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They will work with the buyer to re-set the loan and terms because when they foreclose and bid the property in for their loan amount which they mostly do around here, they have to recognize the loss as a non performing loan which has a multiplier effect on their lending base.

My question would be, is this a good idea, or am I creating unnecessary complexity in the business structure? 

When your rental produces a loss in excess of income (AGI) you have a passive loss.

Also, do the aggregate losses above any W2 income get carried over to the following year?

If your income is below the $150,000 AGI limit you will be able to use up to $25,000 of the passive losses (if any) to reduce your income and therefore tax. 

To your questions though, my clients have not experienced the dramatic loss of negotiating ability that you have illustrated.

Alternatively you could use Section 179 expensing here as well, but the expensing can't create a loss for the rental and may be carried forward.

If I let them run loose it would probably be 5k-10k a year in unnecessary costs.Also the work does come in spurts so it isn't consistent.

BUT this applies to experienced builders who have a strong track record of successful projects without trailing loss history.