Any two companies or organisations who wish to form a joint venture to bid on and carry out engineering or construction projects will require a joint venture agreement.
This Joint Venture Agreement for Construction establishes the basis for cooperation between the joint venture partners. It addresses general responsibilities, the management structure, the criteria for joint bidding on tenders, the sharing of work under contracts awarded to the joint venture, as well as financial arrangements and liability concerns. In this article, construction joint venture agreement, we take a look at the process involved and the options available to you.
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When should a JV be considered?
Joint ventures are widely used in the construction sector to create sizeable projects by combining knowledge and resources. So, for instance, one party builds the tunnels, another party the roads, a third party the land, and a fourth party the buildings. Together, their ability to submit proposals for large-scale projects is significantly enhanced.
Joint ventures can be a highly effective technique for generating and getting new contracts due to the skills, resources, and credentials of the individuals, enterprises, or organisations involved. Due to the generally high expenses associated with beginning new projects, a joint venture might aid to reduce risk by distributing it across equally invested partners. Moreover, they share in the resulting earnings.
Joint ventures are beneficial for both new and existing firms. Historically, they have been utilised for smaller projects, but they are now being employed to help larger businesses diversify and cross-sell to their clientele. In overseas markets, they can also assist with cost control and developing local knowledge.
As an example, it has been difficult for businesses to keep a healthy balance sheet during the recession. Contracts may be denied to organisations with extensive experience and practically immaculate credentials if they have a poor balance sheet. Especially in the construction industry, a client must have confidence in a company’s ability to “make good” if something goes wrong.
A joint venture between a company with a weak balance sheet, let’s call it company A, and a larger company with a strong balance sheet, let’s call it company B, could be one way for company A to obtain the contract, as company A could then portray itself as having a better balance sheet. Company B can benefit from entering a new market and offering new services to its clients. It can provide an alternative route to a certain market while allowing each company to preserve its own brand.
In conclusion, JVs provide wonderful opportunities for the mid-market to compete on larger projects, but it is essential that the structure and commitments of all partners are outlined in advance.
What structure should you use for the JV?
After locating a potential joint venture partner, a contractor will typically address the joint venture’s structure as the first issue. Partners in a joint venture may select for a contractual relationship (i.e., without establishing a separate joint venture vehicle) or they may establish a joint venture business in which each partner holds a stake.
The formation of a joint venture affects the entirety of the contractual framework. When a venture is started, it enters into contracts, establishes bank accounts, and does work. If there is no business, the joint venture partners must step in, but they may do so collectively for some things (such as signing the primary contract) and individually for others (such as sub-contracts, which may be signed by only one joint venture partner).
There is no final answer to the topic of how a joint venture should be structured. In certain circumstances, different arrangements for joint ventures will be appropriate. However, as a contractor analyses its options, numerous factors must be taken into account.
Potential for liability – One of the key motivations for creating a joint venture business is to provide limited liability for the partners. In the vast majority of construction projects, however, an employer will require joint venture partners to provide a parent company guarantee for the joint venture firm, particularly if this is a special purpose vehicle formed specifically for this project. Consequently, this diminishes the benefit of limited liability connected with the formation of a joint venture company.
Tax Implications – The tax implications of executing a project through an incorporated joint venture, as opposed to a contractual joint venture, must be considered, namely the possibility of double taxation.
Administrative and operational concerns – The question of how the assets and liabilities of the joint venture will be held may influence how the parties choose to organise the joint venture. In the absence of a shared vehicle entity, holding any of these requires further consideration.
When contractors want to just form a joint venture for a single project, this may encourage partners to use a contractual joint venture. If, however, contractors intend to engage in long-term collaboration, it may be beneficial to form a joint venture.
Exit — If a swift exit from a failing joint venture is desired, the parties may opt for a purely contractual joint venture since, depending on the terms of the contract, it may be easier to exit as there is no necessity to dissolve a joint venture firm. However, the procedure of continuing a project when a partner defaults is significantly simplified if you can manage a firm, as opposed to attempting to assume responsibility for work done in your partners’ names.
What should be included in the agreement?
Origin and designation. The partners form an unincorporated joint venture and outline its basic aims. The agreement will also address the length of the joint venture.
Duties. The JV partners will agree to bear responsibility for their respective portions of the work, but as principal contractors on the awarded contract, they will be jointly and severally liable to the employer for any mishaps. However, they will share liability as stipulated in the joint venture agreement.
Offers and agreements. There will be a mechanism for submitting bids to the board of directors, awarding contracts, and managing such contracts. The management board will determine the amount of resources allocated to each contract. Additionally, a project manager is typically appointed to oversee each joint venture project.
Management. A management board comprised of members from each party will analyse projects, decide on bids and contracts, and hold regular meetings to review progress and address difficulties. In most cases, all participants will have equal voting rights during management meetings. The chairman may or may not possess a tie-breaking vote.
Financial. The demand for operating capital and the manner in which client payments will be processed and allocated will be determined. Management accounts will be prepared on a regular basis.
What are the main risks of a JV in construction?
Depending on whether it is an integrated or non-integrated JV, the risk profile of a joint venture varies significantly. Integrated joint ventures entail the pooling of resources and the sharing of profits and losses proportionally. Each partner in a non-integrated JV is accountable for the profit, loss, and resources related with his or her piece of the overall work scope.
Scope – Issues might arise at interface points for non-integrated JVs, especially when two organisations deliver comparable job scopes. Creating a responsibility matrix at the beginning of the project that clearly outlines who is responsible for what is one way to avoid this common problem.
Decision-making – a significant issue for integrated JVs is ensuring that an appropriate, effective, and acceptable management structure is in place so that the partners can give a single work scope. Will a primary project director be appointed? What about a board to enable collaborative decision-making? How will cases of impasse be resolved?
How will the timetable of the contract be agreed upon or revised? The risk of not having a well-integrated programme is obvious: inefficient work along an uncertain critical path, which could result in the JV paying delay damages. This risk is heightened for non-integrated joint ventures in which the partners are liable for different scope elements. Obviously, initial agreement on a fixed programme is desired, but if this cannot be achieved, partners will be obliged to comply to certain programme standards.
Avoiding disputes – Joint businesses include the danger of partner disagreements. Therefore, it is prudent to agree beforehand on a pragmatic, swift, and decisive strategy to dispute resolution. For instance, escalation to top managers within the partner companies may be one alternative for resolving issues expeditiously without going to arbitration or court.
What occurs if one of the joint venture partners goes bankrupt? Initial consideration must be given to issues including whether partners are jointly and severally liable. Will the contract or problem at hand be settled or rendered impossible? How is the defaulting party’s interest in joint assets or the joint venture bank account handled?
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We have a proven track-record of dealing with construction joint venture agreements. Not only does our construction department have extensive legal experience and knowledge of construction law but we also have the benefit of chartered surveying experts. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
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It is important for you to be well informed about the issues and possible implications of construction joint venture agreements. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
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Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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