Joint ventures for project delivery

Joint ventures for project delivery

Why are joint ventures entered into on construction projects?

What is a joint venture?
Put simply, it is a strategic alliance to share risk and reward.
Why form a joint venture?

  • Similar companies may join to try to penetrate markets they wouldn't or couldn't consider without investing large resources
  • A large company may decide to form a joint venture with a smaller business in order to quickly acquire critical intellectual property, technology, or resources otherwise hard to obtain
  • To penetrate restricted markets where, for example, through targeted procurement the employer wishes to develop the skills of an emerging firm
    What are the different types of joint venture?
  • The formation of a separate business entity with ownership by parent companies (permanent or long term project basis)
  • A coming together of different companies for a specific short term project
    How do joint venture operate?
  • The members of the joint venture pool their resources and the contract is executed by the joint venture using the pooled resources, or
  • The work and obligations making up the contract are broken down into discrete elements and assigned to a specific member who assumes full responsibility for its execution, under the direction of the joint venture.

Joint ventures in developing countries
Structured Joint Ventures are sometimes used as a way of furthering the growth and capacity of local SMEs.
The employer may, through procurement, make it a requirement of larger companies to enter into an agreement with a local or somehow disadvantaged business as a qualification requirement to tender for the work.


Example: Black economic empowerment in South Africa
South Africa has developed a system of procurement, called targeted procurement, to permit procurement to be used as an instrument of social policy in a measurable, quantifiable, auditable and verifiable manner. This is to address imbalances in business ownership patterns arising from the system of apartheid in the construction sector. At the same time, targeted procurement enables social objectives to be linked to procurement in a fair, transparent, equitable, competitive and cost effective manner. This system of procurement, which includes structured joint ventures, has both facilitated and accelerated growth in the black construction sector.

 

Build effective teams and share knowledge

The key determining element responsible for joint venture failures is the human factor. It is sometimes difficult for employees to accept an alliance that may seem like a threat to them and a way of life/working that they have become used to.

Team building and knowledge sharing

  • Building the relationship between the venture partners
    Making sure that both sides are invested in the venture and understand how much they have to gain from this joint venture. But more importantly, how much they can lose by not partnering
  • Building the relationship with and between staff
    The joint venture partners must ensure that employees feel comfortable. This is crucial to the success of the joint venture. The new combined entity should have a common goal and encourage a shared ethos amongst its staff. Staff must know and trust each other and must feel invested and excited about the new company and its shared future
  • Knowledge sharing
    Information sharing is vital, and it is essential that, as early as possible, both teams talk and exchange their knowledge. This entails meetings, steering committees, joint company events, employee "swaps" and internal promotions. By encouraging knowledge sharing, sceptical staff become aware that they can have lots to gain from the new venture including new skills and new promotion opportunities

A good joint venture agreement (CIDB, 2003):

  • Should clearly and comprehensively set out the contributions to be made by each member towards the activities of the joint venture in securing and executing the contract and should allocate monetary values to such contributions
  • Should record the percentage participation by each member in all aspects of the fortunes of the joint venture, including risks, rewards, losses and liabilities
  • Should provide for meaningful input by all members to the policy making and management activities of the joint venture
  • Should provide for the establishment of a management body for the joint venture
  • Should provide measures to limit, as far as possible, losses to the joint venture by the default of a member
  • Should promote consensus between the members whilst ensuring that the activities of the joint venture will not be unduly hindered by failure to achieve it
  • Should provide for rapid, cheap and easy interim dispute resolution and for effective final disput

    Further reading:


    CIDB document 1013 (March, 2003: Edition 1) Best Practice Guideline D2: Joint venture arrangements J.N. Govenderand R.B. Watermeyer. CIB (2000) Potential Procurement Strategies for Construction Industry Development in the SADC Region