The provisions dealing with the assets of the joint venture usually state that no partner will accrue any right to any of the joint-venture assets until the construction contract with the owner has been fully completed according to its terms. The agreement then details the specifics for the division of assets among the partners when the construction contract has been completed. These normally provide that the liquid assets will be distributed to the partners according to the participation formula stated elsewhere in the agreement and that nonliquid assets be sold at auction and the proceeds similarly distributed. Any remaining nonliquid assets are then usually distributed to the partners as the partners may agree at that time.

Participation Percentages

A conventional joint-venture agreement must establish how partners share the assets and liabilities of the joint venture. A participation formula must be stated defining the proportional share of each partner in percentages, which total 100% for all of the partners.

Since partners are jointly and severally bound to the owner, if one or more partners should refuse or be unable to meet their proportional share of any liability that the joint venture may have, the remaining partners are required to make up the delinquent partner’s share as well as meet their own obligation. Because of this possibility, the agreement provides for cross-indemnification for losses, wherein each partner furnishes indemnification to the other partners for any losses suffered by any of them because that partner failed to meet its full share of any liabilities. This indemnification permits partners who had to pay more than their proportionate shares of a loss, because of another partner’s failure to pay, to get their money back eventually, as long as the delinquent partner has any assets or later comes into any assets.

General Management Matters

Another major section of a conventional joint-venture agreement deals with general management matters, which include at least five separate general management areas:

1. The agreement must provide the name of the managing partner. Usually, the managing partner is the partner company that has the largest participation percentage and provides the field organization that performs the actual construction work of the contract.
2. The agreement defines the authority of the managing partner. This authority gives the managing partner the ability to legally obligate the joint-venture entity and to designate the individual who will occupy the position of project manager. The project manager usually is a proven member of the managing partner’s permanent organization but can be any person satisfactory to the managing partner.
3. The agreement should deal with the often contentious subject of a management fee to be paid to the managing partner (on and above their share of the joint-venture profit) for furnishing the field forces and managing the project. Some agreements provide that the managing partner will not receive a fee. Others may provide that the managing partner receive a fixed fee stated in the agreement, regardless of whether the joint venture makes a profit. This latter arrangement, where the fee is unrelated to profit, is not popular since many contractors feel that it is inequitable for the managing partner to be paid a fee when the joint venture fails to make a profit (or incurs a loss). Consequently, a more common method is for the management fee to be dependent on the profit earned by the joint venture. Under this arrangement, the managing partner is paid a fee equal to a stated percentage of the total joint-venture profit prior to the distribution of the remaining profit to the partners according to the participation formula. For instance, consider the following specific case:
   Partner A (managing partner): 60% participation
   Partner B: 25% participation
   Partner C: 15% participation
   The management fee for the managing partner is 10%. The total joint-venture profit = $3,500,000. This would result in the following profit distribution:
   A’s share: 0.10 x $3,500,000 + 0.60 x (0.90 x $3,500,000) = $350,000 + $1,890,000 = $2,240,000
   B’s share: 0.25 x (0.90 x $3,500,000) = $787,500
   C’s share: 0.15 x (0.90 x $3,500,000) = $472,500
   Total: $3,500,000
   Obviously, the greater the joint-venture profit, the greater the management fee taken off the top prior to the distribution of the balance. If no profit or a loss results, there will be no management fee.
4. The agreement normally establishes a management committee to set joint-venture policy for the guidance of the project manager. The authority of the committee, the committee’s meeting schedule, and the voting rights of the partners in making committee decisions will generally be set forth.
5. Joint-venture agreements sometimes delineate specific tasks or services to be performed by a partner for the benefit of the joint venture for which the partner will be paid directly. Such payments are considered to be normal costs of the joint venture. Common examples include data-processing services performed in the managing partner’s home office or design engineering services for project temporary structures performed in the home office of one of the partners. In these cases, the agreement may also state the dollar value of the compensation to be paid for such services.

Some agreements provide that each partner bill the joint venture each month for an amount equal to their proportionate share of 10% of the revenue received by the joint venture from the owner for that month and that these amounts be paid out to each partner as compensation for that partner’s home office general and administrative effort chargeable to the joint venture. Such a provision in the joint-venture agreement is then advanced as support for a 10% charge on all construction contract change orders to meet the expenses of each partners’ home office general and administrative management effort.

Working Capital Matters

Three main points dealing with working capital should be addressed in a conventional joint-venture agreement. The first, the capital call, is a request made from time to time by the managing partner for each partner to contribute funds to the joint venture for operating capital. The partners are required to respond to capital calls by contributing their proportionate share of the total call. When a call is made, a date is set by which all contributions must be received.

The second point deals with the consequences of a partner’s refusal or failure to meet a capital call. Specific agreements vary but generally provide that from that point onward the delinquent partner loses all voting rights and all rights to a share of the joint-venture profits until the delinquency is made up. Under some agreements, delinquent partners loses all rights permanently. However, delinquent partners are not relieved of their share of the joint-venture’s full liabilities. These potential liabilities flow to the partners as result of each partner signing the joint-venture agreement and, if such joint-venture liabilities eventually occur, they can only be discharged by partners paying their proportionate shares.

