settings once, and the system applies them automatically across transactions. From there, retainage lines are created on invoices, balances are tracked through ledger entries, and releases follow a controlled process tied to the original transaction.

It’s also built to grow with your business. Retainage settings can be configured at the system, customer, vendor, project, or invoice level. That means the app works whether you’re managing a handful of jobs or hundreds.

For firms that need more than retainage management, Retainage Manager is also available as part of Rand Group’s Construction Bundle — a full set of Business Central apps built for construction operations.

Going further: The Construction Bundle for Business Central

Retainage is one workflow. But construction finance involves many more. For firms that need a broader solution, the Construction Bundle for Dynamics 365 Business Central by Rand Group brings together a set of Business Central apps designed specifically for construction operations. Each app addresses a distinct operational need. Together, they provide end-to-end coverage for the financial and document-heavy workflows that construction firms deal with every day.

Here’s what’s included:

The Construction Bundle is the right fit for firms managing multiple jobs, vendors, customers, and contracts, and for teams that want a single integrated solution rather than a patchwork of manual fixes.

Frequently asked questions (FAQs)

Next steps

Business Central is a strong ERP platform for construction firms. However, it doesn’t handle retainage natively. Firms that rely on manual workarounds such as spreadsheets, journal entries, and informal tracking face an increasing risk as job volume increases. Retainage Manager closes that gap. It works directly inside Business Central, automates calculations on both AR and AP, and gives finance teams the visibility and control they need to manage retainage accurately across every project.

For firms with broader operational needs, the Construction Bundle extends that foundation across billing, approvals, document management, and more. If your team is ready to stop managing retainage outside the system, contact us today. We’ll help you find the right solution for your Business Central environment.