429: The Challenges Of Construction Business Partnership

This Podcast Is Episode Number 429, And It's About The Challenges Of Construction Business Partnership

Randalism: A Partnership is the only ship designed to sink.

However, we understand your preference, so I would like to talk about it in this blog post.

Joint ventures are a bit like change orders. They can be an incredible opportunity to make or lose much money very quickly. Almost as quick as betting money on a roulette wheel in a casino.

Joint Ventures have their own accounting rules. The devil is in the details. How costs and profits are shared among the participants depends on how the joint venture is structured and the terms of the agreement.

Contractors with annual sales of less than $10,000,000 often get together to work on a specific project. They find a friendly competitor to supply labor and equipment for a percentage of the job, hourly fee, or a flat number. This could technically be a "Joint Venture"; however, the time and scope are generally short and sweet. For example, a concrete contractor may have a large project requiring more finishers than on staff.

For many business owners, partnerships are an ideal way to run a business. Operating a company with a partner means you don't have to make all the decisions independently. It means you have someone there with you to help you carry the burden and share ideas with. That can be a great thing when it lasts.

Unfortunately, many construction business partnerships fail. Although they fall for various reasons, some main factors contribute to a business partnership breakup. Here are three reasons business partners break up and steps you can take to prevent it from happening to you.

1. Unequal contributions

All partnerships go through periods where one person contributes—their time, money, energy, or other resources—less than the others. That's normal. When it happens over a prolonged period or becomes a pattern, resentment can set in, and the other partners can begin to feel taken for granted.

In some cases, a disparity in contributions is natural. However, these situations require a conversation to ensure that the inequality is addressed and made up for in other ways. For example, if one of the partners has a lot more money or time to invest. If one person has more money to contribute, can the other make it up by contributing more time? If one partner is in a stressful period—maybe they need to step back for a few months due to health issues—can they pick up the slack later so the other partner can take some time off?

Make sure this discussion involves quantifiable amounts. You can't measure "work extra," but you can count "work an extra 6 hours a week for three months."

Unequal contributions can be addressed and managed, but all partners need to talk about the situation and develop a reasonable and realistic plan for ensuring the disparity doesn't become an insurmountable problem.

2. Not hiring help

Partnerships run into trouble when the people involved think they can handle every issue that comes their way, even if it falls outside their area of expertise. It doesn't matter how many people are involved in the partnership; if none of them are good with numbers, none should be doing the accounting.

When people take on too many activities outside their expertise, problems arise. Mistakes get made, and people get blamed. Relationships can sour.

Discuss with your partners your areas of expertise and activities that you aren't comfortable doing. Any tasks that no one has expertise in should be given to a professional so that each of you can focus on the areas you're good at and comfortable in.

3. Differing visions

Business partners should have a shared vision for the company to work towards the same goals. It's okay for partners to have slightly different views on achieving those goals, but overall the vision should be aligned.

Problems can take hold when partners have profoundly different visions for the company and meet their goals.

Ensuring a shared vision is an important step. To do so:

Make sure your company has a formal, written strategic plan. Work with your partners to write and review the plan periodically. Ensure everyone remains committed to the same vision and address any shifts in perspective that may have occurred.

If you're about to start a business partnership, discuss with your partners why they want to run a construction business, their vision for the company, and their long-term goals. Make sure everyone is at least somewhat aligned.

Final thoughts

Business partnerships can be advantageous, but they also have the potential for issues. Open communication about your ability to contribute, your skill sets, and your vision will help your partnership stay on track and prevent a breakup.   Avoid errors, leave nothing to chance. Be sure you and the other party agree on how the income and expenses will be dealt with in your construction accounting systems before starting work. Implement processes and procedures to ensure the venture's activities are appropriately documented.

About The Author:

Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on how to manage the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com