Understanding Joint Ventures:
A joint venture is a collaborative business arrangement where two or more parties generally pool their resources, expertise, and/or capital to undertake a specific project. Typically, unincorporated bodies, joint ventures operate based on shared risks and rewards, with partners jointly and severally liable for the partnership's actions.
The parties to the joint venture may also decide to assign specific elements of a project to individual members as opposed to simply pooling their resources. The success of a joint venture relies on trust, cooperation, and a comprehensive written agreement outlining obligations, rights, risks, and rewards.
Types of Joint Ventures in South Africa:
In South Africa, joint ventures are categorised as either an Incorporated JV (corporate JV) or an Unincorporated JV (contractual JV).
Incorporated JV: This involves the creation of a company through incorporation, with participants becoming shareholders, conducting business jointly, and sharing liabilities.
Unincorporated JV: Typically regarded as a partnership, each partner is jointly and severally liable for debts incurred by the partnership under South African law. Here, the relationship between or amongst the JV partners are contractually governed. The JV agreement will therefore be the document that breathes life into the relationship.
Key Elements of Joint Venture Agreements:
To ensure a reasonably balanced and fair joint venture agreement, it is advisable that the following minimum aspects are to be considered:
- What each JV partner’s contribution will be – money or otherwise.
- What each JV partner’s percentage participation with regards to all aspects (including risks, rewards, losses, and liabilities) will be.
- Each JV partner’s input in policymaking and management activities.
- The establishment of a management body for the joint venture.
- What measures will be activated to limit losses that are unreasonably caused by fellow members.
- What mechanisms will be relied upon or be available to amicably address disputes between / amongst JV members.
The following three types of JV agreements are recommended by the CIDB for construction contracts:
CIDB Joint Venture Agreement:
Intended Use: The CIDB Joint Venture Agreement is designed for use by various types of contractors, including professional service providers, in the context of construction projects.
Applicability: This agreement is versatile and can be used by contractors involved in various construction activities. It caters to a broad range of contractors, providing a framework for collaboration in joint ventures.
SAFCEC Joint Venture Agreement and Heads of Agreement:
Intended Use: The SAFCEC Joint Venture Agreement and Heads of Agreement are specifically crafted for joint ventures between established contractors. This agreement is not suitable for use by professional service providers, focusing more on contractors in the civil engineering sector.
Applicability: SAFCEC, the South African Federation of Civil Engineering Contractors, tailors this agreement to suit the needs of established contractors engaged in civil engineering projects. It provides a framework for collaboration and outlines the terms and conditions for their joint venture.
FIDIC Joint Venture Consortium Agreement:
Intended Use: The FIDIC Joint Venture Consortium Agreement is designed exclusively for joint ventures between professional service providers. The FIDIC Joint Venture Consortium Agreement serves its purpose in regulating joint ventures among professional service providers, with a focus on consulting engineering firms and similar entities.
Applicability: The International Federation of Consulting Engineers (FIDIC) creates this agreement to address the specific needs of joint ventures formed by consulting engineering firms or other professional service providers. It outlines the terms, responsibilities, and liabilities associated with their collaboration.
In summary, each joint venture agreement is tailored to specific contexts within the construction industry:
- CIDB Joint Venture Agreement: General and versatile, suitable for various types of contractors, including professional service providers.
- SAFCEC Joint Venture Agreement and Heads of Agreement: Tailored for joint ventures between established contractors in the civil engineering sector, not suitable for professional service providers.
- FIDIC Joint Venture Consortium Agreement: Designed exclusively for joint ventures between professional service providers, not suitable for contractors but rather for professional service providers involved in the construction industry.
Choosing the right agreement depends on the nature of the joint venture and the roles of the involved parties. It is essential to carefully select the agreement that aligns with the specific characteristics and requirements of the collaboration.
CIDB Joint Venture Grading Designator Calculator:
The CIDB sets specific requirements for joint ventures, aligned with grading designations. In our earlier article, "CIDB Grading Levels and Thresholds - Getting the Basics Right" (https://www.moore-southafrica.com/news-views/july-2023/cidb-grading-levels-and-thresholds-getting-the-bas, we explained the CIDB's grading system.
