This article will address the legal, licensing and practical issues that contractors should consider before making a final decision regarding whether to participate in a construction joint venture.

I. The Joint Venture Agreement
Once you have identified a partner and determined that your business interests are best served by joining forces to undertake new work, the parties should document the scope and effect of their joint venture. Joint venture agreements may be as simple or complicated as the situation requires. There are, however, several fundamental issues that should be addressed in your agreement in order to minimize the chances of encountering problems with your joint venture partner in the future.

 


a. Purpose and scope of the joint venture
It is important to identify the purpose of your joint venture in the agreement. Is the joint venture being created to bid and build a single project or multiple projects? Is the joint venture being created to bid and build a particular type of work of improvement for a particular period of time? Or, are you partnering in order to work for a particular owner? If you do not adequately describe the purpose of your venture, you risk having your new partner claim that it is entitled to profits realized on non-joint venture projects. Conversely, your partner may argue that you are responsible for losses incurred on non-joint venture projects. The best way to avoid these ambiguities is to clearly identify and, indeed, limit, the purpose and intent of the joint venture.

b. Initial contributions and percentage of participation
Your new joint venture will require a cash infusion. Deciding how much each partner is contributing at the outset is important, and should be documented in the agreement. However, the initial contribution may not be as important as deciding the percentage of each party’s participation in profits, losses and liabilities. While it is true that each party is jointly and severally liable to the outside world for the joint venture’s obligations, the internal percentage of ownership and participation among the partners with regard to the profits, losses and liabilities, is determined by the terms of your agreement. Your joint venture agreement should spell out what percentage of interest in the gross profits and share of the losses and/or liabilities of the joint venture each party has. The participation percentage may be the same as each parties percentage of initial contributions, however, it does not need to be, particularly in arrangements where one party is furnishing substantially more “sweat” equity to the venture.

c. Operations and control

Very few construction companies are operated and controlled in the same way. As a result, operation and control disputes between new partners in the joint venture are common and, in many instances, debilitating. Your joint venture agreement should address the management and decision-making structure of the new venture. Generally, these safeguards come into play when a disagreement arises about the direction of the joint venture. For example, in the event of gridlock:

• Who decides whether to bid a particular project?
• Who has the final say on the project estimate?
• Who decides whether to hire and fire employees?
• Who decides to retain or terminate a subcontractor when performance problems arise?
• Who decides whether to invest money to pursue costly project claims or save the litigation cost and waive the right to recover?

• Who decides which services providers to use (e.g. attorneys, bonding agent, insurance agent, banker and accountant)

You may either decide to expressly allocate various responsibilities to each party, or you may decide that in the event of gridlock, one party has the final and conclusive decision making authority, for whatever reason. Either way, it is vital to have these expectations set forth it the agreement before the problems arise.


d. Conflict resolution
Conflicts arise in joint venture arrangements. Your joint venture agreement should include a conflict resolution mechanism that quickly, efficiently and effectively resolves the problem so that the parties can get on with the business of making money. Many agreements require good faith negotiations followed by arbitration, both of which are good options. You may also want to consider selecting a third-party neutral, and identifying him or her in the joint venture agreement as the person designated to facilitate dispute resolution between the parties. Whatever you decide, focus on efficiency and effectiveness because the worst thing that can happen to a joint venture during the course of performing a construction project is an internal dispute.

II. Licensing
Your joint venture will need to have its own license to perform work lawfully in the State of California (other jurisdictions have different licensing requirements). The procedure for is relatively straightforward. The most important rule is that each of the parties to the joint venture must be properly licensed independently. If they are, the joint venture license may be issued in any or all of the classifications in which the members of the joint venture are licensed. Conversely, an unlicensed contractor cannot join forces with a licensed contractor and perform work legally in California. The California joint venture license application may be downloaded at www.cslb.ca.gov.

III. Practical considerations
As with any relationship, formally joining forces changes the dynamic – for good or for bad. Ultimately, your success will likely be driven by the strength of your relationship with your new partner. A thoughtfully prepared joint venture agreement that addresses the various issues that may be encountered, along with an attention to the licensing and other requirements that the new venture will face, will only improve your chance to succeed.
If you have any questions regarding this article feel free to contact the author at as@salamiradmorrow.com.