Every contractor learns this the hard way at least once: you raise a bill for ₹10 lakh, and the amount that actually lands in your account is closer to ₹8.5 lakh — not because anything went wrong, but because four separate, entirely normal deductions all apply to the same bill, and nobody explained upfront that they'd stack.
Here's what each one is, why it exists, and how to make sure none of them get lost across a project that runs for a year or more.
Retention money: the client's security deposit against your own work
Retention is a percentage of each bill — commonly 5-10%, set in the work order — that the client holds back as security against defects discovered after your work is done. It isn't a penalty and it isn't optional once it's in the signed contract; it's standard practice on essentially every construction contract of meaningful size.
What trips contractors up isn't the percentage — it's the release schedule. Most contracts release retention in two parts: half at project handover, half after the defect liability period (commonly 12 months) has passed with no defects raised. That second half is easy to forget about entirely, especially if the contractor has moved on to three other projects by the time it's due. Across a dozen RA bills on one project, the retention held back adds up to a real, specific number that should be tracked as a receivable, not written off as "gone."
Mobilisation advance: money you already received, being recovered
If the client paid an upfront mobilisation advance to help you start the project — buy initial material, mobilise labour — that advance isn't free money sitting separately from the bills. It gets recovered proportionally from each subsequent RA bill, usually as a fixed percentage of each bill's value, until the full advance is repaid.
This deduction is the one most likely to cause a cash-flow surprise, because contractors sometimes mentally treat the advance as "already spent" without connecting it to the fact that every future bill will be smaller because of it. Tracking exactly how much advance remains to be recovered — updated after every RA bill — is the difference between anticipating a smaller net payment and being surprised by one.
TDS under Section 194C: tax deducted before you ever see it
The client, as the party making payment for a works contract, is legally required to deduct income tax at source before paying you — 1% for an individual or HUF contractor, 2% for a company. This isn't extra tax; it's tax you'd owe anyway, deducted in advance and credited to your PAN, which you claim back against your final tax liability when filing returns.
The practical issue isn't the deduction itself — it's matching every TDS deduction to a Form 16A / 26AS entry at year-end. A contractor running several projects with several clients ends up with TDS deducted by multiple parties across many bills; missing even one deduction in your own records means either under-claiming credit you're owed, or a mismatch when your CA reconciles 26AS against what you expected.
GST TDS: the government-contract-specific deduction
On contracts with government departments or PSUs above ₹2.5 lakh, an additional 2% GST TDS applies — separate from income-tax TDS, deducted from the taxable value, and credited to your GST electronic cash ledger rather than your income tax account. This one doesn't apply on private contracts at all, which is part of why it catches contractors off guard when they take on their first government project after years of private work.
Putting it together: what actually lands in your account
Take a ₹10,00,000 RA bill on a private contract, 8% retention, no advance recovery remaining, standard GST:
- Taxable value: ₹10,00,000
- GST @ 18% (9% + 9%): +₹1,80,000
- Gross invoice value: ₹11,80,000
- Retention @ 8% of taxable value: −₹80,000
- TDS 194C @ 1%: −₹10,000
- Net payment received: ₹10,90,000
Roughly 7.6% of the gross invoice value never arrives as cash on this single bill — some of it (retention) is recoverable later, some of it (TDS) is a tax credit you'll claim back eventually, but neither is this bill's cash. Multiply this pattern across 8-10 RA bills on one project, several concurrent projects, and multiple clients, and reconstructing "how much retention am I actually owed across everything right now" from memory or a scattered set of PDFs becomes close to impossible by the time a project wraps up.
The fix is tracking, not avoiding
None of these four deductions are avoidable, and none of them should be — retention protects the client fairly, TDS is a legal obligation, advance recovery is just repaying money you already have. The actual problem is purely one of bookkeeping: retention and advance-recovery balances need to be tracked per contract, updated with every bill, not reconstructed from memory when a project ends or a client's accounts team calls asking for a reconciliation. A vendor/contractor ledger that carries these running balances automatically — instead of a fresh spreadsheet per project — is the difference between knowing exactly what you're owed and finding out you forgot to claim retention six months after it was released.
