They’re hardly new to the industry, but joint ventures remain a tricky move for any construction business that’s largely unfamiliar with the process and experience. A carefully chosen and well-executed joint venture can indeed be profitable, but there are significant risks to consider. Here we explore why contractors typically opt for a joint venture and discuss some of the common challenges involved.
Joint ventures offer both revenue and risk
Some construction projects are too big or too complex for one general contractor alone. In such instances, a viable solution may be for two construction businesses to form a joint venture. This is a legal agreement between the two entities to collaborate on the job, sharing both the revenue and the risks.
If your construction company encounters an opportunity to participate in a joint venture, proceed carefully. It may indeed be a chance to work on a large, high-profile project that boosts your reputation and elevates your revenue projection for the year. It may also represent a good way to enter a new market, as well as gain experience and expertise through collaboration. But those risks we mentioned — you’ve got to be prepared for them.
Reasons to participate
Contractors choose to participate in joint ventures for various reasons. Some projects, though potentially lucrative, are beyond the financial capabilities — in terms of both bonding and working capital — of a single construction company. A joint venture can reduce the amount of each participant’s investment to a manageable level.
There’s also a risk management benefit. A joint venture provides an opportunity for two or more contractors to participate in larger or more complicated projects than they usually would. The financial and other risks of such jobs are shared by participants so, if things go awry, one business won’t have to absorb all the negative repercussions.
A construction company might be able to broaden its horizons through a joint venture — literally. Contractors can move into other geographic markets by forming joint ventures with construction businesses in those areas.
Joint ventures sometimes play a role in diversity initiatives, too. It’s not unusual for bigger construction businesses to partner with smaller, minority-owned companies to enhance diversity and bolster the reputation of the industry.
Difficulties to anticipate
The primary disadvantage faced by participants in a joint venture is loss of control. Most contractors are accustomed to managing project operations without input from another leadership team. However, when you become a partner in a joint venture, you must consider the interests of the other party and sometimes change how you do things.
In fact, important decisions on joint ventures are typically the result of compromise, after much discussion, between the partners. By the same token, an unwillingness to compromise is a major reason why some joint ventures fail — and the consequences of failure can be steep. You may not only lose the anticipated revenue, but also get yourself into a prolonged and expensive legal battle. Your construction company’s reputation could suffer as well.
An agreement’s nuts and bolts
To prevent disaster, the parties involved should draft and sign a comprehensive joint venture agreement. The specific provisions of such an agreement may differ depending on the project and participants. However, commonly addressed items include a statement of the venture’s purpose and provisions addressing the capital contributions to be made by each participant (such as cash, equipment and other project elements).
The agreement should also state the rights and responsibilities of each participant — including bonding obligations if those apply. It needs to include stipulations regarding matters such as how profits and losses will be shared, as well as how major decisions will be made. In addition, the agreement should anticipate negative developments. What, if any, dispute resolution measures will be used? Under what circumstances can the joint venture be terminated?
Be sure any prospective joint venture allows time for you to have your attorney review the agreement, as well as for some negotiation between you and the other party.
Opportunities ahead
One recent development that may boost the prevalence of joint ventures is foreign construction businesses pursuing partnerships with U.S.-based companies to complete federally funded infrastructure projects. It’s perhaps something to keep an eye on if such jobs pop up in your market. Contact your GBQ representative for help evaluating whether to participate in any joint venture.
