Joint Ventures and Surety in Construction: The Promises and Potential Pitfalls of Working Together

Growing up, we’re instilled with the virtues of teamwork. We’re told that if we work together, cooperate, and move toward a common goal, good things will happen. Happily, unlike a lot of things we’re told in childhood, this is still true for adults, and especially true in the construction industry. For contractors, working with one or more other parties is a great way to get work and to build a solid reputation. There will be jobs that require multiple companies and different areas of expertise, and that’s what drives joint ventures.

The Joint Venture

A joint venture project is one in which two or more parties, be they individuals or companies, combine to take on work. Joint ventures are an official partnership, and as such they are governed by complicated legal arrangements in which measures are taken to ensure that each company’s inputs are commensurate with the profits they receive. Participants may contribute money, time, and expertise, jointly funding a project with workers, equipment, and materials.  

This partnership is not always equal. One party may put in, and receive back, considerably more than the other, depending on size or expertise.  What often happens is that a firm with more raw materials, or more capital, will join a firm with greater expertise in a given field which allows both to profit from a project. Alternately, firms of similar size can work together on a larger project which neither had the resources to undertake alone. A joint venture allows them to pool talent, bid and win projects, and share the risks.

Surety, Fraud, and the Joint Venture

As with every government project, and the huge majority of private ones, it is important for all firms involved to be fully bonded. The rules and regulations around bonding can be trickier with joint ventures, though. All firms involved should be bonded equivalent to what they put in, and bonds should protect the firms from each other. One challenge with joint ventures is that if one participant goes under or cannot complete the work, all the firms in the venture could be held liable.

 

A bond issued by a professional and trustworthy bonding company helps avoid negative outcomes because partners will have a means to seek restitution. But the purpose of a bond isn’t just to offer protection to interested parties if something goes wrong.  It is also to help obtain a project in the first place. No firm will want to partner with another that isn’t bonded. If you want to take advantage of joint ventures, you must be able to offer security.

 

Every partner has to be declared to the surety companies for the bond to be upheld. Pitfalls can occur with something called a “silent joint venture,” where two or more companies agree to work together, but one of the parties is left out of all documents and formal arrangements.  People enter into silent joint ventures if a partner is unable to get a bond, but they still want to work together for reasons of size, expertise, or even just friendship. Silent joint ventures can be a perfectly legal arrangement, but failure to disclose parties can void a contract if it is proved that the silent partner was responsible for a breach or failure.

With most federal contracts, silent partnerships are illegal, and it may be considered fraud if you enter into a joint venture with a silent partner. All parties may be exposed to civil and criminal liability, and this is especially true if an ineligible firm enters into a silent partnership with a CBE to obtain a designated contract.  In such cases, you can be fined millions of dollars.

Joint ventures can be greatly beneficial — just make sure that you are bonded, you properly disclose, and you are aware of the law so that you don’t accidentally fall on the wrong side of it. Coming together can make great things happen, and Surety1 wants to be right there with you.

Your contracting firm needs the backing of a strong Surety company with an excellent reputation. Contact Surety1 today for a quick and fair bonding process.