The rights and responsibilities of the companies involved in a construction joint venture agreement can vary greatly based on the composition of the agreement. Specific provisions of joint venture agreements may differ, but certain items should be addressed in each agreement. These include:
• Purpose statement
• Capital contributions by each participant (such as cash and equipment)
• Rights and responsibilities of each participant (specifically bonding)
• Sharing of profits and losses
• Provisions for distributions, decisions, default, and termination
4 Construction Joint Venture Agreement Key Considerations
While forming the joint venture agreement and performing the work, there are several key considerations for any contractor, such as:
(1) Choice of Entity –Partnership vs. Limited Liability Company (LLC)
A partnership is the default entity for a joint venture agreement – absent of any additional legal filings. A limited liability company requires a few extra steps of filing and creation with the state. In practice, the differences are minimal regarding liability to the owners or sureties. However, many owners and sureties require that the individual LLC members sign guarantees to create direct liability.
(2) Bidding Guidelines
It’s important that all joint venture parties decide and agree throughout the bidding process from the initial proposal throughout the often time-consuming answer period. Ultimate performance and profitability depends on teamwork. Questions to consider include the bidding process and whether the parties work together on pricing or each provide pricing for specific areas, as well as who will provide the bonding requirements.
(3) Equipment Issues
Will equipment be contributed by the parties, or will it be rented – in which case the joint venture agreement should address the basis for the rental rates? What if equipment is acquired as a part of this joint venture? The agreement should outline what happens to that equipment after the project is completed.
(4) Completing the Work & Dividing the Revenue
There are two options when considering how best to divide the revenue/losses between the joint venture parties. They include a simple statement (where parties state their percentage interest in the joint venture and split the final profit – after specific deductions) or a line-item division (where the revenue is defined in the project contract and each party assumes the profitability and risk associated with their portion). Also consider any details of cash distributions and expense reimbursements. Timing of these distributions can significantly impact year-end tax planning, so be sure to consult with your construction CPA.
In today’s economy, it’s important for contractors to be increasingly creative when looking for new projects, and joint ventures are often a great way to improve the bottom line of all involved parties. However, as with any partnership, it’s important to determine the terms in an agreement before beginning. Have you recently completed a successful joint venture? If so, please share any additional tips with us.