Consortium or Joint Venture : the same or very different?

The words “joint venture” or “JV” and “consortium” may be used as synonyms in certain countries and cultures. For the purpose of this article, we will adopt the usual differentiation between these, as I’ve 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, having the possibility to rely on two, or more, companies to resolve a breach of contract.

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

Let’s test this by looking at the facts. The list has become a bit longer than anticipated with 12 points to compare. But, I hope, this is helpful to fully understand the implications of both solutions.

1. Distribution of the scope of the works

JV’s are often used by parties that, theoretically, 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 need 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 whole scope towards the employer. Each party’s scope should be established at the time of concluding the consortium agreement, or soon after. Based on this split, each will prepare its part of the joint offer.

2. Stake of a party in the JV or consortium

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

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

For consortium partners, things are not so easy! As explained above, the decisive 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. Only when submitting the joint bid, each party’s 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.

3. Allocation of resources

A JV will be set-up with the whole project team, including support functions like human resources. The JV can “procure/hire” 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 the need for approval from the other party.

The staff in a JV is more likely to have a “project” approach. They will 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 functional leader (e.g. engineering, sourcing, etc.) As a consequence, unfortunately, they may think less “project”.

4. Sharing of risks

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

In a consortium, the risks allocation follows the scope of works.

For example, a consortium partner may be responsible for the supply of equipment 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 influences the overall performances of the project in an interdependent way. In that case, precise allocation rules of the performance LDs have to be established in the consortium agreement.

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

Do you need help with setting-up a consortium agreement? Are you looking for a third party neutral between the consortium partners? Or just for advice? Don’t hesitate to contact Jan Bouckaert at info@afitac.com

5. Sharing of profit & loss

By now, 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 stake in the JV.

Within a consortium, 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 without having to compensate.

6. Sharing of costs

Due to the JV structure, the JV assumes all the costs. Therefore, the parties automatically share the costs.

In a Consortium, parties can agree to have some joint costs (e.g. for insurance) and share these in accordance with their proportionate share. However, for fiscal clarity due to the need to keep the parties “at arm’s length”, 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 the leadership costs (and establishes its price accordingly). This avoids invoicing between the consortium partners, which would not be good for fiscal clarity regarding separation of profit & loss.

7. Price determination

The JV partners decide the offer price jointly. 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, the parties often realize that the result is not competitive. This is especially true when they perceive risks on their partner’s scope and decide to create provision for it. Then, they start pushing each other to lower the price and increase the probability of award . But they only have soft power to influence the other partner(s).

8. Decision power

In a JV, the nominated project director can act with 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 present “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, that only to preserve rights for the consortium or to avoid imminent danger or damage. This happens, for example, in 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 its partner is absent. Agreeing on the spot would put the leader in breach of the consortium agreement. This will result in further dispute within the consortium and may backfire to the employer.

9. 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.

10. 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 its 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. The money will become available quicker to the parties without time lost with additional bank transfers.

11. 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 is 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”

12. 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. Without these, a JV set-up could be far more risky for the employer in case the JV entity 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 on this point the situation is the same for both solutions!

Conclusions

From an employer’s point of view, there may not be a big difference between a JV and a consortium. Yet, the way contractors operate is completely different for both solutions. It is important for both employers and contractors to understand these differences. For employers, this improves understanding the behavior of contractors. For the contracting entities, each and every aspect of their relationship depends on the chosen solutions: price, margin, scope, liquidated damages, invoicing etc.

Quite often, the best choice can be derived 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 presume high risks on the partner’s scope and want to be isolated from these. 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.

About AfiTaC

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