“I’m going to need $6,000 from you.”
“Ok, show me what’s done on your list, and I’ll cut you a check.”
If you’ve ever had this conversation with a contractor, you’re not alone. For those using the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) to grow their rental portfolios, managing contractor payments effectively is critical. While contractors often require upfront payments to secure their time and cover materials, things can quickly go south when they start asking for more money before completing the agreed-upon work. This usually signals cash flow management problems on their end.
Here are the top three reasons contractors face cash flow issues and why you should stick to material deposits and milestone progress payments to protect yourself.
Top 3 Reasons Contractors Have Cash Flow Issues
- Underquoting Projects
Contractors sometimes underestimate project costs to win bids, knowing they’ll secure a deposit to keep the project moving. However, this approach often leads to financial strain as expenses exceed their initial estimates. This “rob Peter to pay Paul” scenario can leave your project stalled if the contractor runs out of funds. - Poor Record Keeping
Failing to track expenses accurately creates cash flow challenges, making it difficult for contractors to manage budgets. This problem can arise from poor management of a single large project or from juggling multiple smaller jobs, which leads to compounding issues. - Taking on Too Many Projects
Overcommitting to multiple jobs stretches resources thin. When cash flow can’t keep up, contractors may request additional payments prematurely, creating delays and financial strain. This “house of cards” approach often results in contractors juggling your project alongside others without clear priorities.
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How to Avoid These Issues with Your Contractors
To ensure your contractors stay focused on your projects and complete their work, use these three strategies:
- Initial Deposit: Limit to 30% or Less
For larger projects, I negotiate an initial deposit of no more than 30%. This allows contractors to secure materials and cover upfront costs without overcommitting your funds. For trusted tradespeople with whom I have a solid relationship, this deposit is often zero. The key is to align the deposit with the project’s scope and your comfort level. - Agreed-Upon Scope of Work
Create a detailed scope of work with clear line items for each task. Each item should have an associated cost, and payments should be tied to completion of these milestones. For example, if there are 10 tasks, you only pay for tasks 1-9 as they’re completed, with the final payment reserved for the last task. - Final Walkthrough: Hold 10-20% Until Full Project Completion
Always withhold the last 10-20% of the total payment until the project is 100% complete and you are fully satisfied. This ensures that the contractor prioritizes your job through to the end and remains accountable for finishing all details.
Why This Matters for the BRRRR Method
For busy parents using the BRRRR method to grow their real estate portfolios, unexpected contractor delays and cash flow issues can derail your timeline and eat into your profits. By sticking to these payment strategies, you can avoid common pitfalls, keep your rehabs on schedule, and ensure your contractors deliver quality work.
How confident are you in negotiating with contractors? Managing these relationships effectively is essential for BRRRR success. Drop a comment or reach out if you have tips or questions—I’d love to hear how you handle contractor payments while building your rental portfolio!