CONSTRUCTION PROCUREMENT

BEST PRACTICE GUIDELINE # D2

Joint venture arrangements
Construction Industry Development Board Pretoria Tel: 012 343 7136 or 012 481 9030 Fax: 012 343 7153 E-mail: cidb@cidb.org.za

March 2004 First edition of CIDB document 1013

1.

Introduction

Joint ventures may be formed for a variety of reasons, the most common being the following: • • • The project is too large, or complex, for a company to undertake with its available resources. The project requires specialist skills, or abilities, which a company is unable, itself, to provide. In developing countries, including South Africa, the skills and expertise of emerging firms can be developed through their association in joint ventures with well-established experienced companies.

A joint venture is a speculation for profit in which the risks and rewards are shared by two or more parties, which have formed an ad hoc association to combine their expertise, capital, property, skills and knowledge in order to execute a specific project. Joint ventures are, normally, unincorporated bodies, regarded in law as partnerships in which the partners are jointly and severally liable for the acts, neglects and omissions of the partnership. Joint ventures may operate in two distinctly different ways, but, in practice, most operate as a mix of the two broad alternatives which are: • • The members of the joint venture pool their resources and the contract is executed by the joint venture using the pooled resources, or The work and obligations making up the contract are broken down into discrete elements, or sections, usually on the basis of locality, the nature of the work, or the capabilities and resources required. Each element is assigned to a specific member of the joint venture who assumes full responsibility for its execution, under the direction of the joint venture.

The successful operation of a joint venture requires a high degree of trust and co-operation between the members. Nevertheless, it is a recipe for possible disaster if a joint venture is not constituted by means of a comprehensive and fair, written agreement between the members, which sets out their obligations, rights, risks and rewards.

2.

Joint ventures formed in response to preferential procurement policies

The members of a joint venture formed in response to preferential procurement policies should share in at least the following aspects of the joint venture’s activities in a meaningful and equitable manner:
Best Practice Guideline D2: Joint venture arrangements March, 2003: Edition 1 of CIDB document 1013 Page 1

1 2 3 4 5 Control Management Operations Risk Profit. which is most common. Table 1: Part # Title 1 Participation of targeted enterprises Parts of SANS 1914 which promote joint venture formation in preferential procurement policies Target Groups provided for TE= targeted enterprise TP= targeted partner TEs (and TPs who are TEs) Means of satisfying contract participation goals (CPG) requirements By one or more of the following: -performing the work as a TE Prime Contractor -subcontracting portions of the contract to TEs -obtaining supplies from Suppliers who are TE -purchasing materials from Manufacturers who are TEs -obtaining bonds and insurance policies from TEs -engaging service providers who are TEs -engaging non-TEs who in turn engage TEs -entering into a joint venture with one or more TPs -engaging non-TEs who in turn enter into joint ventures with TEs By forming a joint venture at the Prime Contract level with one or more TPs By : -forming a joint venture at Prime Contract level with one or more TPs -engaging TPs as subcontractors/service provider/Manufacturers and Supplies (At least two thirds of the CPG must be made up by forming Joint Ventures with TPs) By one or more of the following: -by engaging one or more TEs. -by engaging non-TEs who in turn enter into joint venture agreements with one or more TPs. In this case. with the objective of securing it. normally. 2003: Edition 1 of CIDB document 1013 Page 2 . However. It is recommended that use be made of one of the parts of SANS 1914 listed in Table 1 to secure the participation of targeted enterprises in terms of preferential procurement policies. or loss Joint ventures may be formed prior to the award of a contract. written agreement. this often being the case where joint ventures are formed to secure a preference in the evaluation of tenders. has no reason to be overly concerned with the contents of the agreement between the members of a joint venture. in order to promote the skills and expertise of an emerging firm. when the employer stipulates the formation of a joint venture as a condition for the award of a contract. joint venture formation for the purpose of goal credits is recognised when: Best Practice Guideline D2: Joint venture arrangements March. or as a condition for the award of a contract. The employer. the situation is rather different. the employer has both a moral obligation and a vested interest in ensuring that both the emerging firm and its established joint venture partner are treated reasonably and equitably in terms of a sound. -by engaging non-TEs who in turn engage one or more TEs 2 3 Participation of targeted partners in joint ventures Participation of targeted enterprises and targeted partners in joint ventures Participation of targeted enterprises in concession contracts TPs TPs and TEs who are not necessarily TPs 6 TEs (and TPs who are TEs) In terms parts of the SANS 1914 standards referred to in Table 1.

