Holdbacks and percentage-of-completion are the two mechanics most responsible for why a construction company's books don't behave like a normal small business's. A holdback delays part of every payment for months after the work that earned it; percentage-of-completion determines how much revenue a contractor is even allowed to recognize before a project finishes. This guide covers both in depth. For the wider picture, see construction accounting in Canada and the operational routine in the construction bookkeeping guide.
How a holdback works commercially
Under provincial construction (or builders lien) legislation, an owner paying a contractor — and a contractor paying its subcontractors — is required to retain a percentage of each progress payment rather than paying it in full. The retained amount is held until the project (or the relevant portion of it) reaches substantial completion, after which it becomes payable following a further waiting period set by the applicable legislation.
The purpose is to protect the parties further down the payment chain: if a general contractor or subcontractor fails to pay its own subs or suppliers, the holdback fund is what those unpaid parties can claim against through a lien.
Holdback percentages, release conditions and lien timelines are set by provincial legislation and differ by province. Alberta and BC both have their own construction/builders lien statutes, and the specifics — what percentage is retained, what "substantial completion" means for release purposes, and how long after release a lien claim can still be filed — are not the same from one province to the next. Confirm the current rule for the specific province and contract type you're working with; do not assume a figure carries over from one province, or one project, to another.
How a holdback works in the books
The mechanics on the accounting side are more consistent than the commercial percentages, even though the percentages themselves vary by province:
- The full progress claim (the entire amount earned for that draw, including the portion that will be held back) is recognized as revenue and billed in the normal way.
- The holdback amount is not collected — but it is not written off either. It moves to a holdback receivable account on the balance sheet, distinct from ordinary accounts receivable.
- When the holdback release conditions under the applicable provincial legislation are met, the amount is invoiced or otherwise becomes collectible, and the holdback receivable converts to a normal receivable (and then to cash on collection).
- A general contractor holding back from its own subcontractors records the mirror image: a holdback payable, tracked separately from regular accounts payable.
Treating holdback like a normal receivable understates how much cash is actually available; treating it as a write-off understates revenue and asset value. Tracking it as its own line, per project, is what keeps both the P&L and the cash-flow forecast accurate.
Holdbacks and GST/HST timing
GST/HST generally applies to the full value of a progress claim — including the holdback portion — at the time the claim is invoiced, not deferred until the holdback is actually released and collected. In practice that can mean a contractor remits tax on cash it hasn't received yet, sometimes months before the holdback is paid out. This is a genuine cash-flow consideration for construction businesses and is worth building into a rolling cash-flow forecast rather than discovering at filing time. The precise timing treatment can depend on the specific billing and contract structure, so confirm it against your own invoicing pattern with your accountant rather than assuming a single rule applies uniformly.
Cost-to-cost percentage-of-completion mechanics
The most common way to measure percentage-of-completion is the cost-to-cost method:
Percentage complete = Costs incurred to date ÷ Total estimated contract cost
Revenue recognized to date = Percentage complete × Total contract value
Gross profit recognized to date = Revenue recognized to date − Costs incurred to date
Worked illustrative example (hypothetical figures)
Assume a contractor has a single fixed-price contract with these hypothetical numbers:
| Item | Amount |
|---|---|
| Total contract value | $1,000,000 |
| Total estimated contract cost | $800,000 |
| Costs incurred to date | $400,000 |
| Billed to date | $460,000 |
Step 1 — percentage complete: $400,000 ÷ $800,000 = 50% complete
Step 2 — revenue recognized to date: 50% × $1,000,000 = $500,000
Step 3 — gross profit recognized to date: $500,000 − $400,000 = $100,000
Step 4 — over/under-billing position: Billed to date ($460,000) is less than revenue earned ($500,000), so the contract is under-billed by $40,000 — a contract asset on the balance sheet, representing work performed but not yet invoiced.
These numbers are entirely hypothetical and illustrate the mechanics only — they are not a benchmark for what any real contract should look like. A live WIP schedule applies this same calculation across every open job simultaneously; see construction accounting in Canada for how the WIP schedule fits into the broader set of books.
Completed-contract accounting as the contrast
Completed-contract accounting takes the opposite approach: no revenue or gross profit is recognized until the contract reaches substantial completion, at which point the entire amount is recognized at once. This avoids the estimation involved in percentage-of-completion, but at the cost of financial statements that can look misleadingly flat during a long project and then show a large jump on completion.
Completed-contract applies in narrower circumstances than percentage-of-completion — typically short-duration contracts, or contracts where the final outcome or reliable progress estimates genuinely cannot be determined. Most ongoing, multi-month construction contracts use percentage-of-completion because it matches revenue to the work actually performed period by period. Which method is appropriate — and the specific criteria under ASPE versus IFRS for choosing between them — is a determination to confirm with your accountant for the standard your entity reports under.
How RN Canada helps
RN Canada builds WIP schedules, tracks holdback receivable and payable positions, and applies percentage-of-completion accounting for Alberta and BC construction clients, so the numbers a bank, bonding company or owner sees match what's actually happening on the job. Our founder, Ozgur Duymaz, holds a Ph.D. in accounting and finance and is a CPA (Canada), ACCA (UK) and CMA (US). See our bookkeeping, payroll and tax filing service or talk to us about your construction accounting.
This page is general information, not personalized advice. Speak to us about your specific situation.
Frequently asked questions
A holdback is a percentage of each progress payment that the paying party is required to retain — instead of paying in full — until a construction project reaches substantial completion. It exists to protect owners and to give subcontractors and material suppliers a fund to claim against if they aren't paid. The percentage retained, the release trigger and the lien timeline that follows are set by provincial construction or builders lien legislation and differ by province.
The full progress claim is recognized as revenue and billed in the normal way; the holdback portion that the owner retains is not written off — it moves to a holdback receivable account on the balance sheet, separate from ordinary accounts receivable, until it is released. A general contractor holding back from its own subcontractors records the mirror image as a holdback payable.
GST/HST generally applies to the full value of a progress claim, including the holdback portion, at the time the claim is invoiced — not deferred until the holdback is released. That means a contractor can owe and remit tax on the holdback amount well before actually collecting the cash it relates to. Confirm the specific timing treatment for your invoicing pattern with your accountant, since construction billing arrangements vary.
Cost-to-cost is the most common way to measure percentage-of-completion: percentage complete equals costs incurred to date divided by total estimated cost for the contract. Revenue recognized to date is then that percentage applied to the total contract value. It is called cost-to-cost because it compares cost incurred against total expected cost, rather than measuring physical progress directly.
Completed-contract accounting defers all revenue and cost recognition until the contract is substantially complete. It applies in narrower circumstances than percentage-of-completion — typically very short-duration contracts, or situations where the outcome of the contract or reliable progress estimates aren't available. Most ongoing, multi-month construction contracts use percentage-of-completion because it better matches revenue to work performed.
No. The example uses round, clearly hypothetical figures chosen only to illustrate the cost-to-cost calculation mechanics. It is not a benchmark, a quote, or a real project.