Construction Success Story
When the owner of a midsize construction company heard a major chemical company was going to build a plant in his market, he knew he had to do something. Major projects had been hard to come by recently, and this one could be a big boon to his bottom line. Problem was, his company lacked the labor and some of the equipment to field the project alone.
For the first time in his career, the contractor began to consider proposing a joint venture with another area construction business. Before approaching prospective partners, however, he met with his financial advisor to discuss the idea.
Advantages, risks
Joint ventures do offer advantages, the advisor confirmed. They allow smaller construction businesses to take on larger projects while dividing the contractual and financial risk of such jobs between two parties. A joint venture can also enable contractors to increase their bonding capacity and learn about the newer, more sophisticated technologies that typically accompany bigger projects.
Despite the potential positives, the advisor warned, partnering with another business can present risks. Partners who fail to clearly define the objectives and responsibilities going in can wind up legal adversaries. Communication problems may result in delays and redundancies that undermine profitability.
Money, taxes
The advisor told the contractor that companies generally form joint ventures for one specific purpose, such as the chemical plant project, for a limited time. Partners negotiate beforehand how they’ll split profits and expenses based on the time, money and labor each plans to invest.
For tax purposes and personal liability protection, many joint ventures form a separate business entity — often a limited partnership or limited liability company (LLC). If the contractor went this route, his advisor said, they’d need to look carefully at the tax implications.
Finances, ethics
When considering a prospective joint venture partner, the advisor recommended looking at the company’s finances, including an extensive review of its financial statements. They’d also need to check into the prospect’s legal standing, such as whether the company is involved in any outstanding lawsuits or unsatisfied judgments.
Last, there’s the issue of ethics. The contractor and his advisor would need to check references and do some research to ensure a prospective partner doesn’t have any history of questionable practices.
Challenges, victory
Armed with his advisor’s input, the contractor eventually found a solid partner, and the two companies won the chemical plant job. The job was hardly easy but, after working through the challenges, the two contractors declared the joint venture a solid victory.
For more information contact Bill Poland at [email protected].
