December 5, 2012

A future of consortia and joint ventures

Procurement Perspectives | Stephen Bauld

As we have seen, it is a general rule to have only one contractor (that is, only one person who has a direct contractual relationship with the municipality) in the organization of a construction project.

But, while this is the normal rule, it is not always the case. There are many instances where there will be more than one contractor.

In the case of a project where the municipality chooses to act as its own general contractor, the result is a project in which the municipality divides the work between a number of contractors.

By the same token, two or more contractors may choose to combine their efforts and undertake a project jointly.

There are two structures of organization being used.

First, they may choose to form a consortium. In the past, consortiums were rare in North America, and were more common in the Third World and in Europe.

Alternatively, they may form a joint venture.

Joint ventures are also becoming more common on large-dollar North American contracts.

The common feature of both the joint venture and the consortium is the pooling of the members special talents and resources for the purposes of a single project.

The major difference between these two ideas of organization is that under a consortium, the project is managed by a committee of consortium members.

Responsibility for the overall project is divided between the members of this committee, each of whom takes responsibility for a specific area.

This scheme of organization is unattractive to municipalities because it imposes a divided and complicated process of management on the project.

This arrangement may result in an uncoordinated approach to the execution of the work.

In a joint venture, the project is managed by a single member, called the sponsor, who has overall supervision of the construction of the project.

The other joint venture members provide their services and share in the profits. However, they are under the supervision of the sponsor, and it is he or she who performs the administrative and construction supervision functions of the general contractor.

If there is one feature of construction project organization which distinguishes it more from the method of organizing similar production contracts in other industries, it is indubitably the prevalence of the practice of subcontracting in the construction industry.

The term “project contractual structure” refers to the various ways in which the services of the contractor and the subcontractors can be engaged. The contractual structure of a typical building project is often described as a pyramid, with the municipality engaging the services of a single contractor, who stands at the apex of this pyramid.

The contractor will engage the services of a number of subcontractors (the “principal subcontractor”), who will stand below him at the next level of the pyramid.

Below them, several tiers of further subcontractors (or “tributary subcontractors”), material men and workers will fan out, in ever-increasing numbers at each contractual level. The method of organizing a building project may follow several general patterns and there are many variations on each of these. Each different type of contractual structure results in a different allocation of risk and responsibility for the various aspects of the project, between each of the various parties involved in its construction.

The persistent existence of subcontracting between firms at arm’s length to each other is an interesting phenomenon.

If there is a continuing need to employ the resources of other firms in order for a contractor to perform its obligations under the contracts which it assumes, one is tempted to suspect that the contractor has not achieved an economy of scale. In considering the combinations of firms that may engage in a particular project, one may wonder why there has been little effort to combine several firms into a single firm.

Stephen Bauld, Canada's leading expert on government procurement, is a member of the Daily Commercial News editorial advisory board. He can be reached at stephenbauld@bell.blackberry.net.

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