What is the Purpose of Construction Partnership Agreements?

Small to midsize construction companies can face certain challenges, such as cash flow and staffing, that larger firms typically do not.  Generally speaking, larger firms can more easily hire contractors, technicians, and managers mostly because they have the assets to do so, as well as a steady stream of new business to keep the new employees busy and profitable.  

To address this, as well as the challenge of having to make most of the major business decisions on their own, smaller construction firms often turn to partnership and collaborative agreements.

Here are some things to know about Construction Partnership Agreements:

Construction partnering is a way for contractors to maintain or grow their business or to solve a number of other challenges, including financial concerns and resolving disputes. 

Used in the architecture, engineering and construction industry, this type of business partnering has been used both in the United States and elsewhere since the early 1980s as a method to improve productivity and reduce litigation. 

For many contractors, the benefits of such business partnership may include:  

  • More administrative and business resources
  • Access to wider construction knowledge
  • Individual overhead and cost reduction
  • Increased efficiency
  • Increase in new leads
  • Financial stability and growth

However, in addition to many benefits, there are also pitfalls of this type of partnership that should not be overlooked.

The most common mistake made by contractors is entering into a partnership without a formal and comprehensive written partnership agreement, and the majority of disputes that arise are due to not having a formal agreement, or the agreement not addressing potential points of contention between all parties involved.

Before forming an official partnership, all parties involved should clearly express and address their expectations of each other and their specific goals.  Transparency is key to creating a good partnership and a strong business relationship, and each contractor should have a good understanding of what each party is bringing to the table and what each role involves.

Rather than joining forces in a partnership, many contractors prefer to collaborate with their colleagues or other firms in their field – efforts that also must be clearly detailed in writing from the initial meetings, all parties stating their expectations and limitations.

While there may not be financial liability concerns, damage to one’s reputation and image, as well as general liability, is always a concern.  This makes it critical to establish each party’s workload and the amount of credit that each should expect to take for the project.

Regardless of the size or impact of the partnership or collaboration, a written agreement should be prepared, so each party fully understands rights, obligations and limitations.

The purpose of Construction Partnership Agreement is to have the builder, contractors, subcontractors, and all union trades, if applicable, to agree to work together on an individual project; to ensure the most efficient work between management and labor, and an improved communication by developing mutually agreed upon project and partnership success goals and by monitoring the achievement of these goals during the project.  It also guarantees: the most qualified and skilled labor in the area, no work stoppages and no strikes on the construction project, reduced project costs and schedules, elimination of change orders and claims,

The construction partnering team will also develop an agreed upon process for resolving disputes should they arise, called a dispute resolution ladder.

Most partnerships and/or collaborations, regardless of how successful, eventually come to an end, because a project gets completed, a partner retires/changes industry, or disputes arise.  An often-overlooked pitfall of a partnership or collaboration is entering into one without a strategy in place for transitioning out of it.

Transitioning out of the partnership or collaboration can be relatively smooth as long as there is a written contract that clearly and explicitly addresses company ownership, client management, financial issues and associated matters.

Having a pre-negotiated exit strategy can simplify the exit of one partner, or dealing with challenges as they arise during the partnership.  Still, there are always going to be difficulties, especially when money is involved.  That is why it’s essential to have a business lawyer prepare the Construction Partnership Agreement, and an exit strategy or dissolution agreement.   Even if the parties decide to create their own Partnership Agreement or collaboration contract, it is wise having an attorney draft the dissolution provisions, as it can save big headaches and a significant amount of money in attorney’s fees in the long run.  

Partnerships and collaborative efforts absolutely have positive benefits for small to midsize construction firms, and it is important to focus on all of the variables when embarking on such a venture.  

An experienced business attorney can provide support with proper preparation and planning, drafting, and writing legal agreements and contracts, and help protect you in case of a dispute.

Having legal counsel on your side allows you to focus on other aspects of your business.

Take steps to ensure all processes are legally binding and defined in solid, thorough agreements by choosing a reputable and experienced business law attorney.

At Levin Law Group, our proficient business lawyers are well equipped to assist you with business laws and customs and provide support with legal challenges when planning, structuring, and conducting business transactions.

Contact our business law attorneys today for a free consultation: (800) 517-5240.