How to Make a Retention Invoice: Step-by-Step Guide for Saudi Businesses

Getting paid on time is one of the biggest priorities for any business, but when your projects involve retention payments, managing invoices can get a bit tricky. In Saudi Arabia, more companies are now shifting to digital invoicing systems to simplify this process and stay compliant with government rules. 

According to IMARC Group, the Saudi Arabia e-invoicing market was valued at USD 143.1 million in 2024 and is expected to reach USD 594.2 million by 2033, growing at a CAGR of 15.3%. This steady rise reflects the country’s push for mandatory e-invoicing and the growing use of cloud-based billing systems by small and medium businesses.

That’s why knowing how to make a retention invoice the right way has become so important for business owners, accountants, and finance teams.

In this blog, we’ll cover why retention matters for businesses, how to make a retention invoice, plus common mistakes, best practices for managing retention, and practical use cases, plus how Hal can simplify the process.

At a Glance

• Retention in invoices protects your business and ensures clients meet contractual obligations.
• Always confirm retention terms, calculate accurately, and show retention as a separate line item.
• Exclude retention from VAT in Saudi Arabia and issue a separate invoice to claim it later.
• Avoid common mistakes like unclear terms, incorrect deductions, or mixing retention with other deductions.
• Tools like HAL retention management, automate invoicing, and ensure ZATCA compliance.

What is a Retention Invoice? 

A retention invoice is a type of invoice where a portion of the total payment is withheld until certain conditions are met, usually the completion of a project or satisfactory delivery of services. This retained amount, called retention, acts as a financial safeguard for the client, ensuring that the work is completed according to agreed standards. Retention invoices are common in industries like construction, IT projects, and contracting, especially in Saudi Arabia and globally, to protect both parties and maintain quality assurance.

Why Retention Is Important for Saudi Arabia Businesses?

In many Saudi projects, retention ranges between 5%–10% of the total invoice, which can be a significant amount if not managed carefully. Key importance of retention include:

• Ensures Quality Delivery: Encourages teams to meet project milestones and maintain high standards.
• Reduces Payment Risks: Protects your business from non-payment or disputes.
• Improves Client Trust: Transparent retention policies demonstrate professionalism and accountability.
• Supports Cash Flow Management: Helps plan for future expenses while keeping a safety margin for clients.
• Encourages Timely Completion: Incentivizes businesses to finish projects on schedule to release retained amounts.
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Retention can be tricky to manage, but HAL ERP makes it simple, keeping your invoices accurate and payments on time. Stay stress-free and get paid faster. Contact the HAL team today to see how it works.

With the benefits of retention clear, the next focus is on implementing it effectively in your invoicing process.

7 Simple Steps to Add Retention to an Invoice

To include retention in your invoice, you need a clear process that ensures accurate calculation, proper accounting, and smooth client approval. Below are 7 steps to help you add retention to your invoice correctly.

Step 1: Confirm the Retention Agreement

• Review your contract carefully to ensure it includes a clear retention clause.
• Check the retention percentage agreed upon (commonly 5%–10% of the invoice total in Saudi Arabia).
• Agree with your client on when and how the retained amount will be released.
• Clarifying this upfront avoids disputes and ensures smooth payment processing.

Step 2: Set Up a Retention Account

• In your accounting software, create a dedicated account to track retention, often named “Retention Receivable” or “Retainage Receivable.”
• Assign it as a current asset account in line with Saudi or international accounting standards.
• This ensures that your retained amounts are correctly tracked without affecting other revenue accounts.

Step 3: Create or Edit the Invoice

• Open your invoicing software and either start a new invoice or edit an existing draft.
• Fill in essential details like client name, project name, invoice date, and invoice number.
• Ensure all services or deliverables are clearly described for transparency.

Step 4: Add the Retention Line or Section

• Look for options like “+ Retention” or “Configure Retention” near the invoice total.
• Enter the retention percentage or fixed amount based on your contract agreement.
• Assign the retention to the retention account you created earlier.
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Example:

• Total invoice: SAR 100,000
• Retention rate: 5%
• Retention amount: SAR 5,000
• Amount due now: SAR 95,000
• Retention held: SAR 5,000 (payable after project completion)

Step 5: Check VAT Rules

• Retention amounts are usually excluded from VAT in Saudi Arabia.
• Apply VAT only to the portion of the invoice that is payable immediately.
• This ensures compliance with Zakat, Tax and Customs Authority (ZATCA) regulations.

