Better Roads Staff
• gain access to specific skills or assets such as specialized engineering capabilities or equipment.
• maximize surety capacity.
• meet owner requirements, such as government set-aside contracts, experience, capacity or other pre-qualification requirements.
• mitigate risks on higher-risk projects. Contractors often seek to spread the risks among joint venture partners, but they also seek to reduce risk by having independent review of pricing, construction strategy and other areas of risk.
When a contractor’s strategy calls for finding a joint-venture partner, it is important to note that forming a joint venture requires serious commitments and considerations to be understood and decided even before the relationship begins. In addition to financial and operational concerns, there are also organizational issues to understand before entering a joint venture. Contractors should consult an attorney, insurance agent/broker and accountant to ensure that it has a clear understanding of the legal and financial considerations.
While the financial arrangements of the partnership are at the top of the list for most contractors considering joint ventures, it is important to focus on the idea that two (or more) companies are forming a new relationship. For instance, companies often pursue joint-venture partners to access surety and banking credit that they may not be able to obtain on their own. The other partner — typically a larger, better-capitalized firm — must also see some benefit in this arrangement, such as gaining access to local customers, subcontractors or some other capability needed to pursue a project. Whatever each party brings to the relationship, it is important to recognize that dealing with joint-venture partners can be the beginning of a great relationship or a messy divorce in the making.
All good relationships require a certain amount of openness and good communications to avoid misunderstandings and surprises. Depending on the partnership agreements and the reasons that the partnership is being formed, each partner may be asked to share financial statements more openly than it is accustomed to in normal business situations. For some contractors this can create a high level of anxiety. For instance, if both parties are preparing independent bids, there may be a need to share detailed cost information. Discussing details about how markup will be determined is another area that makes some contractors uncomfortable.
There are also specific financial and accounting requirements that must be addressed.
Discuss these matters in detail with your accountant or other financial advisors to make sure you completely understand how revenue and profit for the joint venture will be recognized, how liabilities and assets will flow from the joint venture to your financial statements and how any assets in the joint venture will be disposed of when the joint venture dissolves. This last concern should be clear at the outset of the joint venture.
Some companies see the joint-venture process as a way to learn from another contractor with specialized skills, expertise or competencies and developing those capabilities yourself is one way to upgrade your company. However, be careful. There is often a tradeoff required before a company is willing to share those things that have made it successful. When the learning seems to be one way, the relationship can become strained.
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