Retention Money in Annual Reports: Hidden Receivable or Real Risk?

Retention Money in Annual Reports: Hidden Receivable or Real Risk?

An EPC company reports ₹1,000 crore of revenue and healthy profit.

But ₹100 crore of the amount earned is still sitting with customers as retention money.

Is that ₹100 crore effectively cash waiting to arrive, or could it remain stuck for years?

The answer depends on why it is being retained, when it becomes payable, who the customer is and whether the balance keeps increasing.

Retention money is normal in construction, infrastructure and EPC contracts. But for stock investors, it can also expose something headline revenue does not show: how much of the company's earnings have actually converted into usable cash.

Why it matters

In many project contracts, the customer does not immediately pay 100% of every certified bill.

A small percentage may be withheld until:

• A project milestone is completed
• Final commissioning takes place
• Performance conditions are satisfied
• The defect liability period ends

That withheld amount is commonly called retention money.

For example:

The company may have performed the work, but it cannot freely use that ₹10 crore yet.

If this happens across dozens of large projects, substantial working capital can become locked.

Key facts

• Retention money is common in EPC, construction, infrastructure, engineering and project-based businesses.
• Its release is usually linked to contractual conditions such as milestones or completion of a Defect Liability Period (DLP).
• Under Ind AS 115, the accounting treatment depends partly on whether the company's right to payment is unconditional or still dependent on something other than the passage of time.
• A conditional right to consideration may be shown as a contract asset, while an unconditional right is generally presented as a receivable.
• Old retention balances may also require an Expected Credit Loss (ECL) assessment under financial-instrument accounting rules.
• Therefore, retention money should never be analysed only by looking at the headline amount.

What exactly is retention money?

Imagine a contractor builds a power plant for ₹500 crore.

The contract may specify:

• 95% of certified invoices are paid normally.
• 5% is retained by the customer.
• Half of the retention is released when the project is completed.
• The remaining amount is released after a one-year defect liability period.

Even though the contractor has performed much of the work, a portion of its money remains unavailable.

This gives the customer protection if:

• Defects appear
• Performance conditions are not achieved
• Rectification work is required
• Contractual obligations remain incomplete

For the contractor, however, it creates a working-capital burden.

Retention money is not automatically overdue

This is the first mistake investors make.

Suppose ₹50 crore is being retained until December 2027 under the contract.

If the contractual release condition has not yet arrived, that ₹50 crore is not necessarily overdue.

The company may simply not yet have an unconditional right to receive it.

This distinction is important.

Contract asset

Under Ind AS 115, a contract asset exists when the right to consideration remains conditional on something other than merely waiting for payment.

Trade receivable

Once the company has an unconditional right to payment, with only the passage of time remaining before cash is due, the amount generally becomes a receivable.

So investors may find retention-related amounts under:

• Contract assets
• Trade receivables
• Other current financial assets
• Other non-current financial assets

The exact presentation depends on the contractual terms and accounting treatment.

A real example: how companies describe retention money

SEPC's annual-report disclosures provide a useful illustration.

The company explains that a specified portion of customer bills can be held back as retention money and becomes payable after a contractual milestone or the defect liability period.

Its FY2024-25 annual report disclosed both current and non-current retention-related receivables, showing why investors should search beyond a single balance-sheet line. SEPC Annual Report

This is not unique to one company.

Retention money is structurally common across project-oriented businesses.

When does retention money become a red flag?

Retention itself is normal.

The warning comes from the pattern.

1. Retention money grows much faster than revenue

Suppose:

Revenue increased 25% over two years.

Retention money increased 167%.

That deserves investigation.

Possible explanations include:

• More projects reaching retention stages
• Change in customer mix
• Slower project closure
• Delayed certifications
• Customers withholding payments longer
• Defect or contractual disputes

The increase itself does not prove a problem, but management should be able to explain it.

2. Retention becomes a large percentage of revenue

A useful ratio is:

Retention Money ÷ Annual Revenue × 100

NCC, for example, reported retention money of about ₹2,008 crore at the end of Q1 FY26, equivalent to roughly 11% of turnover according to its investor-call disclosure. NCC exchange filing

A high percentage does not automatically mean poor quality.

