How Can Small Contractors Develop Successful Strategic Alliances with Larger Ones? (Part 3)
You have an agreement, but have you dealt with the operational aspects?
By Vince Fudzie
This is the third and final 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.
As mentioned in the last posts, many joint venture agreements often neglect to incorporate operational details (i.e. how the venture will operate on a daily basis). Once a project begins, the parties simply start working on the project with little guidance other than the high-level legal jargon included in the joint venture agreement. Again, there are bound to be disputes on any agreed upon procedures. Your venture is likely to experience numerous, unnecessary bumps in the road.
The obvious way to avoid many of these bumps is by anticipating and agreeing on a plan of action before you encounter them. The more both parties can anticipate potential issues unique to construction ventures and agree in advance on how to handle them, the quicker they can be dealt with. For example, if the president of your partner’s company sticks his head into a preconstruction meeting for 15 minutes, is he able to charge his time to the project?
At a minimum, the following issues should be discussed for inclusion in a quasi-operating agreement that supplements the venture agreement. It doesn’t matter if it is a page of bullet points or a lengthy narrative, an operating agreement needs to be useful in guiding the decisions and actions of the venture.
- What are the management powers of the parties?
- What are the requirements for certain decisions (i.e. majority vs. unanimous)?
- When and how will a party be liable to the other for acts or omissions?
- What notice is required from the other party when an issue arises?
- Is there an informal means of resolving disputes?
- Should operational activities continue even while in dispute?
- What are the requirements of parties to keep disputes confidential?
Preconstruction and General Conditions
- How will preconstruction costs be accounted for?
- What costs will be included in general conditions?
- What portion of employee burdens will be included in the job costs?
- Will there be limits to employee related expenses such as computers, software, etc.?
- Will home office overhead be allocated to the project?
- What meetings do we need and what are the objectives?
- Who will be required to attend a particular meeting?
- What will be the frequency of the specific meetings?
- Who will be responsible for taking meeting minutes?
- What portion of the overall labor will be supplied by each party?
- Will employees working on the project be evaluated by both parties?
- What is the procedure for removing an underperforming employee?
- If an employee is removed, should the replacement come from the same party?
- What books will be kept and by whom?
- Who will have the right to access books and records?
- How much time does the knowledgeable party have to answer related questions?
- Who is responsible for submitting periodic reports to Federal and State governments?
I am sure that if you take a moment to think about potential issues, you will come up with many more; however, the issues noted are the one that typically come into play in our ventures.
Obviously, any legal document created by lawyers is going to include a number of other provisions that are needed in your agreement, but you should pay particularly close attention to the ones listed. 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.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2013 TMV, LLC (Triune). Any and all rights reserved.