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For any sized firm, participating in a joint venture can be invaluable for growing revenues, expanding portfolios, and gaining access to new customers while also sharing costs and risk.  The chances of success increase with strategic planning and thorough, open communication between parties well before the formal selection process begins. These tips apply to multi-firm agreements as well.

Cultural Alignment

Prior to negotiating with a potential partner, it is critical to check for cultural alignment. For example, ensuring both firms have a similar culture of long-term service, collaboration, transparency and value creation can lead to repeat business. If either firm has a more near-horizon view with a primary focus on business return, the results could be unfavorable.

Core value conversations between the respective senior leadership teams must happen early in the process. Determination of cultural and behavioral alignment up front is critical to contractors working together successfully. Misalignment can doom a team at worst and make the journey much more difficult and contentious than it needs to be at best.

Another factor to consider is the portfolio of clients each firm serves. The expectations of these different client types—institutional versus commercial or public versus private—can be tremendously different and can greatly influence the behavior of organizations.

Determine Agreed-On Responsibilities

But beyond cultural alignment, significant attention must be given to the legal points outlined in the agreement. This is true for a joint venture agreement for a large, multi-year project and for a simple teaming agreement for a professional service effort. The devil is in the details, and the negotiation process will serve to reaffirm (or call into question) alignment between the firms and preempt conflict and confusion later in the project. This is not to say, however, that the agreement needs to be massive in its content and length. As short as is practical is preferred as long as all substantive matters are addressed.

Determining what share of the joint venture each firm will hold should be influenced by the share of resources each firm is expected to provide given consideration of their capabilities. Which firm holds the primary and differentiating relationship with the client or other key stakeholders is also a factor. Local market and supply chain experience and relationships also should be considered as well as any HUB or MWBE-type requirements. Profit and loss sharing typically follows the sharing ratios.

The firm holding the majority share typically assigns the project management leadership, provides the project management process and systems used, the insurance program (contractor controlled insurance program or otherwise) and the subcontractor default insurance program or subcontractor bonding arrangements. If it is a 50/50 joint venture, or otherwise agreed on by the firms, these items can be negotiated.

The firm holding the majority share typically will provide accounting services, including tax matters, on behalf of the joint venture. It is important to determine if the majority-share firm will be allowed to collect a fee from the joint venture for that service.

If the project requires a performance and payment bond from the joint venture, the surety arrangements for both firms will have to be agreed on, as it is likely that both will be required to exhibit bonding capacity for the full amount of the contract.

The amount of initial capital investment in the joint venture will need to be determined, as well as the process for capital calls and capital and profit distributions.

As in any legally binding agreement, many other topics need to be addressed such as cross indemnification, definition of direct personnel expense and actual hours allowable to be billed, allowable overhead expenses by each firm, distribution of payments in preconstruction, how costs and expenses are accounted for, and more.

Create Joint Teams

The most successful joint ventures establish an “executive” or “management” committee. This select committee of senior management representatives from each firm lead and guide the joint venture project team as senior management would in their respective firms. An executive committee should meet quarterly to review the project status as presented by the team and provide executive oversight and guidance.

An alternative would be to form a management committee that meets monthly to perform a more direct management role. Overall authority and responsibility of either of these committee types must be agreed on, and typically would include resolving any matters referred to them by the project team. The committee membership, the requirement for unanimous or simple majority vote, and quorum are all issues that demand mutual agreement and would be of particular interest to any firm that does not hold the majority joint venture share.

Dispute Resolution

Agreement on a dispute resolution process before proceeding is very important and should be documented in the agreement. If a joint venture executive or management committee is unable to resolve any matter for which it has responsibility and authority, a mutually agreed on process must be in place. If the firms are unable to resolve conflicts through the established process, then a mediation or arbitration proceeding should be outlined in the agreement.

Contractors that are aligned culturally and have the benefit of a mutually favorable agreement that supports their common interests of a profitable project and satisfied client can have a very successful journey together. The proven ability to succeed while teaming with others can open up new markets, projects and clients that were otherwise out of reach.

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