The Risks and Rewards of Forming Joint Ventures

May 4, 2019

Joint ventures are becoming common in the construction industry, as partnering with another company can make it easier for contractors to take on a project that is large in scale or in a market segment that is new to them, while sharing some of the financial burdens and other risks associated with completing a challenging project. But because having a partner can also entail a loss of control, as well as some additional legal, financial, and reputational risks, contractors should carefully weigh the potential benefits and  downsides before committing to enter into a joint venture with another construction business.

 

Contractors’ motivations for entering into a joint venture vary. In addition to wanting to share the risk on a project, contractors may seek partners to expand their geographic reach, secure additional bonding capacity, or move into an unfamiliar market sector. Among the resources a partner may be able to offer are working capital, skilled personnel, technical expertise, specialized equipment, local knowledge, and relationships with suppliers or trades. In some cases, a contractor may form a joint venture for a specific reason, such as gaining access to a minority- or women-owned firm’s employees to meet affirmative action compliance goals when bidding for government contracts. A joint venture can cover a single project and be limited in time and scope, or it can be a multi-project or even open-ended partnership arrangement. 

 

While joint ventures can be created through a simple contractual agreement, setting up the venture as a partnership, limited liability company (LLC), or corporation generally provides the partners with more legal protections. The choice of business entity will depend on the legal and tax implications of the joint venture for each of the partners. The partners can then draw up an operating agreement that outlines the joint venture structure in detail, including the rights and responsibilities of each partner, labor and overhead rates, insurance and bonding arrangements, and the sharing of profits and losses.

 

The agreement should also clearly lay out the procedures for day-to-day operations, such as managing billing and cash transactions, procuring supplies and materials, obtaining permits and licenses, and monitoring jobsite safety. In addition, the agreement should provide for dispute resolution procedures, such as mediation or arbitration. Thus, before starting a project with a new partner, contractors should work with accountants and attorneys with expertise in construction joint ventures to structure the agreement to ensure that it serves the financial and legal interests of both parties.

 

Moreover, before entering into a joint venture, contractors should perform due diligence by carefully reviewing the prospective partner’s financial statements, banking arrangements and relationships, and bonding capacity. It is essential to understand the prospective partner’s financial strength, because if a contractor does not have the ability to fund a loss on a project, the contractor’s partners may be forced to cover the loss.

 

It is also important to be aware of the prospective partner’s quality and safety records and litigation and legal claims histories, as any bad behavior by the partner could reflect poorly on the other parties involved in the project. Contractors considering entering into a joint venture should ask the prospective partner for references from owners they have worked with in the past, and research the prospective partner’s public record to check whether the company has a history of engaging in dubious practices, or has any outstanding legal problems.

 

Finally, contractors should consider whether the company culture and management style of their prospective partner meshes well with their own, as differences in approaches to running a project can lead to miscommunication, conflicts, and costly delays or mistakes. But when entered into under the right conditions, forming a joint venture can help contractors grow their business and remain profitable even in a competitive marketplace.

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