The third point deals with the return of capital to the partners. Conventional joint-venture agreements typically provide that the joint venture only retain funds sufficient to guarantee the ability to meet all future liabilities. In other words, the joint-venture management will not retain funds in excess of reasonable needs. A prudent joint-venture management committee will construe this provision very conservatively, particularly in situations where, because of front-end loading, the joint venture’s earnings from contract work are disproportionally high in relation to the cost of the work performed. Unanticipated costs later in the job may require the expenditure of those funds, and an imprudent partner may have committed them elsewhere and be unable to respond to the capital call asking for their return. For this reason, some joint-venture agreements specify that no excess funds be distributed until the project work is completed. This latter provision is viewed by some as overly conservative and is less frequently used than simply providing for distribution of funds in “excess of reasonable needs.” Additional provisions in this section typically deal with such matters as how the joint venture will report income for tax purposes, where options are permitted by the tax laws, conditions under which a partner may borrow from the joint venture against its share of equity, and requirements for the prudent and conservative investment of excess funds in interest-bearing securities, pending eventual distribution to the partners.

Accounting Matters

A conventional joint-venture agreement must also deal with at least six separate accounting matters:

1. The partners must agree on the bank or banks where the joint-venture bank accounts are to be established. The joint-venture agreement should either list the banks or provide a means for their selection.
2. The agreement should provide that separate books of account be set up for all necessary joint-venture accounting records and that joint-venture accounts must not intermingle with the accounts of any other business entity, particularly those of any of the partners.
3. The agreement should state the required frequency of financial reports to the partners, normally monthly.
4. The tax reporting declaration, where there is an option, should be stated in the agreement.
5. The agreement should contain a fiscal year declaration fixing the starting and ending dates of the particular fiscal year for the joint venture agreed on by the partners.
6. If a home office charge by the managing partner for the provision of data-processing and accounting services is intended, in addition to the management fee, the agreement should so provide.

Bond and Indemnification Matters

A number of provisions in conventional joint-venture agreements deal with bond and indemnification matters. Three main points are of interest:

1. Usually only one package of bonds is put up by the joint venture, in which the agreed-upon name-style of the joint venture appears as principal. The sureties of the several partners, through internal indemnification agreements among themselves, arrange for one of the sureties to furnish the necessary guarantees on the bonds and to sign the bonds as surety. For all of this to occur, each partner has to indemnify its individual surety for its proportionate share of the contract. Such indemnifications may involve personal indemnifications by the owners and/or officers of the individual contractor partners.
2. When personal indemnifications are required by a partner’s surety, a prudent joint-venture partner will insist that similar personal indemnifications be furnished to all of the other partners as well. Therefore, many joint-venture agreements provide that such “like indemnifications” be given by each partner to each of the others.
3. Bond brokerage fees on large contracts can be sizeable. Since the brokers of all of the partners are usually involved to some degree, the total brokerage commission is sometimes split among them in proportion to the partners’ participation percentages, Some joint-venture agreements provide for this.

Insurance Matters

Conventional joint-venture agreements also contain provisions regarding insurance. Since the joint venture is going to be a separate, independent operating entity, the joint venture name-style appears as the insured on all the normal insurance policies discussed in Chapter 8. The joint-venture agreement insurance provisions deal with five main points:

1. All partners in the joint venture should be named as additional named insureds on all joint-venture insurance policies. Otherwise, partners can be sued individually regarding a joint-venture matter and required to defend such suits and pay any judgments that are entered against them without any joint-venture insurance protection.
2. Many joint-venture partner companies do not want the insurance company to have subrogation rights. (See discussion of subrogation in Chapter 8.) If this is the case, the joint-venture agreement should require that the insurance company’s subrogation rights be waived.
3. The added protection of a completed operations endorsement with third-party liability insurance was discussed in Chapter 8. The joint-venture agreement should require that this endorsement be included with the joint-venture’s third-party liability policy.
4. When the prime construction contract requires the joint venture to indemnify the owner and architect/engineer, the joint-venture agreement should provide that the joint-venture’s third-party liability insurance policy be written with the owner and architect/engineer named as additional named insureds for the reason explained in Chapter 8.
5. Joint-venture insurance policies should be written to cover the use of partner-furnished construction equipment rented to the joint venture so that the individual partners who actually own the equipment are protected.

Partner Bankruptcy Provisions

The typical conventional joint-venture agreement also contains provisions dealing with the unhappy event of the bankruptcy of one or more of the partners. First, the agreement normally provides that bankrupt partners will immediately lose rights to all further profit and all management committee rights but are not relieved of their share of liability.

The agreement also provides that surviving partners assume the bankrupt partner’s share of any further joint-venture profits, pro rata to the surviving partner’s original shares, and then complete the construction contract according to its terms.

Construction Equipment Acquisition and Disposal

Comprehensive conventional joint-venture agreements deal with the problems of how, and from where, the joint venture will obtain the necessary construction equipment to construct the project through its equipment acquisition provisions. The value of the necessary equipment acquisitions can run to many millions of dollars for large projects.

A comprehensive agreement provides for acquisition of the equipment as determined by the management committee in one of three basic ways:

1. The partners may contribute the necessary cash for the joint venture to purchase new or used equipment outright from third parties.
2. Some or all of the equipment may be purchased from one or more of the partners at sale prices to be mutually agreed upon. An alternate form of purchase from a partner includes a guaranteed buy-back agreement at the end of the project. With this arrangement, it is often also specified that the original sale price and the buy-back price be determined by an independent equipment appraiser.
3. The equipment may be rented, either from one or more of the partners or from third parties at rental rates to be approved by the joint-venture management committee. A related provision is that when equipment rented from one of the partners is damaged when in use by the joint venture, such damage will be repaired at the expense of the joint venture, normal wear and tear excepted.