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CONSTRUCTION PROCUREMENT

BEST PRACTICE GUIDELINE # D2


Joint venture arrangements
Construction Industry Development Board March 2004
Pretoria - Head Office
Tel: 012 482 7200 First edition of CIDB document 1013
Fraudline: 0800 11 24 32
Call Centre: 0860 103 353
E-mail: cidb@cidb.org.za

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 ventures activities in a meaningful and equitable manner:

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1 Control
2 Management
3 Operations
4 Risk
5 Profit, or loss

Joint ventures may be formed prior to the award of a contract, with the objective of securing it, which is
most common, or as a condition for the award of a contract, this often being the case where joint ventures
are formed to secure a preference in the evaluation of tenders.

The employer, normally, has no reason to be overly concerned with the contents of the agreement
between the members of a joint venture. However, when the employer stipulates the formation of a joint
venture as a condition for the award of a contract, in order to promote the skills and expertise of an
emerging firm, the situation is rather different. In this case, 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, written agreement.

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.

Table 1: Parts of SANS 1914 which promote joint venture formation in preferential
procurement policies

Part Target Groups provided Means of satisfying contract participation goals (CPG)
# Title for requirements
TE= targeted enterprise
TP= targeted partner
1 Participation of TEs (and TPs who are By one or more of the following:
targeted TEs) -performing the work as a TE Prime Contractor
enterprises -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
2 Participation of TPs By forming a joint venture at the Prime Contract level with
targeted partners one or more TPs
in joint ventures
3 Participation of TPs and TEs who are not By :
targeted necessarily TPs -forming a joint venture at Prime Contract level with one or
enterprises and more TPs
targeted partners -engaging TPs as subcontractors/service
in joint ventures provider/Manufacturers and Supplies
(At least two thirds of the CPG must be made up by forming
Joint Ventures with TPs)
6 Participation of TEs (and TPs who are By one or more of the following:
targeted TEs) -by engaging one or more TEs;
enterprises in -by engaging non-TEs who in turn enter into joint venture
concession agreements with one or more TPs;
contracts -by engaging non-TEs who in turn engage one or more TEs

In terms parts of the SANS 1914 standards referred to in Table 1, joint venture formation for the purpose
of goal credits is recognised when:

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a) The targeted partner shares in the following aspects of the Joint Venture in an appropriate and
meaningful manner, consistent with reasonable business practices :
- ownership;
- control;
- management responsibilities;
- risks; and
- profits.
b) The targeted partner is responsible for a clearly defined portion of the contract.
c) 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 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;
assumes responsibility for a distinct portion of the management and control of the work; and
assumes responsibility for the provision of a portion of the resources required to perform the
contract.

Recognition characteristic 1 establishes whether or not the entity in question is a joint venture.
Recognition characteristic 2 enables the management component and participation of the targeted joint
venture partners to be measured and quantified. 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. (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) the financial value of the contract for which the targeted partner is responsible; and
b) 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.

The SANS 1914 standards also provide Joint Venture Disclosure Forms which allow compliance with
requirements to be established.

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. Such companies do not satisfy the requirements of the SANS 1914 standards in respect of joint venture formation.

3. 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.
should record the percentage participation by each member in all aspects of the fortunes of the
joint venture, including risks, rewards, losses and liabilities.
should provide for meaningful input by all members to the policy making and management
activities of the joint venture;
should provide for the establishment of a management body for the joint venture;
should provide measures to limit, as far as possible, losses to the joint venture by the default of a
member;
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;

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should provide for rapid, cheap and easy interim dispute resolution and for effective final dispute
resolution, if required; and
should be sufficiently flexible to allow for joint ventures which differ in nature, objectives, inputs by
members, management systems, etc;

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, which is intended for use by all types of contractors including
professional service providers1.
The South African Federation of Civil Engineering Contractors (SAFCEC) Joint Venture
Agreement and Heads of Agreement, which is intended only for joint ventures between
established contractors and is not suitable for use by professional service providers.
The International Federation of Consulting Engineers (FIDIC) Joint Venture Consortium
Agreement, which is intended only for joint ventures between professional service providers and is
not suitable for use by contractors.

The CIDB and SAFCEC agreements may be downloaded from the CIDB website (www.cidb.org.za). The
FIDIC agreement may be purchased from the South African Association of Consulting Engineers (
www.saace.co.za or tel 011- 463-2022).

1
It should be noted that the term Members Interest, as used in the CID Joint Venture Agreement, is not necessarily equivalent to
the term participation parameter used in the SANS 1914 standards. 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.

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