By Keiter CPAs
The Advantages and Disadvantages of Joint Ventures in Construction
Investing in a joint venture with another contractor can be a very attractive method to take on larger, more profitable jobs while effectively managing risk. A joint venture is organized as a separate entity and can either be created to bid on a singular project or to function with an indefinite life.
For the contractor, investing in a joint venture has certain advantages and disadvantages.
Joint ventures allow multiple companies to pool their resources to assist with funding a larger project or obtaining more capital from a lender
- Risk mitigation
As the number of investors in the joint venture increases, risk is spread evenly across the participants
- Loss of control
The contractor will have to share decision making responsibilities and financial information with its partners
- Increased record-keeping responsibilities
The contractor is required to keep separate records for the joint venture, as it is a separate entity outside of the contractor’s corporate structure. The firm that bears this responsibility will have to devote additional resources to accounting and record-keeping.
Depending on the structure and the contractor’s ability to influence the operations of the joint venture, a contractor can have different options for reporting its investment in its own financial statements.
Generally, the following accounting methods are available for reporting in the contractor’s financial statements:
- Cost method
Normally used when the contractor has less than a 20 percent interest in the venture.
- Consolidation method
Generally required when the contractor owns greater than 50 percent interest in the venture and can exercise influence over the venture.
- Equity method
Generally required when the contractor owns between 20 percent and 50 percent of the venture.
For more information on whether a joint venture is a profitable endeavor for your construction company or on how to account for such ventures, please contact your Keiter representative or one of Keiter’s Real Estate and Construction Industry team members. Contact us. 804.747.0000
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.