. 3. The SANS 1914 standards also provide Joint Venture Disclosure Forms which allow compliance with requirements to be established. should promote consensus between the members whilst ensuring that the activities of the joint venture will not be unduly hindered by failure to achieve it. losses and liabilities. should provide measures to limit. . NOTE: Permanent joint venture companies where the targeted partners do not pursue business activities in their own right are no different to non-targeted companies which may have shareholdings by persons targeted in a preferential procurement policy.control. (See also SANS 10396: The Implementation of Preferential Procurement Policies using Targeted Procurement Procedures) These standards measure joint venture participation in terms of a participation parameter which by definition is equated to the lesser of: a) b) the financial value of the contract for which the targeted partner is responsible. and assumes responsibility for the provision of a portion of the resources required to perform the contract. losses to the joint venture by the default of a member.management responsibilities.a) b) c) The targeted partner shares in the following aspects of the Joint Venture in an appropriate and meaningful manner. consistent with reasonable business practices : . Best Practice Guideline D2: Joint venture arrangements March. Recognition characteristic 3 verifies that the targeted joint venture partners participate in a meaningful way in the joint venture and adds value to the joint venture. should provide for meaningful input by all members to the policy making and management activities of the joint venture. Recognition characteristic 2 enables the management component and participation of the targeted joint venture partners to be measured and quantified. The targeted partner performs part of the defined portion of the contract for which he is responsible using his own resources or resources hired by him independently of his non-targeted partners. The targeted partner is responsible for a clearly defined portion of the contract. as far as possible. including risks.ownership. and twice the financial value of the contract which the targeted partner performs using his own resources or resources hired by him independently of his non-targeted partners.risks.profits. 2003: Edition 1 of CIDB document 1013 Page 3 . . assumes responsibility for a distinct portion of the management and control of the work. should record the percentage participation by each member in all aspects of the fortunes of the joint venture. Recognition characteristic 1 establishes whether or not the entity in question is a joint venture. The abovementioned “recognition characteristics” test whether or not the targeted partner: • • • exercises ownership and control in the joint venture and hence shares in the risks and rewards. should provide for the establishment of a management body for the joint venture. and . Such companies do not satisfy the requirements of the SANS 1914 standards in respect of joint venture formation. Joint venture agreements A good joint venture agreement: • • • • • • should clearly and comprehensively set out the contributions to be made by each member towards the activities of the joint venture in securing and executing the contract and should allocate monetary values to such contributions. rewards.

The CIDB and SAFCEC agreements may be downloaded from the CIDB website (www.• • should provide for rapid. The International Federation of Consulting Engineers (FIDIC) Joint Venture Consortium Agreement. It should be noted that the term “Member’s Interest”.saace. The South African Federation of Civil Engineering Contractors (SAFCEC) Joint Venture Agreement and Heads of Agreement.cidb. etc. and should be sufficiently flexible to allow for joint ventures which differ in nature. if required.co.za). Members Interest measures the commercial participation of a member in a joint venture whereas the participation parameter measures the extent of the participation of the targeted partner in the performance of a contract. objectives. cheap and easy interim dispute resolution and for effective final dispute resolution.za or tel 011. inputs by members. which is intended only for joint ventures between established contractors and is not suitable for use by professional service providers. which is intended for use by all types of contractors including professional service providers1. as used in the CID Joint Venture Agreement.org. management systems. is not necessarily equivalent to the term “participation parameter” used in the SANS 1914 standards. which is intended only for joint ventures between professional service providers and is not suitable for use by contractors. 2003: Edition 1 of CIDB document 1013 Page 4 . The following joint venture agreements are recommended for use or to serve as a basis for the development of an agreement: • • • The CIDB Joint Venture Agreement. The FIDIC agreement may be purchased from the South African Association of Consulting Engineers (www.463-2022). 1 Best Practice Guideline D2: Joint venture arrangements March.

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