In Project Operations for Manufacturing environments (Previously Project management and accounting module in D365 for Finance & Operations). there is a function for Vendor Retention. You can assign retention terms to a project. Then, when Project purchase orders are created for that project and an invoice is generated, the retention amount is automatically calculated. When this happens, the cost associated to the project is the full amount of the invoice MINUS the vendor retention amount. Then the rest of the invoice (The retained amount) is part of the project cost once the retention invoice is posted.

This seems incorrect. The project cost amount should be the full amount of the invoice. It would seem that just because an amount is being retained from the vendor doesn't mean that it is not due and still part of the project cost. The offset, after all, is a payable (just split up between retention and accounts payable). And when the retention invoice is posted, the posting just moves the amount from retention payable to accounts payable. This entry does not seem to correlate to adding the cost to the project at this point.

This is not to mention that this causes issues in being able to reconcile your project balance against the associated ledger balance for project costs until the final retention invoice is posted.

I would suggest that the project transaction amount on the initial invoice with retention should match the full invoice amount. Then when the retention invoice is posted it should have no effect on the project cost.