Design Collaboration: Joint Ventures & Beyond

David A. Ericksen, Esq.

Severson & Werson April 23, 2015

To Joint Ventures & Beyond! - Flying higher, farther, better together

Or crash & burn . . .

Dreams & Realities

“A joint venture represents the optimism of two firms that they can unite to achieve marketplace goals that neither could achieve alone. Some joint ventures work, some do not.”

- Forbes, 11/26/2013

Our goal today is to build a structure for strategic success in design collaboration and avoid the failures.

A Tale of Two Projects: De Young Museum - Seattle’s Big Bertha

A Tale of Two Projects: De Young Museum - Seattle’s Big Bertha

-Int’l Design JV

-Heavily Political

-$125M Construction

-Completed On Time & On Budget

-AIA Civic Achievement Award

-Int’l Design JV

-Heavily Political

-$4.25B Construction

-3 ½ year delay

-$190M “repair/rescue”

-ENR – 2014 Worst Projects

We will see . . .

Everyday Design-Related JVs are Succeeding on Projects Large & Small

K-12 School District

Approximately 25,000 Combined Students

JV of Architect and Construction Manager Provide District Wide Site/Facilities Programming, Design, and Project Management

Renewed for two five year terms

No claims

Profits 30% above typical with lower overhead

Related Side Tracks

— Design-Build

— Builder side

— Public Private Partnerships (P3)

— Integrated Project Delivery

Agenda & Learning Objectives

Why?

- Objectives & Opportunities

Who?

- Picking the Right Team

What?

- Structure, Management, Decisions

How?

- Finance, Insurance, Contracting

Four Stages of Critical Impact - Sillars Study (2003)

1. Whether to Team/Joint Venture

2. Selecting a Partner/Team

3. Developing the Joint Venture Agreement

4. Operating the Joint Venture

Seven Steps to “Making Joint Ventures a Strategic Success”

1. Identify strategic & logic drivers

2. Evaluate member value & strengths

3. Construct an effective operating structure

4. Define the business model

5. Create economic system favorable to all

6. Pursue “win-win” within boundaries & limits

7. Shake hands and lock arms - Business Strategy Review, London Bus. School (’13)

Why: Objectives & Opportunities

Drivers Toward Collaboration Opportunities:

- “The Great Recession”

- Lean staffing

- Limited resources

- Technology in communication & design

- Reduced barriers to participation

- Collective Expertise & Qualifications

- Specialization

- Client demand

Why?: Objectives & Opportunities

“Clients of the A/E/C industry are finding themselves required to react to a dynamically changing world. The construction industry itself must react in kind. [Experts have] recognized the emergence of flexible A/E/C industry firms that can react to the changing needs of their clients. Further, emerging foreign markets create opportunity for U.S. firms to export their strengths overseas through venturing with local partners.”

- David N. Sillars, Ph.D, Oregon State Univ.

Why: Objectives & Opportunities - Sectors & Projects (ENR Study)

— 2/3 of joint venture opportunities are public sector

— Project Types — 46% General Building

— 18% Transportation

— 16% Water/Sewer/Wastewater

— 9% Industrial/Petroleum

— 6% Manufacturing

— 4% Hazardous Waste

— 2% Power

Why Not: Warnings & Risks

— ALL Members of the Joint Venture are legally and financially responsible for the performance of the ENTIRE Joint Venture

— Most joint ventures are temporary, one-time enterprises

— Loss (or dilution) of intellection and human capital and resources

— Administrative redundancy and inefficiency

Why: Objectives & Opportunities - A Checklist for Go/No Go

— Significant increased likelihood of “winning” project

— Significant increased likelihood of “success” on project

— Project may be delivered (more) efficiently and effectively on a team basis

— Project experience will leave firm “better” for the experience

Who: Picking the Team Criteria & Objectives

— With the end in mind

— Is it a single, temporary, focused venture?

— Is it a long term strategic alliance of collaboration?

— It is a team

— Will it be the “best team” or “team of the best”?

