They say two heads are better than one. This can sometimes be the case for construction projects when, whether because of difficult logistics or challenging technical aspects of a job, two contractors team up under a joint venture to give themselves the best odds of success.
It’s an excellent solution when the circumstances are right. But sometimes you’re better off not getting involved in a joint venture and, instead, focusing your attention on more likely sources of profitability. Let’s look at some points to consider the next time one of these opportunities comes up.
Weigh pros and cons
Joint ventures do offer advantages. They allow smaller construction businesses to take on larger projects while dividing the contractual and financial risk of such jobs between two parties. A joint venture can also enable contractors to increase their bonding capacity and learn about the newer, more sophisticated technologies that typically accompany bigger projects.
Indeed, the right joint venture can serve as a great way to get your feet wet in a new area of construction. If you can find a partner who’s already established in that area, the project can provide a great learning opportunity — assuming you can still perform the work up to standards, of course.
Despite the potential positives, however, partnering with another business can present risks. Partners who fail to clearly define the objectives and responsibilities going in can wind up legal adversaries. So you’ll need to discuss the venture in depth beforehand and draw up the proper documents.
During the project, communication problems can result in confusion, delays and redundancies that undermine profitability. Of particular importance is finding a partner whose culture and communication style (and technology) are compatible with yours.
Clarify the structure
First and foremost, be sure you have a clear objective when joining a joint venture. Construction companies generally undertake these arrangements for one specific purpose (such as to build a chemical plant or complete an infrastructure project) for a defined period of time. Partners negotiate beforehand how they’ll split profits and expenses based on the time, money and labor each plans to invest.
To this end, there are various forms of joint ventures — some more complicated than others. One example: For tax purposes and personal liability protection, many joint ventures form a separate business entity — often a limited partnership or limited liability company (LLC). This is sometime referred to as an “equity” joint venture. When going this route, it’s important to carefully examine the tax implications.
Another example is the contractual joint venture. As its name implies, here you and the other construction company draw up a contract outlining the joint venture and its objectives regarding the project at hand. The advantage is that this is typically a simpler and more time-efficient approach. The downside is that the contract language may expose you to liabilities from third parties.
Consider your reputation
When considering a prospective joint venture partner, ask your CPA to perform an extensive review of its financial statements. He or she can look for red flags regarding how the company manages its money. Also, have your attorney check into the prospect’s legal standing, such as whether the company is involved in any outstanding lawsuits or unsatisfied judgments.
Last, there’s the issue of ethics. Ask for references and do some media research to ensure a prospective partner doesn’t have any history of questionable practices. One of the major risks of joint ventures is participating in a project that suddenly goes wrong because of bad publicity or even criminal actions. Your construction business can do everything properly and above board and still find itself suffering in the court of public opinion.
Take great care
Joint ventures aren’t all doom and gloom. Many have been carried out successfully and many more shall be. But just as you wouldn’t hire a project manager without a careful vetting process, you must take great care when signing on to a joint venture.