Consortium or Joint Venture : the same or very different?

In certain countries and cultures, the words “joint venture” or “JV” and “consortium” may be used as synonyms. For the purpose of this article, we will adopt the usual differentiation between these, as observed during the past decades in the construction, infrastructure, oil & gas, power and renewable businesses.

Both a consortium and a JV (Joint Venture) are ways for two or more parties to join forces and participate to a tender. And, if successful, they will jointly execute the contract. Thanks to the “joint and several liability”, the employer is no worse off compared to dealing with a single contractor. In fact, joint & several means that the employer can go to either or both for fulfillment of the contract or recovery of damages. The employer is therefore in a better position, spreading the risk of in-execution over two or more companies.

From the above, can we assume that a consortium and an incorporated JV are more or less the same?

Let’s test this by looking at the facts. The list is a bit longer than anticipated. But, I hope, this is helpful to fully understand the implications of either solution.

Distribution of the scope of the works

JV’s are often used by parties that also have the competences to execute the whole works on their own. However, the project is perceived as too big or too risky to go alone. In a JV, their is no necessity to allocate the scope to specific parties from the start of the project.

A consortium requires a clear scope split between the parties. Care should be taken that nothing falls in between the scope of the consortium partners. Jointly they are obviously responsible for the total scope (the whole works) towards the employer. Each parties’ scope will be established at the time of concluding the consortium agreement (or soon after). Based on this, they will each prepare their part of the joint offer.

Percentage of a party in the JV or consortium

Often, employers ask contractors what is the stake of each party in the project.

This question feels completely natural for JV partners. They will easily give the precise figures of their participation: 50/50 or 60/40 or 40/30/30 etc. The figures are round numbers and remain constant all the way through the project execution, from signing the JV agreement up to conclusion of the project. The numbers represent the participation of each member in the JV, including the equity (if applicable).

For consortium partners, things are not so easy. As explained above, the important parameter for the partners is their scope of works. At the beginning, the parties only have an approximate idea of how much their scope will represent in the overall contract price. When submitting the joint bid, each parties’ proportionate share will be known: it is the percentage of their price in the overall price. This proportionate share will vary during the course of the project due to the inevitable change orders, price escalation (if applicable) and successful claims.

Allocation of resources

A JV will set-up and staff a whole project team including even support functions like human resources. The JV somehow “rents” resources from the consortium partners or from third parties.

In a consortium, each party uses its existing resources to execute the works. They can draw from their existing pool of resources without needing the approval from the other party.

The staff in a JV is more likely to have a “project” approach. They will naturally identify themselves with the performance and results of the project. The staff in a consortium often works within a matrix structure. They report partly to the project manager and partly to their function leader (e.g. engineering, sourcing, etc.) As a consequence, and unfortunately so, they probably think less “project”.

Sharing of risks

JV’s are usually chosen by civil contractors to share the risks of a project. Clearly, the risks are not allocated to individual partners but assumed by the JV.

In a consortium, the risks allocation goes together with the scope of works. For example, a consortium partner may be responsible for the supply of certain equipment that is subject to performance testing. The corresponding performance LDs are usually borne entirely by that party. Obviously, things get more complicated when the scope of several partners actually influence the overall performances of the project in an interdependent way. In that case, in the consortium agreement, precise allocation rules of the performance LDs have to be established.

So, consortium partners normally don’t share the risks but allocate it to a specific party. One exception is sharing of delay LDs above the % cap applied to a party’s proportionate share. Such “extreme delay LDs” are often allocated in accordance with the proportionate share of the parties.

Sharing of profit & loss

From all what is mentioned above, one can guess that the sharing of profit & loss is also very different for the two solutions:

For a JV, the parties share the profit (or loss) in accordance with their participation in the JV.

Within a consortium set-up, potential profit or loss depends on the relevant party’s performance on its scope. The actual profit is not known by the other partner. One party can be at a loss while the other is making profit and doesn’t have to compensate the other.

Sharing of costs

Due to the JV structure, the JV assume all the costs and therefore the parties automatically share the costs.

In a Consortium, parties can agree to have joint costs (e.g. for insurance) and are likely to share this in accordance with their proportionate share. However, due to the need to keep the parties “at arm’s length” for fiscal clarity, Consortium partners try to avoid sharing of costs and prefer to allocate costs to a specific party. For example, in the past, there was a usual practice for consortium members to provision, say 2% of their price, as the consortium leader’s fee. Nowadays, the preferred solution is that the consortium leader provisions its leadership costs (and establishes its price accordingly). This avoids invoicing between the consortium partners, which is not favorable for fiscal clarity regarding separation of profit & loss.

Price determination

The JV partners jointly decide the offer price. Together, they establish the project budget, the provisions and the resulting project margin.

