Last edited 15 Jul 2016

Joint venture for construction

A joint venture (JV) is a commercial alliance between two or more separate entities that enables them to share risk and reward. A new business is created to which each party contributes resources such as land, capital, intellectual property, skills, credentials or equipment.

Joint ventures are commonly used to:

  • Enable smaller companies to deliver large projects by combining their expertise and resources.
  • Enable a larger company to acquire new resources or expertise from a smaller company.
  • Enable a smaller company to benefit from the credibility and financial stability of a larger company.
  • Gain local knowledge in overseas markets.
  • To share risks and costs.

Joint ventures are becoming more common, encouraged by initiatives such as PF2 (the most recent iteration of the private finance initiative) and the emergence of very large projects in the Middle East and Asia.

The structure of a joint venture will depend on the degree to which the parties wish to integrate. Typical structures for joint ventures are:

  • Limited liability company: creates an entirely separate legal identity from shareholders.
  • Partnership: equity is owned by two or more parties who are jointly and separately liable for all of the debts of the business.
  • Limited liability partnership: liability for debts is limited to the amount of the investment.
  • Contractual agreement.

It is important in structuring a joint venture to properly consider tax issues, particularly on a project such as an institutional Public Private Partnership (PPP) where a joint venture is established by a public authority and a private company which will have very different tax profiles.

A joint venture may be funded by equity funding, debt funding or loans from shareholders.

In 2012, a report by EC Harris warned that one in five UK construction joint ventures ends in a dispute between the parties (Global Construction Disputes: A Longer Resolution). This was mainly as a result of:

  • 'Failure to properly administer the contract.
  • Failure to understand and / or comply with its contractual obligations by the Employer / Contractor / Subcontractor.
  • Employer imposed change.
  • Conflicting party interests.
  • Incomplete and / or unsubstantiated claims.'

For joint ventures to function effectively, it is important that:

  • There is a shared vision and ethos.
  • The structure, resourcing and governance is clear from the outset.
  • Efforts are made to build relationships between staff.
  • Collaborative practices are in place, and ideally a collaborative contract type.
  • The parties adopt common technology platforms.

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my concern is how jv parteners share risks of bussiness. can these be clarified in its agreement?