Is a Joint Venture the Fastest Way to Increase Bonding Capacity?
Brent Headley, Surety Account Executive at Anderson & Catania Surety Services LLC, discusses some of the caveats to joint venturing as it relates to bonding support.
Are there any common pitfalls that contractors may face while joint venturing? Are there any common pitfalls that contractors face while joint venturing?
Yes, each contractor involved with the joint venture will have joint and several liability. Joint and several liability is a legal term for a responsibility that is shared by two or more parties to a lawsuit. A wronged party may sue any or all of the contractors involved in joint venture, and collect the total damages awarded by a court from any or all of them. Contractors considering a joint venture must be familiar with the performance capabilities of their joint venture partners. Trust between the parties is essential.
Do joint ventures complicate financial reporting?
Financial reporting could be more complicated depending on how the joint venture is structured. For example, the joint venture could be set up as a special purpose vehicle (SPV) to apply to a single project. Revenues and profits associated with the SPV would then be split according to the agreed-upon percentages. A 50/50 split is common in the commercial market.
Can a small business contractor entertain multiple joint ventures and sustain favorable bonding support from a single surety company?
This scenario could be difficult for the surety underwriter to determine a contractor's total aggregate surety program. Joint ventures are often used for very large projects in the commercial market. A small contractor might find that much of their backlog capacity is obligated to a single joint venture project, leaving little capacity to add new projects outside the joint venture.
Joint ventures are used extensively in the Federal small business arena due to regulatory requirements. Federal small business contractors partner with larger firms or smaller firms that can demonstrate the relevant past performance needed to win larger contract opportunities.
Again, it's important to understand how the surety will treat the backlog associated with joint ventures.
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Well, first of all, this conversation is based on the assumption that there’s a surety company for each joint venture partner involved in the project. A joint venture only makes sense where you have phases on a contract where one contractor has significant expertise, and the other contractor has significant expertise in the other piece. For example, roads, projects where there may be significant bridge work. Therefore, the project has to make sense.
From a surety perspective…the surety company going to look at the financial capacity of each joint venture partner. So, the surety company for one contractor is going to want to look at the financial position, condition, experience of the joint venture partner, and vice versa.
From the standpoint of the joint venture itself, again, it has to make financial sense because you have joint and several liability. So therefore, if one joint venture partner does not hold up their end of the deal in the performance or the payment of the project then all of a sudden, the other joint venture partner finds himself in a very difficult situation.