Contractors live in a world full of risk. Around almost every corner, risk is waiting to unhinge a project and bulldoze profits. While contractors accept risk as part of working in the industry, their challenge is to identify how much risk to accept in order to become a profitable entity.
There are many ways a contractor can look to manage risks: risk transfer options such as transferring risk to customers or subcontractors; risk assumption options such as self-insurance; risk reduction options such as safety measures; risk avoidance options such as not performing certain types of projects or avoiding certain geographic areas; and, risk sharing options such as joint ventures or partnerships. As part of their overall business processes, management should spend time adequately reviewing all of these options and determine the best course for the particular challenges confronting the entity.
When is risk sharing through a joint venture the best course? The teaming together of contractors can result in a mutually beneficial project in which all parties feel the agreement is a “win-win.” When done correctly, the joint venture allows the contractors to draw on the strengths and experiences of each management team in order to bid on projects that may have been out of reach if they were bid on individually. Upon completion of the joint venture, each contractor now has the benefit of being able to leverage that experience so that the bottom line continues to benefit from it – well after the joint venture has ended.
For contractors, joint ventures are generally formed for one project only and typically for these reasons:
- Generating additional bonding capacity required for the project.
- Sharing expertise such as engineering, design, and construction expertise required for the project.
- One contractor lacks qualifying experience and is able to work with another contractor who acts as figurehead of the project.
- One contractor needs experience and can help reduce the load of the main contractor.
Once the decision is made to proceed with the joint venture, the first order of business is a written agreement between the participants is essential. The agreement should specify all parties’ rights, obligations, and duties, and should account for all transactions between the joint venture and its participants including how profits will be shared and capital contributed. Time spent on the business model and structure — including exit strategies — will be easier at the beginning of the project while all parties are still excited about and fully committed to a successful joint venture.
Of course, as with anything, there are no guarantees as to the success of the joint venture. Even a joint venture has inherent risks. Joint ventures often fail because the parties are not fully sharing the financial details, one or both parties overstated their expertise or experience on similar projects, or the partners aren’t suited to one another.
When building a profitable construction entity, joint ventures are one tool contractors can use to mitigate risks and build business.
