| June 09, 2012 |
Let’s Get Together
Building strategic partnerships that work – for both of you
Contractors are, out of necessity, seeking work outside of their traditional markets.
These economy-driven moves require changing strategies to win and successfully complete projects that might be in a new place and/or in a new market type. There can be both risks and rewards when a company leaves its comfort zone, which is why a highway/civil construction firm must first consider how these new markets or larger projects will fit into the company’s current strategy.
For instance, a strategy of just “get more work” or “keep everyone busy” can quickly lead to a waste of time estimating and bidding everything out there, or worse, winning the work and losing your shirt. The response to these difficulties might be, “OK, then we will find a partner to work with to assure we have the capabilities and capacity to do the job.”
Problem solved? Not quite.
Although building collaborative relationships is one of the most successful trends for completing large, complex projects these days, there are many different forms of collaboration, teamwork and partner relationships.
The recession has caused many companies to reduce their workforce and often their capabilities for certain work in order to return to their core competencies. However, this may also mean the company can no longer compete for certain types or sizes of projects. Company management might consider forming some type of temporary partnership with a firm that has the capabilities it lacks. But joining with a partner has several different approaches — which also means there are different levels of legal and financial responsibility and risk involved. A partnership should not be construed as “buddying up” on a project. All have contract implications, and failed relationships can be costly. At the same time, all of these collaborative approaches are being used to great advantage by many companies for a number of reasons.
Joint ventures are one of the least understood, yet often the most effective approaches to forming temporary partnerships for the duration of a project or selected projects.
Although joint ventures are considerably more common on large, technically complex projects, they also appear on small and relatively straightforward projects. Companies pursue joint ventures for a variety of reasons. Among them are to:
• expand market penetration by tapping into another company’s expertise. Companies often seek to take advantage of a joint venture partner’s local knowledge, familiarity with subcontractors, customer understanding or other market expertise.
• 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.
Examining financial reports and researching the reputation and capabilities of potential joint-venture partners are necessary step before signing an agreement. Nevertheless, one important bit of research that might be overlooked in the rush to find a suitable partner is the cultural fit of the partners. You should consider one that makes a good match with your company culture. Few organizations will share the same type of culture, but you want to avoid those that have drastically different cultures from your organization. A joint-venture arrangement that mixes cultures as different as oil and water is headed for disaster.
Cultural characteristics to consider when screening potential joint-venture candidates:
• Communication styles: How do the company’s internal and external communications styles compare with your company’s practices?
• Process development and procedures: How strict are the company’s procedures and policies?
• Employee satisfaction: Do concerns for employee satisfaction clash or complement the need to have a profitable project?
• Safety awareness, programs and culture: In addition to safety ratings, understand the importance management actually places on safety.
Once you have considered all the financial, operational and organization concerns of forming a joint venture you still have to draw up an agreement that is agreeable. Ward and Smith, P.A., a North Carolina law firm with considerable construction expertise, created a checklist to help its clients with the joint-venture agreement drafting process. Some selected items from that list include points to consider before drafting the agreement as well as a number of decisions that will have to be made:
• What is the scope of the joint venture? The agreement should clearly define the project that is covered by the joint venture and the capacity in which the joint venture will bid for the project (i.e., general contractor, construction manager or construction manager at risk).
• Who will be the members of the management committee?
• What actions of the joint venture will require the unanimous vote of the members of the management committee? What decisions can the sponsor partner make unilaterally?
• How will the costs of preparing the bid be allocated between the joint-venture partners? Will each party bear its own costs or will it be allocated based upon participation percentages?
• Who will be the joint-venture manager who is responsible for the day-to-day management of the joint venture?
• Who will be the project manager who is responsible for day-to-day construction of the project?
• How will the project be insured? (i.e., each party with separate liability insurance policies) How will Builders Risk Insurance be purchased? Whose insurance agency will be used?
• What are the financial arrangements?
• How will profits and losses be allocated?
• How will initial contributions be determined?
• How will additional capital contributions be handled? (For example, is a unanimous vote required?)
• What if a party fails to make additional contributions?
• How will reimbursements be handled?
• How will cash disbursements be made?
• How will disputes be handled?
Brian Moore is a principal with construction industry management consultants FMI Corporation, focusing on strategic, organizational and operational issues. Contact at (919)785-9269 or email@example.com.
Go to our digital edition at betterroads.com to read (page 33a) about a contractor (actually Equipment World magazine’s Contractor of the Year) who started a new business to get through the recession.