Joint Ventures in Construction: Why consider it?

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The perfect project is coming out to bid, but there are elements to it that you are unable to manage.  It’s a shame to pass it up because you see potential in making a good profit.  Why not consider putting together a Joint Venture? 

In this conversation, Stephen Brown, Wade Carpenter, and Rob Williams discuss the advantages of joint ventures in construction.

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Rob: [00:00:00] 
All right. So today we have Wade Carpenter with Carpenter and Company CPAs. He  is a CPA that does remote construction in bookkeeping with job costing done right. And we have Stephen Brown with McDaniel Whitley  inc. He is a surety bond and insurance specialist minimizing your risk and maximizing your bonding capacity.

And I’m Rob Williams with iron gate entrepreneurial support systems. I’m a profit strategist. I drive profits for bonded contractors. Well welcome guys. And today we’re talking about joint ventures and the advantages of doing joint ventures. And Wade, would you like to start? 

Wade: [00:00:44] 
I mean, I, you know, I actually, when we were talking about this, I found there’s a lot of different reasons people may want to do a joint venture. And there are, you know, I kind of break them down into maybe four or five different main topics or reasons. You know, you kind of have, you know, sometimes a smaller contractor doesn’t have the financial strength. Or the bonding capacity that Stephen will probably be talking about on this, you know , sometimes we have problems with jurisdictions, like crossing state lines and, you know, crossing state lines or different cities and things like that brings up a host of things like income taxes, payroll taxes, you know, licensing different states, a lot of things we can talk about there.

You know, sometimes there are, you know, Somebody has really good capacity to do something, but they need specialized skill. And so , maybe they don’t particularly have that in their organization, but it’s a key part of the project. And so maybe they want to partner with somebody that has a key piece to the puzzle.

And lastly, government contracts, things like that. They need a participation with a disadvantaged business, whether they’re, you know, a women owned business or MBE, veteran- owned business, those kinds of things.  So, I mean, those are the four main things and I could go on different tangents, but 

Rob: [00:02:05] 
Yeah I think we have a long,  list of the advantages of them.

How about, how about Stephen? You want to comment on some of those items? 

Wade: [00:02:11] 
I mean, I’d love to hear from Stephen’s perspective, the bonding capacity, 

Rob: [00:02:16] 
Really interesting, to hear how these joint ventures the advantages, 

Stephen: [00:02:19] 
The most important thing. I remember from a bonding capacity as the surety bond underwriters want not only want to know you can finish the job, but you can make a profit on it.

And sometimes a job will come up that’s perfect for one contractor. But there’ll be a a part of that job and it might be a small part, it might be half of the job that they’re not comfortable performing. And all the bigger contractors that grow their businesses seem to do that through key strategic partnerships. Joint venture agreements are one way to iron out how you’re going to bid a job.

You, you want to be fair. You don’t want there to be any problems legally between the two of you and you want to iron out every problem before it happens, and a way to do that is with the joint venture agreement. And you have examples of over 30 different joint venture agreements from everything from just teaming up to bid a job together.

But also they’re solid joint ventures where one of the joint venture partners just wants to not be named in the joint venture wants to do it silently there’s open joint ventures. And then as Wade was talking about, the federal government has a mentor protege program, which is a joint venture partnership.

And what’s interesting about that is the the protege can only have one mentor, but the mentor can have as many proteges as they want. And so this is fantastic for a mentor because a larger contractor can literally have a, an open door to some of the set aside businesses available, woman-owned, service disabled hub zone you know, veterans, those kind of things.

 So all of that can be set up to a mentor protege agreement, which there’s literally instructions are on the SBA website. We can help you get that information, rough out your joint venture agreement and file it with the government. And then you’d be surprised. What I’m seeing a lot of times is so that they, a lot of the proteges that are already doing government work – specialty government work like electrical work  or heavy, horizontal civil work.

There are jobs that involve a lot of different type of trades and that’s the perfect situation for a mentor protege agreement or a joint venture. You can have as many parties in a joint venture as you want. 

