- Recognizing Industry Holdbacks in the Construction and Professional Services Sectors
Holdbacks, or retention conditions, which indicate that “holding back” a portion of the invoice until all the work is complete, may be included into contracts in the construction and professional services sectors to safeguard the buyer. In this article, we refer to holdbacks instead of retention, retainage, or holdbacks to keep things simple. Holdback is the amount that the customer withholds from progress payments and eventually releases to the contractor in accordance with the contract’s conditions. When considering the payment delay of holdbacks as for a predetermined percentage, let’s say 10% of the sale profits, holdbacks have an influence on cash flow for firms.
- The Potential Tax Consequences
It’s crucial to think about how holdbacks are taxed in addition to how they affect cash flow. If the money hasn’t come in from the client and the task isn’t finished, the Canada Revenue Agency (CRA) permits the exclusion of any holdbacks from income. This enables the business to postpone making any tax payments on its holdbacks due. The company’s prospective financial burden is greatly reduced by the deferred tax liability on holdbacks. As the corporation is not paying taxes on money it has not received, it also assures that the tax expense incurred is consistent with the activities of the company and can enhance an organization’s cash flow management.
- Example of Holdback
The customer invoice’s treatment of holdbacks is seen in the example below. As you can see, tax is determined using the amount after holdback, 1800 CAD, rather than the total amount, 2000 CAD.
2. Solution for SAP Business ByDesign Holdback
- Current performance
In ByD, retainage functionality is only available in procurement; sales are not supported. By adding Retainage to the supplier invoice, ByD permits withholding a specific portion of the overall invoice amount as a security deposit until all items have been delivered or all services rendered by the vendor have been completed. However, there are several workarounds as this process is not supported by ByD’s customer invoicing system.
- Proposed remedy
- Make a master holdback/retainage service.
We first build a fixed price item type service master in order to accurately total the amount in the sales order/contract and be able to charge back the entire retained amount. To record the total retained amount, this will be utilised in the sales documentation.
Holdback service master item type
- Placing a holdback pricing component in place
The creation of a pricing component for holdback is the next step. The creation of additional pricing components is not permitted by Byd, although one of the discount price components may be modified to a retention price component. ByD offers two discount pricing components, a percentage and an amount. Either of these two can be adjusted to retention depending on the business requirement. Since percentages are frequently utilised, I changed the discount percentage to the retention rate and left the amount discount for the firm to use as a discount.
Retention as an element of price
- Making a sales order or contract
It is possible to generate a sales order or contract based on business needs. As client project capability of ByD is primarily used by construction companies for their customer projects, I will demonstrate sales orders. One project item will be added, allocated to the customer’s project, and used as a holdback item to record the entire retention amount in the sales order.
Order for sales with a holdback payment
The sum of my project is $10,000 Canadian. I therefore entered 1000 CAD (10% of 10,000 CAD) as the holdback price. I have added the retention price component for the sole first-line item in the Pricing and Invoicing tab at the item level. This will aid in determining the holdback amount in each invoice. As you can see, the overall sales order amount was fixed at $10,000 CAD to match the project’s entire budget.
Cost of a Sales Order
- Client Invoicing
Various methods of client invoicing (such as invoice scheduling, project invoice requests, and recurring invoicing) can be employed depending on the situation. Retention will appear on every client invoice, regardless of the form of invoicing. Let’s look at the 2000 CAD invoice for this project.
Invoice from a client with a holdback
- Abandonment of Holdback
Once the job is finished and all specifications have been met. The sales order’s second line item may be confirmed and released. The second line item is then invoiced in order to collect the retained sum.
The above-mentioned solution enables users to defer output tax and collect the holdback amount separately in each client invoice. Additionally, it gives users the option to invoice the entire holdback sum once the construction or service projects are finished.