Step 6: Finalize and Send the Invoice

• Review the invoice for accuracy, ensuring both the payable amount and retention amount are clearly shown.
• Save and send it to your client in the agreed format (PDF or through your invoicing software).
• Clear labeling improves client trust and reduces payment delays.

Step 7: Raise a Retention Claim Invoice Later

• Once the project or contract milestones are completed, issue a new invoice to claim the retained amount.
• Reference the original invoice and link it to the retention account.
  

Example:

• Description: “Retention claim for Project XYZ – SAR 5,000”
• Item: Retention receivable account
• This step ensures the retained funds are received promptly and accurately recorded in your books.

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Also read: Proforma Invoice Guide: Uses, Examples, and Key Information

After setting up retention on your invoices, understanding frequent pitfalls will help you manage payments more smoothly and professionally.

Common Mistakes to Know When Adding Retention to Invoices

Avoiding errors when adding retention ensures smooth payments and professional client relations. Key mistakes to watch out for include:

• Not Clearly Showing Retention Amount: Failing to list retention as a distinct line item labeled “Retention” or “Retention Amount” can confuse clients.
• Applying VAT or Taxes on Retention: Retention is usually excluded from VAT in Saudi Arabia, so applying taxes incorrectly can cause compliance issues.
• Mixing Retention with Other Deductions: Combining retention with discounts, withholding tax, or other deductions can cause accounting errors.
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Avoiding errors is crucial, but implementing structured practices ensures retention is handled smoothly and cash flow stays steady.

Best Practices for Managing Retention Payments in Saudi Arabia

Managing retention payments efficiently helps maintain steady cash flow, clear accounting, and strong client relationships. Here’s how you can handle it effectively:

1. Define Clear Retention Terms

• Clearly state the retention percentage, amount withheld, and release date in both contracts and invoices.
• Clear terms prevent disputes and ensure clients understand the payment schedule.

2. Separate Retention from Regular Invoices

• Issue invoices for the payable amount first, and raise a separate retention invoice after project completion.
• This improves transparency and simplifies accounting.

3. Use Professional Invoicing Software

• Employ invoicing solutions or ERP tools that support retention management, like HAL, to automate calculations and track retention balances.
• Automated reminders and smart workflows reduce missed payments and manual errors.

4. Communicate Proactively with Clients

• Keep clients informed about retention balances, due dates, and project progress.
• Regular updates and polite follow-ups increase the chances of timely payment and strengthen trust.

5. Maintain Accurate Records

• Track all retention amounts in a dedicated account in your accounting system.
• Proper record-keeping provides full visibility of outstanding payments and supports accurate financial planning.

6. Ensure Compliance with Local Regulations

• Follow Saudi Arabia’s ZATCA and tax regulations when handling retention amounts.
• Correctly applying VAT rules and e-invoicing standards avoids legal issues and ensures smooth operations.

7. Offer Flexible Payment Options

• Provide multiple payment channels, including online payments, bank transfers, or integrated payment gateways.
• Flexible options make it easier for clients to pay retention promptly, accelerating cash flow.
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To understand the impact of proper retention management, let’s look at a practical case study from a leading retail chain.

Also read: The Benefits of Implementing E-Invoicing Software for Businesses in Saudi Arabia

Case Study: Al Haram Retail Chain

Al-Haram, a prominent retail chain in Saudi Arabia, needed a dependable solution to streamline its e-invoicing process and ensure full compliance with ZATCA regulations.

The Challenge

The company faced difficulties in generating ZATCA-compliant invoices manually, which was time-consuming and prone to errors. Manual processes also complicated tax reporting and risked non-compliance, potentially affecting daily operations.

The Solution

Al-Haram implemented HAL VAT Care, a smart e-invoicing solution. The system was integrated swiftly, ensuring a smooth transition without disrupting business operations. Now, the company automatically generates compliant invoices, simplifies tax reporting, and eliminates manual errors. This allows the team to focus on core retail activities while maintaining full compliance and peace of mind.

Now let’s explore another customer success story.

Customer Success Story: Al Faneyah Group

Al Faneyah is a top corporate group in Saudi Arabia, specializing in construction, electromechanical contracting, elevators, and engineering products. Their key projects include IMC Jeddah, IKEA Jeddah, and SABIC HQ Riyadh. With decades of experience and over 1,250 completed projects, efficient operations were critical to maintain growth.

