Joint Venture Agreements

Joint Ventures Joint Venture (JV) : Two or more construction contractors jointly competing for a particular project pooling their resources and sharing risk and profit, constitute a JV. Technicalities involved when it comes to the obligations and rights of each partner, which will be discussed henceforth. Eg.

Joint and Several Liability Joint and several liability implies: –If certain partners are unable or unwilling to meet their share of the joint-venture obligations, each partner company can be held liable, not only for that partner’s share but also for the joint-venture’s total obligation. –Very essential for a JV if it seeks a contract.

Types of JV’s Conventional –The partners agree to share benefits and liabilities according to a participation formula. –Usually, actual on-site work performed by one partner and costs charged to the JV. –Mode of operation is that of a single independent entity, with its own accounts, mgmt structure, etc. Item –Each partner (usually two) agree to be responsible for a separate physical part of contract work –Costs incurred are separate and so are profits.

Contd.. –So, one might profit whereas other might make a loss. –Joint and several liability still holds Eg: A highway contract might involve bridge building as well as heavy grading and paving. So, two entities who have expertise in each will join to form an “item JV”. –Permits bidding without depending on subcontract bids

Conventional JV’s Mode of operation – single independent entity with its own assets, bank accounts, books of account, and management structure Formation Matters –Specifies duration of JV, purpose (the project concerned) –Does not extend to other projects that each entity might be involved with. –All partners to agree with terms of bid, else a partner can choose to withdraw. –A partner who withdraws is precluded from submitting a separate bid of his own.

Contd.. Termination Matters –If contract is not awarded, JV terminated and has no further effect. –If awarded, agreement remains until each and every provision of the contract has been carried out. –No rights to assets of JV to any partner until contract completed as per the terms. –Agreements made to liquidate assets and settle the share of each partner, on culmination of project.

Participation Percentages Establishes how partners share the assets and liabilities of the JV. Must be stated, defining the proportional share of each partner in percentages. If any partner is not able to perform his share of liabilities, the others are expected to make up for delinquent partners share. Delinquent partner to indemnify the others for any losses they may have incurred In doing the same.

General Management Matters Agreement to provide name of managing partner, usually the one with the largest participating percentage. Defines authority of managing partner and right to appoint project manager, etc. Management fees (see worked example on pg 143) Establish the management committee to set JV policy for guiding the project manager. Delineate services performed by a partner for which payment is made directly and treated as costs to JV

Working Capital Matters Three issues to be dealt with –Capital call: Request made from time to time by managing partner for each partner to contribute funds to the JV for operations. –Failure to meet capital call: Delinquent partner loses all rights to a share of JV’s profits, until delinquency is made up. They are liable at all stages to the JV and the owner. –Return of capital: Excess joint venture funds are normally not distributed until contract is completed as per terms. They are ‘prudently and conservatively invested’ in interest bearing securities, etc.

Accounting Matters The JV must also deal with the following accounting matters: –Must agree on bank/s where JV accounts are to be established. –Provide for separate accounting of expenses and revenues of JV and not to mix with any partners account. –Frequency of financial reporting to partners. –Tax reporting. –Declaration of fiscal year.

Bond and Indemnification Matters Usually only one package of bonds is put up by JV. –Sureties of several partners through internal indemnification agreements, arrange for one of the sureties to furnish the necessary guarantee and to sign the bonds as surety. –Each partner has to indemnify his surety for a proportionate amount. Personal indemnifications required by a surety are furnished to all other partners as well. Brokerage split in proportion to the partner’s participation percentage.

Insurance Matters All JV partners to be named as additional named insureds on all insurance policies. Require subrogation rights of insurance company to be waived. JV insurance policies should cover the use of equipment furnished by any partner so that individual partners are protected. Completed operations endorsement to be included with JV’s third party liability coverage

Partner Bankruptcy Provisions Agreements on this issue normally provide for the following –Bankrupt partners will immediately lose rights to all further profit and management committee rights, but will not lose his share of liability –Each other partner will assume a portion of bankrupt partners profit, and complete contract as per terms

Const. Equipment and Disposal Construction equipment required to run the project can be acquired in a variety of ways, –Each partner contributes necessary cash to acquire used/new equipment from third party. –May be purchased from one of the partners itself (normally with a buy back agreement at the end of project). –Equipment may be rented from one or more partners or third parties and expenses (O&M, damage, etc) will be charged to the JV.

Item JV’s Similarities with Conventional JV’s –Joint and several liability –Single management interface with owner. –Single bid to be submitted by the JV –Pre-bid expenses as in other case, born by each party separately.

Differences –No common agreement on bid, viz, each partner has no control over that portions of schedule that pertain to other partner. –No joint ownership of assets –No common profit and loss participations.

Contd.. –Managing partner not given power to bind the other partner legally to anything. –No management fee, except for cost of administrative interface services performed. –No common working capital or common book of account, bank accounts, tax returns, or insurance policies.