Rob: [00:04:40]
I thought it was interesting back when you were bonding me, Stephen, when I was, when I had that, my framing companies as a general contractor, a commercial contractor, and a lot of those companies brought me in for the wood framing aspects.  I had the trust company and doing different things back then and the home building. So the specialty contractors, I wasn’t actually a joint venture though. I guess that was a. The, the, the involvement of those guys together. And that’s a subcontractor. And I asked you the questions the other day of the ownership group, because while we were sort of partnering on the group talking about it together, we were not actually a joint venture. And then you guys told me for the bonding, you really typically are forming a separate corporation or LLC or something for these jobs, as opposed to some of the ways we did when we didn’t have the bonding, the actual bond on it.

Stephen: [00:05:38] 
That’s right. And you can have a joint venture set up for one project in specific or ongoing for any future projects. And you can do that in the form of an L LC, of course your accountant – Wade would help you get that set up and running. But it spells out exactly who’s responsible for what. 

And what you see in a lot of those joint venture agreements is that sometimes the the joint venture partners will bond back to the joint venture to protect the joint venture enters. Especially if it’s it’s. It’s a way to get larger bonds approved, more complicated projects approved.

Rob: [00:06:20] 
I think that was actually our situation, because you were bonding me, which helped my friend that had the contract on that job that was bonded. So  that’s interesting.  I hadn’t thought about some of these things from your perspective. I just wanted to make sure I got my bond. 

Wade: [00:06:35] 
Can I jump in on what was Stephen was saying for a minute? We actually just started working with one that’s a perfect example of what he was saying.

Concrete contractor you know, the main contractor’s in Georgia, but the one that got a job, just, you know, $1.5 million job up in North Carolina and he bit off more than he could chew. And so he reached out to my guy down here in Georgia and they pointed a joint venture to do that. And number one, didn’t have the skills to do it, but he also  could not have cash-flowed the job.

He did not have the financial strength for it. And so the other partner kind of, he typically, you’re going to have a dominant partner. But for this other partner in North Carolina, it was an excellent way for him to get, some experience doing larger jobs, you know, to have the capital to do it.

I mean, you know, have somebody to do that. And now after they’ve gotten going a little bit- originally it was intended, as Stephen said, to be a one- shot deal. And now they’re bidding a $16 million job 

Rob: [00:07:43] 

Wade: [00:07:43] 
So, it’s been a learning experience because having somebody to keep the books separately, it does need to be a separate entity and  you need to treat it as one job instead of one contractor having part of the pieces of the puzzle and one contractor having the other part, you need to keep it under one roof as far as, you know, trying to keep up with that.

Rob: [00:08:03] 
That’s a great clarifying thing  for some of us that had not been so familiar with them on whether somebody is a subcontractor of that bond, the bond it got for that actual job, versus being an actual joint venture partner in that and the advantages and disadvantages – and I guess  there are a lot of things to think about on which way you do that, whether you actually want to formally make it that way, or just bring in somebody strong that can perform the jobs and bond under you – cashflow reasons, multiple reasons. And maybe going forward with that, you can take that partnership, that joint venture forward to  bid other jobs. So that’s really creative, a lot of things to think about for sure guys, that haven’t thought about it as much. 

Stephen: [00:08:51] 
And  Rob, how many times as a contractor did you  see a situation where all the stars lined up and you thought you could make the biggest chunk of profit on it?

Because that’s what everyone is shooting for, they’re shooting for of course,  hitting their numbers of the profit that they realistically think they can make. But secretly hoping to hit a home run by having a job that’s in the right location, which is the right timeframe, based on their labor force on the materials that are provided, the type of construction that’s being done might be something that the contractor is really the best around at doing. And it allows them to jump on something fast. 

And these joint venture agreements sound a whole lot more complicated than they are. All of this is just an agreement of, of two or more parties agreeing to something. You spell out what equipment might be shared, if any. What financing might be required by both parties, how you’re going to handle subcontractors to the joint venture. Are you going to make them bond back to the joint venture?  What other joint venture partners might you want? And the different trades that like each other and everybody wants to help each other – that’s the key to success. That’s the key: seeing what other people are doing that are successful and emulating it. And joint venture’s   a great way to do that. 

Rob: [00:10:19] 
You brought up a great point because I remember when we were bidding jobs, the location  was a big deal. We wanted to bid some of the jobs that, that you were bonding for me, but they were a few states away, so we got really nervous about whether we could perform. We were sending our own guys and the drive time, and the travel and different things, and partnering or joint venturing with some guys may have been a better solution for some of the things that we had done.

