How to account for retention and progress billing in UAE construction projects

A typical interim payment certificate shows the gross value of work done to date, less the amount certified previously, giving this period’s gross value. From that, the client deducts retention at the contract rate and a proportion of the advance payment. VAT is then added on the amount the contract says is invoiced.

Your ledger should record the certified amount, not your submitted claim. The difference between claimed and certified is a commercial matter until the consultant agrees it; booking it as revenue inflates profit and receivables.

A Dubai fit-out contractor has a AED 4 million contract with 10% retention and a 10% advance payment (AED 400,000) recovered pro rata. Claim four is certified at AED 520,000 of work for the period.

• Gross work certified this period: AED 520,000.
• Retention at 10%: AED 52,000, recorded as retention receivable, not as a normal receivable.
• Advance recovery at 10%: AED 52,000, reducing the advance received liability.
• Net amount due before VAT: AED 416,000.
• VAT at 5% on the amount the contract and your tax agent agree is invoiced now.

Retention receivable is money you have earned but cannot collect until practical completion or the end of the defects liability period, often a year or more later. Keep it in its own account, broken down by project, with the expected release date. Ageing it with ordinary receivables makes the business look worse at collections than it is, and hides real overdue debts.

The mirror applies to subcontractors. If you hold 10% of their certified work, that is retention payable, a liability, released on the same kind of milestones.

VAT timing for construction is not intuitive. When VAT falls due on the retained portion, and on advance payments received before work starts, depends on the date of supply rules for the contract, including when invoices are issued and payments received. Contractors commonly get this wrong in both directions.

Agree the treatment with your tax agent at the start of each major contract, write it into your billing procedure, and apply it consistently. The Ministry of Finance and FTA publish the VAT law and executive regulation; your agent can point to the relevant articles for your contract type.

Every bill and every claim should carry a project code. That lets you compare revenue certified to date with cost to date on each job and spot loss-making contracts early. A project showing AED 2.1 million certified against AED 2.05 million of cost at 55% complete is heading for a loss, whatever the bank balance says.

Under IFRS 15, many construction contracts recognise revenue over time based on progress. The approach your auditor accepts will determine whether certified amounts or a cost-based measure drive revenue; either way, project-level records are the input.

Close each project with a checklist.

• Agree the final account value with the consultant.
• Invoice the first half of retention at practical completion, if the contract says so.
• Track defects liability period end date and invoice the balance on release.
• Release subcontractor retention on the matching back-to-back terms.
• Clear the advance payment account to zero.

HelloBooks tracks projects with their own revenue and cost, and holds separate accounts for retention receivable, retention payable and advances received. The AI agent drafts a progress invoice from the certified figures you enter, splitting retention and advance recovery, and answers “how much retention is due to be released in the next six months?” from the project records.

VAT treatment of retention is set by you and your tax agent; HelloBooks applies the codes you choose. For a progress claim invoice layout matching your clients’ certificates, request a customization at /book-a-demo.