How Can Small Contractors Develop Successful Strategic Alliances with Larger Ones? (Part 2)
7 Key Issues Requiring Negotiation in Your Agreement
By Vince Fudzie
This is the second part of a series that discusses what to consider in choosing a partner, what needs to be in your agreement and how the venture will operate.
An alliance has the potential for huge rewards but can conversely result in devastating losses, particularly for the smaller company. Any significant loss relative to your size may be disproportionally large and damaging. As an example, you’re $150,000,000 municipal joint venture project gives you a profit/loss percentage of 15%. Many small companies enter into such agreements barely giving thought to the fact that if the project goes south by $10,000,000, they could be on the hook for $1,500,000. You may want to think twice about entering an agreement if you are not prepared to deal with such possibilities.
As the smaller company, you will probably not have controlling interest in the venture (unless you are in a formal SBA mentor/protégé program which requires it). Nevertheless, this certainly should not preclude you from negotiating good deal points. The overriding principle in your agreement should be to memorialize key terms in order to minimize potential disputes in the future. Many joint venture agreements will neglect to incorporate specific operational details. This is understandable since, at this point, you are probably still chasing the project. However, once the project is secured, you, as the smaller company, will have to push to make sure the operational details are worked out. While it would be easier for your larger partner to simply run the venture operations the same way they run their separate operations, this may not be in the best interest of your company. In Part 3 of this series, we will discuss the points that should be included in your operational agreement.
While you may not be negotiating with the greatest of strength, the following key provisions should still be vigorously pursued for you benefit:
- Consent and Participation. Oftentimes, small contractors are content to be on the team with the potential for a share of the profit. They try to stay out of the way and may even feel they have very little to offer. This is the wrong attitude. Even if you don’t make a cent, you want to secure as much intellectual capital for your company as possible. Therefore, secure your place at the learning table by indentifying what issues require your consent and/or participation – issues such as negotiations, legal/consulting discussions, special project meetings, email distribution lists, etc. Basically, don’t miss out on this learning opportunity.
- Performance of Work and Employees. Past performance and experience are paramount to the success of any company. In any joint venture, you should seek to gain both real and relevant company-wide experience, while increasing the experiences of individual employees. Structure your agreement to glean as much knowledge from the project as possible. This includes, but is not limited to, daily administrative and operational activities in which your people are actively responsible for certain aspects of the project. For example, if your partner wants to assign the project manager from their staff, you may fight to assign the superintendent and/or quality control representative. The main thing is to have your employees participate in a meaningful way on the project.
- Joint Bank Accounts. As mentioned earlier, the fact that you could be responsible for a portion of any losses means that it is wise for you to be somewhat actively involved in the financial aspects of the venture. There is no better place to stake a level of control than having an agreement which requires a joint bank account and dual signatures with an authorized signer from each partner on all checks. In addition, you should notify the project owner that all draws should be made to the joint account. Lastly, be sure that you have access to monthly bank statements and internal bank reconciliation. These measures will help you maintain a good feel of what is going in and out of the account.
- Record Keeping. For a small company, there is a lot you can glean from reviewing the project files and records. Better understanding of contract provisions, improved writing skills through correspondence reviews and valuable project management experience are just a few things available. As a part of your agreement, make sure that you have full access to all project records and familiarize yourself with them. On our joint venture projects, we typically put all project files on a cloud-based storage platform which make them readily available and reduces excess paper. If you ever need the documentation for other reasons, you will not have to rely on your partner to access them.
- Job Costs Pre-Defined. Unfortunately, some partners will see the venture as an opportunity to expense every cost imaginable to the project. These costs will typically fall in the category of preconstruction and general conditions. Every dollar of cost that a partner can transfer to the project goes directly to the bottom line and is shared by you. Expenses such as lavish meals, excessively manned preconstruction and parking at the corporate office are just a few of the questionable costs we have seen. While these costs may not be wrong in and of themselves, why should you pay for your partner’s employees to park at their own building? As such, all parties need to be in agreement as to what costs are acceptably charged to the project. Otherwise, there is no way to determine if the project is as profitable as it should have been.
- Standing Meeting/Open Communication. As with any relationship, open communication is key. If trust is to be developed, all parties must openly share and own issues negatively affecting the project. Recognizing that issues are inevitable and can be resolved, it is more important to find a solution than to point fingers. Make it a requirement of the joint venture that there be periodic, dedicated times to meet and discuss such topics as busts in the estimate, underperforming personnel and administration of the venture. Again, these meetings are of paramount importance, so don’t allow yourself or partners to disregard them.
- Dispute Resolution/Exit Strategy. Unless one of the parties to the venture doesn’t like saying “no” very often, there are going to be disputes. And, at some point in the venture, one or all parties may feel the need to separate. When conflicts arise or someone simply wants out, it is vital to have a formal dispute and/or exit mechanism in place. This avoids potentially costly and distracting litigation. After all, even if you and your partners have a total falling out, you will probably still be required to complete the project together. Having a predetermined means of solving disputes will work to make the completion of projects and ultimate dissolution more pleasant.
Obviously, any legal document created by lawyers is going to include a number of other types of provisions that are needed in your agreement, but you should pay particularly close attention to the ones listed above. As always, check with competent legal counsel before entering into any legally binding agreement.
Vince Fudzie MBA, CPA, CIRA, is the Managing Member of Triune. Founded in 1997 with headquarters in Dallas, Triune is a leading, integrated, design-build general contractor in the Southwest region of the country.
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