Stephen: [00:10:47] 
Right. And you might’ve met someone in that area where the job was taking place that you wanted to partner with because of their local knowledge. That’s a huge advantage 

Wade: [00:10:56] 
And having the local labor, too. 

Rob: [00:10:58] 
I remember that hurricane Katrina, we were, we were using our labor down, going hundreds and hundreds of miles away and, and driving back and forth and housing, and back then there were actually a lot of tents involved  in that situation. Because there was no housing. 

Stephen: [00:11:15] 
It costs money. 

Wade: [00:11:17] 
Can I stick with that for just a second? As far as like, you know, the legal structure of it, there are different situations, but typically you form  an LLC and  treat it as a partnership.

And that way we can be very loose on how we structure capital, how we are sharing profits. We could even choose to share profits on two different jobs, two different ways. One of the things that y’all were talking about crossing state lines, and if you don’t have the local labor, you get into having to do payroll taxes and, you know, you send your labor there, you end up with unemployment and those kind of logistical things can make or break a job by the time you pay a bunch of people per diem and hotel bills and those kinds of things. 

Stephen: [00:12:02] 
Right Wade, and some states have higher prevailing wage rates on jobs. 

Wade: [00:12:07] 
Worker’s comp issues, which you haven’t even touched on Stephen, which I’m sure you could talk a long time about.

Stephen: [00:12:14] 
Yeah. Some states are just a whole lot higher than other states. And some of them are harder to get worker’s comp in that state. So you got to talk to your insurance agent and be aware of that before you head into that part of town. But that’s where a joint venture with a  good local partner, if there’s a lot of work going on there is a great way to grow your sales, I think.  

Rob: [00:12:34] 
Yeah. So that’s great. Y’all made a lot of great points. You know, I see some of the other ones that Stephen had written an article on this recently: the accuracy of your bids, you get to combine some knowledge with some of the guys.

Stephen: [00:12:46] 
You’re not a lone wolf bidding it. You’re bouncing it off other people. That’s invaluable. Not only to quadruple check your numbers, but to see how other people look at things that are also successful contractors. 

Rob: [00:13:00] 
Oh yeah. That’s great. I think some of the takeaways that we’ve got on this, is maximizing your ability to get more jobs in your bonds. You have combining your talents. You’ve got all those state line issues . I do remember that Stephen, that was really difficult for us. Especially having been a local contractor. And then we went into multiple states. I got very difficult on our back office guys, like you, Wade. So,  pooling that talent. 

Actually, here’s the last one that you had mentioned in your articles about being a mentor, helping a small business. Some of you want to talk about that too? Stephen? 

Stephen: [00:13:40] 
Wade kind of touched on that a little bit earlier, and I discussed too, that mentor protege agreement.

And if you want to find out a little bit more about that, just go to the website and look under federal contracting. They’ve got some fantastic stuff in there and it’s an art form being a good federal contractor. You know, the pros are that you’ll get paid. And the cons are you don’t know when the job will start and stop. There’s a lot of red tape to bidding the work, but the contractors that know how to do  the work love it. And it’s a steady source of additional income. So, forming an, organization that would make you a good protege or a good mentor to a protege  is all listed there on an website.

Wade: [00:14:25] 
More points there. I don’t really mean to go on on that topic, but again, the federal contracts and things like that, you’ve got Davis-Bacon and prevailing wage and having to do certified payroll. There is more red tape, but  if you know the ropes, you make some pretty good money at it.

Rob: [00:14:42] 
We’re looking forward to having more and more discussions about this. So thanks guys for talking about this and Wade, as we’re departing : 

Wade: [00:14:50] 
I’m Wade Carpenter. I’m a CPA and work with a lot of contractors. We are not your average bean counters. 

Rob: [00:14:57] 
All right. And Stephen?

Stephen: [00:14:59] 
Stephen Brown with McDaniel-Whitley, Inc. And we specialize in bonding and insurance for contractors. We’re licensed in all 50 states and we love what we do and we want to try to help you if we can. 

Rob: [00:15:11] 
And I’m Rob Williams with IronGate Entrepreneurial Support Systems. I’m a profit strategist driving profit in your contracting business. So thanks a lot for tuning into us and we’ll see you guys soon. Thanks!

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