Large EPC businesses naturally carry significant retention balances.

But investors should compare:

• Current year vs previous years
• Company vs similar EPC companies
• Retention growth vs order execution
• Retention growth vs operating cash flow

3. Projects are finished but the money is still not released

This is more concerning.

A retention amount waiting for an active defect liability period is very different from money remaining unpaid years after the contractual release conditions were satisfied.

Look for references to:

• Completed projects
• Arbitration
• Claims
• Customer disputes
• Delayed certification
• Legal proceedings
• Expected Credit Loss

If the project ended years ago but retention remains unresolved, recovery risk increases.

4. Expected Credit Loss provisions start rising

Retention money is still exposed to customer credit risk.

ICAI specifically identifies accounting issues involving Expected Credit Loss on deferred debts or retention money, showing that investors should not assume every withheld amount will ultimately be recovered in full. ICAI Expert Advisory Committee resources

Compare:

The headline retention balance is identical.

The underlying risk clearly is not.

5. Operating cash flow remains weak despite strong profits

This is where retention money becomes especially important for investors.

A contractor may report:

• Revenue: ₹5,000 crore
• PAT: ₹300 crore
• New order wins: ₹8,000 crore

Yet operating cash flow remains weak because large amounts are trapped in:

• Trade receivables
• Contract assets
• Retention money
• Unbilled revenue

In its annual report, KEI Industries previously highlighted how EPC businesses can face elongated working-capital cycles partly because of retention-money clauses, which can negatively affect cash flow and profitability. KEI Annual Report

That is why an order book alone tells only part of the story.

Retention money vs normal trade receivables

These two should not be analysed identically.

A large retention balance therefore requires contract analysis, not just ageing analysis.

Retention money vs unbilled revenue

They are also different.

Unbilled revenue generally represents revenue recognised for work performed but not yet invoiced under the contract.

Retention money generally represents consideration withheld under contractual conditions.

A company can therefore simultaneously have:

• Trade receivables
• Unbilled revenue / contract assets
• Retention money

When all three become large, working-capital requirements can become substantial.

Why EPC companies can look profitable but remain cash hungry

Consider this simplified example:

A company completes ₹1,000 crore of work.

It reports:

• EBITDA: ₹120 crore
• PAT: ₹70 crore

But cash is tied up in:

The income statement looks profitable.

Yet ₹430 crore is still tied to project execution and customer collection.

The company may need working-capital borrowings to:

• Pay employees
• Buy raw materials
• Pay subcontractors
• Fund new projects

That increases interest costs and reduces the economic quality of growth.

The most useful retention-money checks

Whenever you analyse an EPC or infrastructure stock, search its annual report for:

“retention”

Then check:

1. Total retention money.
2. Current vs non-current retention.
3. Growth over the previous 3–5 years.
4. Retention as a percentage of revenue.
5. Expected Credit Loss against retention balances.
6. Whether amounts are disputed.
7. Customer quality.
8. Defect liability periods.
9. Completed projects with unreleased retention.
10. Operating cash flow compared with PAT.

A particularly useful warning combination

One individual number rarely proves much.

But this combination deserves deeper investigation:

Order book rising

• Revenue rising
• PAT rising
• Retention money rising faster
• Unbilled revenue rising
• Operating cash flow staying weak

The company may still be genuinely growing.

But the investor should ask:

How much cash does the business need to generate every ₹1 of accounting profit?

That question can separate a high-quality EPC company from a growth story constantly dependent on working-capital funding.

What readers should watch next

Retention money should not be labelled a red flag simply because it exists.

For many engineering and construction companies, it is a normal part of doing business.

What matters is whether the company:

• Completes projects on time
• Meets contractual conditions
• Releases retention predictably
• Maintains strong customers
• Provides adequately for risky balances
• Converts reported profits into cash

The next time an EPC company announces a huge order book, don't stop at the headline.

Open the annual report and search:

“Retention Money”

That small line item can tell you how much of the company's reported business has translated into cash — and how much is still waiting on the other side of the contract.

Disclaimer: This article is for educational and informational purposes only and is not investment advice or a recommendation to buy, sell or hold any security. Investors should study complete company filings before making investment decisions.