How does it work?
The joint venture calculator considers the lead partner's grading designation and sums up the capacities of all partners to determine the joint venture's grading designation. The table below summarises the combinations satisfying the requirements for relevant designations.
The lead partner must be registered in a contractor grading designation not lower than one level below the required grading designation in the class of construction works under consideration. (The JV calculator can also be found at the following link
https://registers.cidb.org.za/PublicContractors/JVGradingDesignationCalc)
For example, if the advertised grade is 6GB then the lead partner must be registered in Grade 5GB or higher.
The joint venture calculator sums the capacity of all the joint venture partners and calculates a grading designation for the joint venture. Notwithstanding the calculated result, the following table summarises the combinations of designations held by Joint Venture partners which will as a result be deemed to satisfy the requirements for the relevant designation:
See table below:
| Designation |
Deemed to satisfy joint venture arrangements |
| 4 |
Three contractors registered in contractor grading designation 3 of which the lead partner must be registered in the class of work under consideration.
OR
One grade 4 lead partner within the class of work under consideration and any other contractor in any grade combination and any class of work. |
| 5 |
Three contractors registered in contractor grading designation 4 of which the lead partner must be registered in the class of work under consideration.
OR
Two contractors registered in contractor grading designation 4 of which one is the lead partner registered in the class of work under consideration plus two contractors registered in grading designation 3.
OR
One grade 5 lead partner within the class of work under consideration plus any grade combination contractors in any class of work. |
| 6 |
Three contractors registered in contractor grading designation 5 of which the lead partner must be registered in the class of work under consideration.
OR
Two contractors registered in contractor grading designation 5 of which one is the lead partner registered in the class of work under consideration plus two contractors registered in contractor grading designation 4 within the class of work under consideration.
OR
One grade 6 lead partner within the class of work under consideration plus any grade combination contractors in any class of work. |
| 7 |
Three contractors registered in contractor grading designation 6 of which the lead partner must be registered in the class of work under consideration.
OR
Two contractors registered in contractor grading designation 6 of which one is the lead partner registered in the class of work under consideration plus two contractors registered in contractor grading designation 5 within the class of work under consideration.
OR
One grade 7 lead partner within the class of work under consideration plus any grade combination contractors in any class of work. |
| 8 |
Three contractors registered in contractor grading designation 7 of which the lead partner must be registered in the class of work under consideration.
OR
One grade 8 lead partner within the class of work under consideration plus any grade combination within any class of work. |
| 9 |
Three contractors registered in contractor grading designation 8 of which the lead partner must be registered in the class of work under consideration.
OR
One grade 9 lead partner within the class of work under consideration plus any grade combination in any class of work. |
Conclusion
In summary, joint ventures in the construction industry require careful consideration of CIDB requirements and the selection of the appropriate agreement based on the nature of collaboration and the roles of involved parties.
The JV calculator ensures that joint ventures are formed with lead partners meeting specific qualification standards and that the overall composition of the joint venture, as reflected in the grading designations of its partners, aligns with the requirements for the intended construction works. This structured approach aims to guarantee that joint ventures are well-equipped and qualified for their designated projects according to CIDB standards.
Where assistance is required with the drafting of JV Agreements or advice / clarity pertaining thereto, contact your local Moore Firm
HERE.
References
- CIDB. (2021). CIDB Endorsed Forms of Contracts. Retrieved from https://www.cidb.org.za/clients/procurement-guides/cidb-endorsed-forms-of-contracts/ (Accessed: October 10, 2023).
- Construction Industry Development Board (CIDB). (2004). Construction Procurement Best Practice Guideline # D2: Joint Venture Arrangements. March 2004. First edition of CIDB document 1013.
- Moore South Africa. (2023, July). CIDB Grading Levels and Thresholds: Getting the Basics Right. Retrieved from https://www.moore-southafrica.com/news-views/july-2023/cidb-grading-levels-and-thresholds-getting-the-bas (Accessed: October 10, 2023).
- Lwandu, C. (2021) Requirements for grading, cidb. Available at: https://www.cidb.org.za/contractors/register-of-contractors/requirements-for-grading/ (Accessed: October 10, 2023)