Known as joint ventures, allowing multiple companies to create a commercial alliance for a particular project or series of projects is becoming more common in the construction industry. In this article we look into why organisations enter into joint ventures and what the possible risks are.
Why enter into a joint venture?
When a contractor enters a country or region for the first time it may be unfamiliar with the practices, culture and procedures of the area. Local expertise can be beneficial to accelerate the initial integration into a region. Rather than starting from scratch, a joint venture with a local partner can give you access to tried and trusted local subcontractors / suppliers etc. It can also help you navigate the minefield of local rules, regulations and cultural sensitivities.
There are many reasons for setting up a domestic joint venture the most common being:
A typical joint venture might split the project costs 50/50 between the two parties. These lower costs it may give a party the opportunity to work on much larger project than they could initially budget for. This can allow a smaller contractor to increase the size and the scope of the projects in its portfolio.
In addition to the benefits of split funding and sharing expertise, comes the split risks. Where a project is not a financial success, the loss is shared between the parties involved. The extent of the liability will depend on the way the structure of the joint venture. But a contractor could find themselves liable should delays, cost overruns or disputes occur.
Share experience and expertise
Traditionally a joint venture partner may be chosen based on experience. This can be in the type of construction , sector, region or when a particular system is specified by the contract. The experienced partner may know the most efficient manner to carry out the work. The will also be more familiar with the risks associated with the works.
Shared experience and expertise of personnel will be an increasing reason to form a joint venture in the near future. It is already apparent that there is a lack of experienced professionals available to resource the increasing number of projects being undertaken. A well-resourced and experienced site team is essential in the success of any project.
When the two organisations integrate there will be a natural element of critical analysis of working methods and protocol. Challenging the normal working methods should assist the parties to evolve and become more efficient.
Possible pitfalls of joint venture agreements
If the parties fail to agree on operating systems and practices it can lead to disruptive and inefficient working of the site team. There will also be additional costs in the site set up. It could be some time into the project before the benefits of the joint venture are realised.
Failure of one of the joint venture partners to perform a task can reflect poorly on both parties. For example, if one party is responsible for the accounts of the job and consistently fails to make its payments to suppliers and subcontractors in good time. This could lead to interest claims on late payment, an end to good relationships and discounts from suppliers and generally a reputation for being a poor payer leading to increased rates / quotes for future works.
The hierarchy of the joint venture team can be difficult to determine. For example, it may be difficult for a manager to discipline staff from the joint venture partner. There is also the risk staff allocated to a joint venture project may feel they may be forgotten about by the parent company and consider the role as a stumbling block in career progressions.
Advice for entering a joint venture agreement
First of all, allow a long lead in time for site staff to integrate. Carry out workshops to enable each team member to know their role and important procedures from the earliest possible point.
Establish the delegation of authority and accountability at an early stage. It is important to not allow an ‘us and them’ attitude to develop. Communication must be maintained between the parties.
When selecting staff choose people who will represent the company in a positive way. Make it clear they will be rewarded for their work and contribution in making the joint venture successful. It would be wise to have a mutual agreement in place with the joint venture partner to stop headhunting of staff from each party.
When working on a NEC, FIDC or any other contract with stringent notification periods for additional time and / or costs, ensure an adequate procedure for checking notices are submitted within the defined period. Leaving one member of the team to deal with submitting notices will only lead to an internal dispute between the joint venture parties if a notice is late and determined to be “time barred”.
Look to use independent persons, or parties, to review and audit the works. This will ensure any errors or inconsistencies can be identified and addressed by an unbiased and non-conflicted party.
The obvious indicator into whether a joint venture is successful is if it is profitable. However, poor financial performance of one project may not reflect on the experience and lessons learnt in operating, administrative or geographical aspects of the project. These issues may lead to significantly better financial results on future projects, even if the initial project did not appear to be a success.
If you require any further advice on joint venture contracts, contract administration or contract selection get in touch with us.
Senior Quantity Surveyor
Decipher Consulting (UK) Ltd