THE BOTTOM LINE

Atlantic Coverage Corp.

EXCELLENCE IN SURETY BONDS

4th Qtr 2002 Volume 4, Issue 4

THE FACTS REGARDING JOINT VENTURES “Famous Quotes” “The smallest good deed is better than the grandest good intention.” -Duguet “I love deadlines. I like the whooshing sound they make as they fly by.” -Douglas Adams “Whenever ideas are shared, the result is always greater than the sum of the parts.” -Rich Willis “Make the most of yourself, for that is all there is of you.” -Ralph Waldo Emerson “Character is not made in a crisis—it is only exhibited. -Robert Freeman “No one can make you feel inferior without your consent.” -Eleanor Roosevelt            One of the more frequent conversations we have with our clients is about Joint Ventures (JV). A JV is normally considered to achieve financial goals that neither JV partner could achieve on its own. It enables contractors with different strengths to join forces.           Contractors are surprised to hear that most JVs seem to fail for one reason or another. There are no explanations that apply in all cases. It just seems that when you throw two entrepreneurial organizations into a partnership-type arrangement, personal, control and monetary conflicts typically arise. Failure of the JV does not necessarily mean that the original project responsible for the JV’s creation in the first place was not completed successfully. In most respects, failure is meant that the JV partners decide it best to separate once the project is completed.           Many times a JV is formed strictly to achieve some level of bonding. Of course, bonding limitations are always of significant concern on projects that require bonding, however, the most successful JVs seem to occur if one of the following objectives is the driving force behind the JV arrangement: An opportunity to venture into a new geographic territory; A vehicle to spread risk; Access to additional financial strength, resources, and administrative and management expertise; A means to gain experience on larger projects;           An opportunity to work with an organization that might be a good merger or acquisition candidate ( a dating period, so to speak, prior to the marriage).           Each partner must determine what he/she is willing and able to contribute to the JV. This includes up-front capital, resources, skill, etc. Pre-bid JV Agreements that outline each partners’ intentions should be executed. Unfortunately, we have seen the damages that can occur if such an agreement does not exist. Pre-bid JV    agreements are required by bonding companies for this reason. Both JV partners should be in agreement as to each others responsibilities PRIOR to going after work. This will eliminate or substantially decrease any disagreements once a project begins.           The most important issue that needs to be understood is that each partner assumes complete responsibility for the entire project. This includes the payment of all project obligations on the JV project, not just your specific role in the JV. This is referred to as “joint and several liability”. Again, the JV is an entity in its own right. If one JV partner becomes financially insolvent, the bonding company will expect the remaining partner to be responsible for the entire project. It will not offer any assistance on the project unless the project itself is going to be defaulted.           Consider an example where A and B enter into a JV on a bonded project, each with their own bonding company. If A were unable to meet its obligations, A’s Bonding Company would not remedy the situation. B would be responsible to meet A’s obligations as well as their own. If B is unsuccessful, then the bonding companies would come into the picture. If there is indeed a loss to the bonding companies, the bonding companies share in this loss in the same percentages as their respective clients participated in the JV. Then, of course, the bonding companies would typically attempt to recoup their losses from the JV partners. If A had no financial resources, the bonding companies could turn to B for full indemnification. To summarize, a JV partner must realize that they may share in a percentage of the upside, but may assume 100% of the downside.           While the actual legal form of the JV may vary, for all intent and purposes, it is a partnership. Like any partnership, trust and effective communication must be present if the JV is to achieve its goals. For many projects, the JV will last two, three, four years or more from bid to project close-out. - Continued on page 3...

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THE BOTTOM LINE

“Famous Quotes” *** “I have enough money to last the rest of my life, unless I buy something.” -Jackie Mason “There is scarcely an instance of a man who has made a fortune by speculation and kept it.” -Andrew Carnegie “Only those who dare to fail greatly can ever achieve greatly.” -Robert F. Kennedy “Make a success of living by seeing the goal and aiming for it unswervingly.” -Cecil B. DeMille “The will to believe is perhaps the most powerful but certainly the most dangerous human attribute.” -Dero Daunders “Don’t be run so much by what you lack as by what you have already achieved.” -Marcus Aurelius “No matter how hard the past, you can always begin again today.” -Buddha The Importance of Risk Management           In today’s world, owners and risk managers must take the following factors into consideration when evaluating acceptable amount of risks:      Insurance / Surety      Project Risks      Safety / Loss Control      Claims Management We will briefly discuss each factor, since all of these factor should be weighed equally. Insurance / Surety           It is critical for owners and risk managers to understand their company’s exposures and responses to many kinds of potential losses. To adequately protect your firm, you should educate yourself about all insurance products (standard and non-traditional) that mitigate the risk of loss.           Many contractors do not take the time to understand their insurance coverage. Now more than ever, you should nurture relationships with your agent in order to get the most from your professional relationship, in terms of:      Service      Information / Advice      Competitive premiums / Fees      Help in reducing total cost of risk Your insurance agent should be able to help you understand your policy and to help you either minimize your insurance costs and/or increase your firm’s coverage. Project Risk           Educate your estimating staff to ensure that all project specific insurance requirements are met with competitive and complete coverages. With insurance rates and surety rates on the rise, is your company adding these increases to your price at the time of the bid? While some may say that these questions aren’t necessary, I guarantee you that many owners are not reviewing their estimators numbers and/or the estimators do not know of the increases in the both the insurance and surety rates. Safety / Loss Control           Everyone knows that good loss controls translate into lower insurance prices and competitive bidding advantages. We recommend that upper management review their policy for loss control and work on an effective safety / loss control program. One way of doing this is by communicating your goals to all employees. By getting all of your employees involved in the program, you will find that it will be more readily accepted and will cost you less to implement.           Every company should promote safety by encouraging or establishing Supervisor training programs that include safety training. This training program will help everyone understand the importance of effective loss control, up and down the contractual food chain. Claims Management           Unfortunately, no matter what your company does; claims will happen from time to time. However, the way your company deals with a claim could help to reduce the exposure and keep costs down. Here are a few suggestions that you should try to establish in your firm:      Establish an effective claims reporting systems      Establish an incident investigation team      Review insurance company’s loss runs monthly      Communicate with internal and external counsel on the status of any open claims           In today’s market, insurance is becoming harder and harder to obtain. When you renew your insurance, you can expect significant price increases due to the economy. With this in mind, it is extremely important for all of us to evaluate our companies’ policy for reviewing risks. Remember knowledge is power, and power equals money in your pocket. THE FACTS REGARDING JOINT VENTURES This relationship should not be taken lightly nor entered into haphazardly. Please feel free to contact our offices with any questions or sample agreements that may be needed.           Some interesting facts you may not know about JVs. According to the 1990 Construction Industry Financial Survey published by the Construction Financial Management Association 44% of contractors included in the survey had participated at least once in a JV. There are various ways to form JVs, from Corporations to Partnerships. JVs can be open (everyone knows the partners of the JV) or Silent (no one knows about the JV but the JV partners). Percentages of involvement (50/50; 70/30; etc) between the JV partners can also vary.

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