The Challenge

Before HAL ERP, Al Faneyah relied on manual Excel workflows. Sales teams struggled with lost or delayed quotations, procurement faced slow tracking of purchase orders and deliveries, and finance lacked real-time visibility into project costs. This led to revenue leakage, overspending, and delays in decision-making.

The Solution

Al Faneyah implemented HAL ERP Enterprise Plan to integrate sales, procurement, inventory, and finance into a single platform. Key improvements included:

• Automated quotation tracking to reduce lost opportunities
• Streamlined RFQ-to-PO processes and material tracking
• Real-time budget control and margin visibility
• Actionable reporting and analytics for faster decisions

Results & ROI

• 60% boost in procurement efficiency
• 40% reduction in accounts workload
• 100% budget compliance achieved
• Over 90% reduction in quotation losses
• Payback achieved in under 1 year with 900% annual ROI
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Building on this example, the next step is learning how HAL simplifies your invoicing and accelerates payments.

Make Invoices Smarter with HAL ERP

Managing invoices efficiently is crucial to getting paid faster and keeping your cash flow healthy. With HAL ERP, you can transform your invoicing process, making it smarter, faster, and fully compliant with Saudi e-invoicing regulations. From creating professional invoices to collecting payments seamlessly, HAL ERP streamlines every step of your billing workflow.

Here is what makes HAL ERP the go-to solution for smarter invoicing:

• Compliant E-Invoicing: Generate invoices that fully comply with ZATCA Phase I & II e-invoicing rules, ensuring legal and tax compliance effortlessly.
• Flexible Invoice Types: Create invoices for your business needs, standard, recurring, milestone-based, or customized formats, all from one platform.
• Mobile Approvals: Approve invoices directly from your phone, giving you full control even when on the move.
• Integrated Online Payments: Collect payments online and reconcile them automatically, reducing manual effort and improving cash flow.
• Convert Quotes to Invoices Quickly: Automate billing from sales orders, delivery notes, contracts, or time-and-material documents with just a few clicks.
• AI-Powered Follow-Ups: Never miss a payment with AI agents that follow up on overdue invoices on your behalf.
• Easy Sharing Options
  Send invoices via email, WhatsApp, or mobile notifications, making it convenient for your customers to receive and pay on time.
• Accelerated Cash Realization: Use customized workflows to follow up and collect payments through both online and offline channels efficiently.
• Professional Invoice Creation: Generate polished and comprehensive invoices in seconds, ensuring your business always looks professional.
• Streamlined Refunds: Easily create credit notes and manage reimbursement transactions without delays.
• Seamless Multi-Company Operations: Synchronize orders and invoices across multiple entities for enhanced operational efficiency.
• Comprehensive Reporting: Access real-time accounting insights, dynamic sales reports, and automated tax reporting to make informed business decisions.

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Conclusion

Adding retention to your invoices is essential for protecting your business, maintaining clear client relationships, and ensuring smooth cash flow. By following proper steps, confirming agreements, setting up retention accounts, calculating accurately, and raising separate retention invoices, you reduce errors and avoid payment delays.

Efficient retention management also aligns with Saudi Vision 2030, supporting digital transformation, streamlined business processes, and a more transparent, accountable corporate environment.

To make this process even easier, HAL ERP simplifies retention management with smart, compliant invoicing, automated calculations, and integrated payment options. You can generate professional invoices, track retention amounts, and ensure full ZATCA compliance without extra manual work.

Take control of your invoicing and get paid faster. Book a demo with HAL ERP today to see how it can transform your billing process.

Frequently Asked Questions (FAQ)

1. Can retention be applied to both goods and services invoices?

Yes, retention can be applied to invoices for both goods delivery and service-based projects. It acts as a financial safeguard to ensure quality or compliance before the final payment is released, making it relevant across industries like construction, IT, and contracting in Saudi Arabia.

2. How should I record retention in my accounting software?

Retention should be tracked separately using a dedicated account, such as “Retention Receivable.” This ensures accurate reporting, avoids mixing with regular revenue, and simplifies reconciliation when the retained amount is eventually released.

3. Is VAT applicable to retention amounts in Saudi Arabia?

Generally, VAT is not applied to retained amounts under Saudi e-invoicing rules. Only the portion of the invoice payable immediately is subject to VAT. Following this ensures compliance with ZATCA and avoids accounting issues.

4. What is the best way to automate retention invoice tracking?

Using ERP solutions like HAL allows you to automate retention calculations, track pending amounts, and raise separate retention invoices efficiently. Automation reduces manual errors, improves cash flow visibility, and ensures compliance with local regulations.