The construction industry is a highly competitive one. At some point, a construction company will want to bid on larger, more complex contracts. The problem is that they might not have the financial capital, resources, or business contacts required to pursue them. To overcome this hurdle, many companies decide to band together to form a joint venture.
“If you can’t beat ’em, join ’em”– Queen
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What is a Joint Venture?
A joint venture (JV) is when two or more parties agree to form a business arrangement with the purpose of pooling their resources. This can be done for a “one-off” project or a long term arrangement between the members. Either way, forming a joint venture can help companies bid on otherwise, unattainable contracts. The typical scenario involves one company that has business contacts, but not the bonding capacity or resources to bid on the project, and another company that has the resources but are unable to land the contract for other reasons.
Why are Joint Ventures so Prevalent in Construction?
In the US, construction is a $1.2 billion industry – and it continues to expand. Landing larger contracts are the only way to stay competitive in such a growing industry. Given the level of competition, contractors must get creative when seeking out new contracts. Joint ventures are a great way to do this. They offer numerous advantages to small and medium-sized construction companies.
First and foremost is access to more resources. The ability to pool capital, workforce, equipment, and other resources can give the competitive edge necessary to land those lucrative contracts. Not only material resources but also business contacts, specialized knowledge, and experience. These can provide access to other geographic regions and projects that may require specific trade expertise.
Access to Contracts
Also, depending on the members of the joint venture, a contractor may be able to bid on contracts they wouldn’t otherwise be able to; such as government set-asides. Many government contracts are offered exclusively to small businesses that are women/minority owned, or owned by service-disabled veterans.
However, one of the most important advantages is the spreading of risk. By teaming up with more contractors, the risk of each individual contractor is reduced. Thus, the joint venture will find it easier to qualify for bonds at a lower rate. Most sureties view joint ventures as less risky then solo contractors.
Drawbacks to Joint Ventures
Deciding to form a joint venture is a high-risk, high-reward situation. They may grant access to other contracts, but contractors should be prepared for allying with another firm. Do your due diligence and research beforehand. Not only the obvious things like capital, work history, and licensing, but also be sure that the company cultures, objectives and, management styles are also aligned as well. This is important because you’ll be sharing decision making responsibilities and risks as well.
Joint Venture Construction Agreements
Joint ventures act as a sort-of short term marriage between business, and there are some specifics to keep in mind when coming to a joint venture agreement.
Forming the Joint Venture
One of the first things that must be agreed upon is the “legal entity” of the joint venture. Joint ventures can be structured as a “new company,” but they don’t have to be. If the agreement is for the purposes of a single construction project, then the members may simply have a contractual agreement to pool resources. This can avoid having to file corporate organization documents and obtaining new tax ID numbers as well. However, if the venture is to continue working together for multiple projects, it may be wiser to set up a new entity, such as a partnership or LLC, depending on the tax considerations.
Management & Payments
The largest portion of the agreement will focus on the responsibilities of both members. Once the structure is decided upon, how will management be structured? The companies need to agree on both overall joint venture management and actual project management itself. The duties of each should be clearly defined in the agreement. This is especially important for the requisition process and cash flow as well. Who will handle all the payments? There are payments upstream to GCs and owners, payments downstream to subs and suppliers, and payments among the venture members. Be sure to detail how all the profits and losses will be allocated. This is typically tied to the capital contribution of each member.
Risks & Disputes
Risk is a significant concern, which is why attention should be paid to the indemnification clause. Here is where risk and liabilities are allocated to each party. Speaking of liability, what type of insurance are one or both members required to have? Who will be posting the payment and performance bonds? What will happen if there’s a hit on the payment bond that was only posted by one member? These are essential things to establish early on to avoid misunderstandings and potential conflicts. And when a conflict does arise, there should be a clear alternative dispute resolution procedure in place to resolve them.
Staying relevant in a competitive industry like construction can be tough. Having the ability to land larger, and more lucrative contracts can help push the needle in the right direction. One of the best ways to do so is by forming a joint venture. The resource pooling and increased access to alternative contracts can help keep the cash flowing. But caution should be taken when joining forces with another company. Once you’ve entered into a joint venture, trust and open communication will be crucial to keep the business relationship a successful and profitable one.