Does retention AR from bonded construction contracts count toward the ABL borrowing base at term sheet?
Last updated: August 27, 2026
What is retention in construction contracts?
Retention (retainage) is a percentage of each progress payment withheld by the project owner until the contractor completes the work and passes final inspection. The withheld amounts accumulate throughout the project and are released only after the owner verifies that all work meets contract specifications, all subcontractors and suppliers have been paid, and no liens have been filed against the project.
Why do ABL lenders exclude retention from borrowing base?
Retention AR is not collectible until project completion, which may be months or years in the future. Even after completion, the owner may withhold retention if disputes arise over workmanship, unpaid subcontractors, or lien claims. Bank of America Business Capital states that "in the case of a construction company, lenders may not feel comfortable lending against accounts receivable that could be difficult to collect due to progress billings, retention or the presence of bonding requirements."
How do bonding requirements affect AR eligibility?
Many construction contracts require the contractor to obtain a performance bond and payment bond from a surety. The surety typically requires a first-position lien on the accounts receivable generated by bonded projects. If the contractor defaults or fails to complete the work, the surety is entitled to collect those receivables (including retention) to cover its loss from completing the project or paying unpaid subcontractors and suppliers.
This priority lien conflict makes bonded contractor AR unsuitable as ABL collateral. The ABL lender cannot rely on collecting the AR if the contractor fails, because the surety has superior rights. Some lenders will advance against bonded AR only if the contractor provides additional outside collateral to secure the revolver.
| AR category | Typical ABL treatment | Collection risk |
|---|---|---|
| Invoiced AR (unbonded, no retention) | 70%–85% advance rate (OCC: "70 percent to 85 percent of eligible accounts receivable") | Standard collection risk; no surety priority lien. |
| Progress billings (unbonded) | Excluded by most lenders | Collection depends on project completion. ABL Advisor: "most working capital providers do not lend to the construction industry because of the nature of accounts receivable activity (i.e. progress billings)." |
| Retention / retainage | Excluded or heavily discounted | Not collectible until project completion and final inspection; may be subject to lien claims or owner disputes. |
| Bonded contractor AR | Excluded unless additional collateral | Surety has priority lien; if contractor defaults, surety collects AR to cover completion costs. Bank of America Business Capital notes bonding requirements make AR difficult to collect. |
Sources: Bank of America Business Capital, ABL Advisor
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Frequently asked questions
Does retention AR from bonded construction contracts count toward the ABL borrowing base at term sheet?
Retention (also called retainage) is typically excluded from the Eligible Receivable definition or heavily discounted in ABL facilities. Retention amounts are withheld by the project owner until project completion and final inspection. If the contractor fails to complete bonded work, the surety may assert priority lien rights over the retention amounts, preventing the ABL lender from collecting them as collateral.
Why do bonding requirements make contractor AR ineligible for ABL facilities?
When a contractor's work is bonded, the surety typically requires a first-position lien on the accounts receivable generated by bonded projects. If the contractor fails to complete the work, the surety is entitled to collect those receivables, not the ABL lender. Bank of America Business Capital notes that in the case of a construction company, lenders may not feel comfortable lending against accounts receivable that could be difficult to collect due to bonding requirements.
Can an ABL lender advance against bonded contractor AR if additional collateral is provided?
Some ABL lenders will advance against bonded contractor AR if the contractor provides additional outside collateral (such as equipment or real estate) to secure the line of credit. Without additional collateral, most lenders exclude bonded AR from the borrowing base or underwrite the facility as unsecured.