“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.”
Managing contractors is a crucial part of the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat), especially for busy parents side hustling in buy-and-hold real estate. Contractors often ask for payments before completing a job, but giving in too early can lead to costly issues. Here are the top three reasons why contractors ask for payment prior to job completion and why you should stick to only material deposits and milestone-based progress payments.
Why Contractors Ask for Payments Before Job Completion
It all comes down to cash flow management. While it’s normal for contractors to request an upfront payment to hold a spot on their calendar and buy initial materials, problems start when they ask for more money before finishing agreed-upon tasks. Often, this signals that they’re using your funds to pay for someone else’s job, explaining it as “needing to pay their guys.” Here are the top three reasons why this cash flow issue arises:
- Underquoting Projects
Some contractors underestimate project costs to secure contracts, assuming a deposit will keep them moving forward. This approach can dig them into a deeper hole, leading to financial strain as expenses exceed the initial quotes. It’s a “rob Peter to pay Paul” situation, where they take on new jobs to cover costs from previous ones. - Poor Record Keeping
Many contractors fail to track expenses accurately, leading to cash flow challenges and budget issues. Without a clear sense of their spending, it’s tough for contractors to manage project budgets effectively, which can result in delays and requests for more money before completing your job. - Taking on Too Many Projects
Overcommitting to multiple jobs without sufficient cash flow to support them can cause major financial strain. This “house of cards” approach is common with some contractors, and when cash is tight, they’ll often request additional payments to keep your project moving.
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How to Manage Contractor Payments with the BRRRR Method
To keep your projects on track and ensure contractors stay focused on your job, use these three key strategies:
- Initial Deposit
Limit the initial deposit to no more than 30%. This deposit can vary depending on your relationship with the contractor, the project size, and scope. For trades I’ve worked with for years, the deposit is often zero. But for larger, multi-week projects, I negotiate a 30% deposit upfront to cover initial materials and labor. - Agreed Upon Scope of Work
Detail each task in a written scope of work, with line items that include costs for each stage. The more detailed, the better. Payment is made upon completion of each line item, except for the final one, ensuring the project progresses according to plan and prevents overpayment before the job is done. - Final Walkthrough
Never pay a contractor in full before the work is 100% completed to your satisfaction. Hold back 10-20% of the total contract as the final payment. This not only ensures priority but also keeps contractors accountable for completing the job properly.
Boosting Confidence in Contractor Negotiations
Using the BRRRR method for real estate investing means managing your rehabs effectively. By sticking to these payment guidelines, you ensure that contractors stay focused on your project and meet the agreed-upon standards. Managing contractor payments like this keeps your side hustle moving smoothly and prevents setbacks that can drain your resources and time.
How confident do you feel negotiating with contractors? Drop a comment or reach out to share your experiences. Let’s make sure your real estate investments stay on track and profitable with the BRRRR method!