Joint Ventures: When are two contractors better than one?

Joint Ventures:  When are two contractors better than one?

A large project has come up for bid and a contractor knows he is qualified—for roughly half the requirements.  Hard to pass it by.  Must he?  Possibly not.  Owners and architects have already recognized the necessity for individual arrangements, called joint ventures, and in fact approve when both parties have demonstrated their separate competence.

 With a strategy in place, the experienced contractor will search for another contractor who can fill in the missing qualifications, and with a logical presentation, persuade a qualified candidate to look at the possibilities.  The two contractors compare their business and project experience and agree that, between them, they have a basis for a joint venture.

 A joint venture is not a partnership.

A joint venture is formed for one project only.  The arrangement may be adopted for these reasons:
*Combining two contractors to generate the bonding capacity required for a project.
*Teaming two contractors, each with a special expertise that will meet project requirements
*One contractor needs an experience in his resume and can help reduce the load of the main contractor
*One contractor lacks qualifying experience and co-opts another contractor to act as figurehead

Important features of a joint venture

  • Full disclosure, concerning past experience with similar projects, financial statements, credit rating, bonding qualification, current insurance in effect, and licensing becomes the platform to support the joint venture.
  • Both contractors must agree to specific project responsibilities, milestones, goals, cost-sharing, and fee distribution. 

A joint venture agreement is a complex process and requires a disciplined, professional approach.  To further complicate matters, both contractors should be prepared to work on the agreement concurrent with bid preparation. 

Two main types of joint ventures

  1. Type 1:  In a 50/50 JV, spreading the risk reduces the insurance costs of the project, particularly if each contractor has been in business for approximately the same amount of time, and has taken on projects of similar value.  However, their bonding value is increased, and owners are more comfortable with the arrangement.  AGC has a very effective joint venture contract that will satisfy contractors and owners.
  2. Type 2: One contractor becomes the figurehead to lend credibility to the project, and becomes a consultant to the “working” contractor who is actually performing the work.  For the privilege of having the  figurehead on the contract and a 5% fee, the “working” contractor is twice obligated in performing the project to standards the figurehead contractor has established in his business.  Supplemental insurance may be a requirement for this arrangement.  It is also important that the “working” contractor maintains quality and workmanship demanded in the specifications; if there are unresolvable problems, the owners will pursue the figurehead contractor in litigation just as vigorously as they will pursue the “working” contractor.

Keep in mind that every project will lay out differently, and because every contractor has an individual business approach, it is important that profit and liability are shared fairly, and ably incorporated to suit individual business profiles.  These are key factors in the successful joint venture. Caution is warranted, however, and JV contractors would be wise to include arbitration in their agreement.

Entering into a joint venture agreement requires of participants close attention to proceeds disbursement, respect for one another’s work and acknowledgment of a job well done.  With a successful project, both contractors’ reputations are strengthened, and the possibility exists for another joint venture.

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Posted on Nov 02, 2010 by admin | Posted in Joint Ventures, Uncategorized

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