What the advance payment is
The advance payment is the money the owner hands over to the contractor at the start of the contract so they can get the project going: buy materials, mobilize equipment, and cover the first expenses without draining their own capital. On public works a 30% advance is common (typically 10% to start the work and 20% to buy materials and equipment), though on private projects the percentage is negotiated.
One point that gets misunderstood: the advance is not income or profit. It is a loan from the client that will be deducted from the billings as the work progresses. To release it, an advance-payment bond that guarantees it is almost always required; and to be able to collect each billing, that advance has to be paid back gradually. That repayment is the advance recovery.
What advance recovery is
Advance recovery is the mechanism by which the advance is paid back little by little on each billing. The logic is simple: if the client advanced you 30% of the total amount, each billing deducts 30% of that period's progress, so that when the work reaches 100% the advance is paid back exactly to 100%.
The recovery percentage equals the advance percentage. If the advance was 30%, you recover 30% of each billing; if it was 20%, you recover 20%. It is calculated on the amount of the billing's progress (before retention), not on the net amount.
- Formula: Advance recovery = amount of the billing's progress × advance %.
- Calculation base: the amount of work executed in the period, not the cumulative total or the net amount payable.
- Goal: that the sum of all advance recoveries equals the advance paid out once progress reaches 100%.
- If recovery was incomplete (due to adjustments or amendments), it is settled at the project's final settlement.
What retention is
Retention is a percentage the owner holds from each billing as a guarantee that the contractor will perform and will fix defects or hidden flaws. Unlike the advance, retention comes out of money the contractor has already earned: it is executed work that is paid later, not a loan.
The percentage is agreed in the contract; a common value is 5% of each billing, sometimes called a guarantee fund. That withheld money accumulates throughout the project and is released at the end, at final settlement or when the defects-liability bond that replaces it is provided. In the meantime, it acts as a cushion for the client if something goes wrong.
Advance recovery vs. retention: the most common confusion
Both are deductions that appear on the billing and lower the net amount payable, which is why they get confused. But conceptually they are opposites, and it pays to be clear on this so you do not throw off your collections or the project's accounting.
Advance recovery recovers money the client already handed you (the advance): it reduces your debt to them. Retention holds money you have already earned (executed work): it is your guarantee, temporarily in the client's hands. Advance recovery never comes back to you because you already received it as an advance at the start; retention does come back, at final settlement. One settles a loan; the other defers a payment.
- Source: advance recovery comes from the advance (the client's money); retention, from the executed work (your money).
- Effect on you: advance recovery lowers your debt; retention postpones a payment you have already earned.
- Does it come back to you? Advance recovery does not (you already collected it as an advance); retention does (it is released at final settlement).
- Typical percentage: advance recovery = advance % (e.g. 30%); retention = guarantee fund (e.g. 5%).
- Calculation base: both are calculated on the amount of the period's progress, but they are independent deductions.
Numeric example: all three in one billing
Suppose a contract for $1,000,000 with a 30% advance ($300,000) and 5% retention. At the start the client hands over the $300,000 advance. On the first billing, executed progress of $200,000 is reported for the period.
Advance recovery: 30% of $200,000 = $60,000 (this is how the advance starts to be paid back). Retention: 5% of $200,000 = $10,000 (held as a guarantee). Net amount payable = $200,000 − $60,000 − $10,000 = $130,000.
Notice how each deduction does something different: the $60,000 of advance recovery reduces your advance debt (you have $240,000 left to recover); the $10,000 of retention is work you executed that you will collect at final settlement. If you repeat this calculation billing by billing, at 100% progress you will have recovered the full $300,000 and the client will release the accumulated 5% retention ($50,000 on the million).
- Amount of the period's progress: $200,000.
- Advance recovery (30%): −$60,000 → recovers the advance, lowers your debt.
- Retention (5%): −$10,000 → guarantee, released at final settlement.
- Net amount payable on this billing: $130,000.
- At closeout: advance recovered $300,000 (100%) and retention released $50,000.