In a consortium, each party has full power to decide on its respective price, provisions and margin. When adding the prices, often, the parties realize that the result is not competitive. This is especially true when they perceive risk on their partners and provision for it. Then, they start pushing each other to lower the price and increase the award probability. But they only have soft power to influence the other partner(s).

Decision power

In a JV, the nominated project director can act with a certain autonomy to make the project a success.

In a consortium, each party has its own project manager. Together they choose a leader, just to coordinate and be the “one face to the customer”. Usually, the party with the biggest scope becomes the leader. The leader cannot bind the parties without prior agreement from all. Only in very exceptional cases, can the leader act immediately. He must do so impartially and only to preserve rights for the consortium or avoid imminent damage. This can apply to an emergency situation related to health & safety or environmental damage.

It is important for the employer to understand the limits to the power of the consortium leader. The employer should avoid demanding immediate responses when the consortium leader doesn’t have prior approvals and his partner is absent. Agreeing on the spot would put him in breach of the consortium agreement. This will result in further dispute within the consortium and may backfire to the employer.

Legal entity, or not

An incorporated JV is in fact a new legal entity, although temporary, set-up by the parties to execute that specific project.

In case of a consortium, no new legal entity is created. It is just a contractual agreement for two (or more) existing entities to work together on that project.

Invoicing and payments

The previous point should make one thing clear: a consortium cannot invoice. The underlying entities, being the consortium partners, each have to invoice the respective progress on their scope. Usually, the parties provide a cover letter, summarizing the underlying invoices. Technically speaking, this cover letter is not an invoice. I’ve seen many employer representatives object to multiple invoices but… there is no other way around. A JV doesn’t have this problem.

The JV will have its own bank account. For a consortium, the parties could identify a single bank account and redistribute monies in accordance with their invoices. However, an employer can be pragmatic and accept to pay directly to the bank accounts of each of the consortium partners. With the joint & several liability, this doesn’t lead to additional exposure and will facilitate the life of the contractor (as the money will become available quicker to the parties without time lost with additional bank transfers).

Accounting and tax

An incorporated JV will have its own accounting and will take care of the payment of the taxes for the whole project. These will directly impact the project results and therefore the distribution of profit (or loss) among the parties.

For a consortium, each party handles its own accounting and taxes. Typical wording for a consortium agreement goes as follows: “Each Party shall be fully and solely responsible for paying all taxes, duties, social security contributions and similar charges (including penalties and interest) of whatever nature  levied in connection with its Scope of Supply, or relating to its personnel or its subcontractors‘ personnel, and shall carry out all necessary filings, registrations and fulfill all other obligations towards relevant fiscal authorities in relation thereto”

Default by the contractor or one of the parties

As mentioned above, the consortium partners are jointly and severally liable towards the employer. The employer can automatically go after each of existing entities that have signed the contract.

For a JV, employers need to check their recourse to the underlying entities. Parent company guarantees may clarify this. If not, this set-up could be far more risky for the employer in case the JV becomes insolvent.

If one party is in default, the other consortium or JV partner(s) has to find a replacement entity. Or otherwise perform the whole of the works. At least one similarity from the point of view of the contractors!

Conclusions:

From an employer’s point of view, there may be no big difference between a JV and a consortium. However, the way contractors operate is completely different for both solutions. It is important for both the employer and the contractors to understand these differences. For the employer, this helps understanding the behavior of the contractor. For the contracting entities, each and every aspect of their relationship depends on the set-up: price, margin, scope, liquidated damages, invoicing etc.

The best choice between either solution can be derived quite naturally from the following:

  • Consortium: Each party knows how to perform a specific part of the scope but not the scope of the partner(s). Due to lack of understanding, they fear the risks on the partner’s scope and want to be isolated from it. For example, on a power plant, the civil works contractor and the electro-mechanical contractor usually work as a consortium.
  • Joint Venture: The parties want to share the risks and will execute the project through a common organization. This is the typical way of collaboration between two civil works contractors.

We encourage you to have a look at the rest of our blog, containing interesting articles on subjects like negotiation, contract risk management, FIDIC, dispute resolution etc.

2 Comments

  1. Jeremie Averous | | Reply

    This article seem to assume the JV is incorporated. Unincorporated JV also exist, which are more like consortiums.

    • Jan B. | | Reply

      Thank you for your comment, Jeremie Averous.
      Indeed, it assumes the JV is incorporated.
      We are talking here about the two most distinct choices.
      Maybe in a next article, we can go through all the intermediate versions: unincorporated JV, internal consortium (only one party signing the main contract) etc.
      If you want to contribute, that would be great!

Leave a Reply

Your email address will not be published.