In Part One of this series, we looked at the fundamentals of joint ventures and why they arise in major project delivery. In Part Two, we turn to the two main JV structures used in construction and the key issues that should be addressed when forming either model.
The structure selected will shape how the relationship operates, how risks are managed and how the project is ultimately delivered.
Legally Incorporated Joint Ventures
A legally incorporated joint venture involves creating a new company jointly owned by the JV participants.
Contractor A and Contractor B become shareholders of a newly formed JV entity and contribute capital, staff or plant as agreed. The JV company usually has its own branding and governance framework and functions as a standalone business created for the project. Because the entity is separate, it (and its directors!) must comply with the Corporations Act and broader corporate obligations. This includes appointing directors, maintaining records, lodging ASIC reports and putting in place internal governance systems. The directors also take on additional fiduciary and legal responsibilities to the company that might not always be present in a contractual JV.
Incorporated JVs tend to be used for long-term, high-value or complex projects, or where parties intend to collaborate beyond a single engagement. By placing the project within a separate company, the participants can contain financial exposure and avoid placing the full burden of the project on their own balance sheets.
Advantages of an Incorporated JV
The main advantage is liability isolation. The JV company, not the shareholders, contracts with the principal, which generally confines risk to the JV entity. This offers comfort for projects involving significant design or financial exposure.
Incorporated JVs also provide clear and familiar governance. Decision-making occurs within a corporate structure (through directors, formal voting and documented procedures) which can reduce disputes and provide stability on longer projects.
Disadvantages of an Incorporated JV
The drawback is increased administrative effort.
Establishing and maintaining a company requires time and ongoing compliance. Incorporated JVs are also less flexible; adjusting shareholdings, governance arrangements or voting rights usually requires formal corporate steps. For short-term projects or fast-moving bidding processes, this rigidity can be a disadvantage.
Moreover, the closer relationship between parties and the obligations of directors to each other and the company sometimes feel to many organisations to be a bit “close for comfort”.
Contractual Joint Ventures
A contractual joint venture is an arrangement where the parties collaborate under a joint venture agreement (JVA) without forming a new legal entity.
Each participant continues operating under its own ABN and ACN and works together solely through the terms of the agreement. Contractual JVs can be assembled quickly, tailored specifically to the project scope and dissolved once the works are complete.
Some obtain a JV ABN for taxation purposes, but this does not create a separate legal entity.
This structure is overwhelmingly the most common in the construction industry, particularly for project-specific opportunities where flexibility, speed and tailored arrangements are essential.
Advantages of a Contractual JV
Contractual JVs offer speed and adaptability. Because no new company is created, the parties can focus on negotiating commercial terms rather than setting up corporate structures. The arrangement can be drafted to suit the exact needs of the project including how work is divided, how contributions are made and how profits and losses are shared.
A further benefit is that each party maintains its own identity while still presenting a unified project team. This allows contractors to take on larger work without diluting their brand presence.
Disadvantages of a Contractual JV
The primary disadvantage is that the parties are usually jointly and severally liable to the principal. If one party is unable to meet its obligations, the other may be required to cover the full liability. While the JVA can allocate responsibility internally, these arrangements do not restrict the principal’s rights. This is different from an incorporated JV, where risk can be quarantined to the JV entity (if the principal agrees to do so) and not extend directly to the underlying parties.
Contractual JVs also demand careful drafting. Because the agreement governs the entire relationship, any ambiguity around roles, contributions, liability or decision-making can create tension once delivery begins. Without care being taken, it is possible for a contractual JV to inadvertently become a “partnership”, which offers its own complexities and risks and generally should be avoided.
What Should Be Addressed in the JV Agreement?
Regardless of structure, the JV’s governing agreement is central to how the relationship functions. It should clearly identify the purpose of the JV and the project or projects it is intended to cover. Some JVs are created for a single engagement, while others remain on foot in case future opportunities arise.
Decision-making is one of the most important issues to resolve. The agreement should specify how decisions are made, whether through a management committee or another mechanism, and how voting rights are allocated. Without this clarity, disagreements can quickly escalate into delivery issues.
Liability allocation must also be addressed. Some JVs adopt a shared liability model; others require each participant to bear responsibility for its own acts or omissions through cross-indemnities. Contributions (whether capital, personnel, plant or intellectual property) should be detailed, along with how profits and losses will be distributed.
Other essential matters include confidentiality, insurance arrangements, licensing requirements, dispute resolution processes and how the JV will conclude.
Establishing a Clear Framework
The decision between an incorporated and contractual JV depends on the project’s complexity, value and risk profile. Whatever the structure, investing time upfront to document responsibilities, contributions, governance and liability is critical to ensuring the venture operates smoothly.
In Part 3, we turn to how JV works are delivered in practice, including Integrated Joint Ventures, Non-Integrated Joint Ventures and, more critically, who bears the risk when things go wrong.