Who: Picking the Team - A Checklist for Evaluation

— Familiarity & History with Partner

— Financial Strength & Stability

— Flexibility

— Expertise & Qualifications

— Capacity within Expertise & Geography

— Technical Compatibility

— Political/Client Connections

— Cultural & Trust Match

Who: Picking the Team - A Cautionary Tale

Often partners or team members will be attractive due to a advantageous status or qualification

That should NEVER be the driving basis for team selection

- Driving factors should be value & capability

It should only be:

- An entry criteria or

- A tiebreaker between equally qualified options

Who: Picking the Team/Teammate

In the end it is about a relationship:

- Maybe short term

- Maybe long term

Always it should be: a 1) trustworthy, 2) effective, 3) efficient, and 4) cultural fit

What: Organization & Structure - What the Industry Does as JV

ENR Study Data On Size of JV:

— Two Member JV– 74%

— Three Member JV– 16%

— Four Member JV– 10%

ENR Study Data on Percentages of Design-Involved JVs”

— Design Firm Only- 63%

— Design & Contractor- 37%

What is a Joint Venture?

A Joint Venture takes one of two forms:

- A formally created entity structured as a corporation, LLC, LLP, or similar entity

- A formal or de facto general partnership

From a liability standpoint, there are great advantages to a limited liability entity format if the contract is in that entity name alone.

What: Organization & Structure - Joint Venture Structures

Side By Side

- Task by Task or All In

Sequential

Designer Of Record

What: Organization & Structure - JV Alternates

Multi-Party (IPD?) Prime-Sub (Traditional)

Industry Form Agreements

AIA C101 Joint Venture Agreement (1993)

EJCDC E-580TA – Teaming Agreement (2011)

EJCDC E-580JV – Joint Venture Agreement (2011)

AGC ConsensusDocs 299 Joint Venture LLC Agreement (2013)

Small Business Administration

What: Organization & Structure - Agreement Structures & Options

— Each Undertaking Includes Two Phases:

— Project Pursuit

— Project Delivery

— Two Models of Relationship Contracting

— Single Undertaking for a Particular Project

• More common

— Ongoing Strategic Alliance

• Greater efficiency & value, less risk

What: Organization & Structure - Perils of Pursuit Without a Plan

So you won the project, now what?

— Contracts

— Funding

— Work Distribution

— Staffing

— Insurance

— Profits/Losses

What: Organization & Structure - Pursuit (a.k.a. Teaming) Agreement

Necessary Elements

- Confidentiality & Non-Disclosure

- Financial + Intellectual Property

- Exclusivity (or not)

- Schedule & Work Plan for Pursuit

- Expenses + Effort/Time

- Duration – Termination

- Memorandum of Plan for Performance if Selected

- Non-Competition or Non-Poaching

What: Organization & Structure - Project Delivery Agreement

Necessary Elements – Performance Side

— Allocation of Service Obligations

• By Task, Phase, Time, or Priority

• Correlated to Expense/Profit Split

— Shared or One-party Leadership

— Management & Decision Making Protocol

• Especially for Impasse Resolution

— Resource Commitment

• Financial, Technology, Staffing, Location

— Communication Protocol– Client, Subconsultants, Others

— Authority for Amendment to Client Agreement

What: Organization & Structure - Project Delivery Agreement

Necessary Elements – Business Side

— Accounting

— Internal Indemnity & “Joint” Defense Consistent with Roles/Tasks

— Insurance Consistent with Prime Agreement (min. 2/3+ of prime contract requirement)

— Authority for Upstream & Downstream Contracts

— Dispute Resolution

— Termination

— Project/Relationship Closeout

— Marketing Representations

What: Organization & Structure - Ongoing Agreement for Strategic Alliance

Combined Elements of Pursuit & Performance Plus:

- Right of First Refusal or Optional Presentation

- Geographic, Value, Subject Matter Parameters

- Fixed Duration Plus Renewal

- Termination Criteria & Process

- Residual Rights

What: Organization & Structure - Building Block: Confidentiality

The Parties may exchange (orally, visually, electronically, or in hard copy) Confidential Information as required to perform the tasks and obligations. Neither Party shall use the other Party’s Confidential Information for any purpose not expressly related to the performance of this Agreement. The Parties shall not release or disclose the Confidential Information to any other party except as authorized in writing or required by law.

What: Organization & Structure - Building Block: Allocations

The Parties have established a desired allocation of responsibility for the services as well as the associated expenses, revenues, and income from the services. The Parties shall cooperate as set forth by that desired allocation and in good faith such that the ultimate allocations shall generally conform to the desired allocation measured for the services as a whole.

What: Organization & Structure - Building Block: Impasse

Service related decisions and directions shall be made in the first instance by the designated Project Manager(s). Any Member may challenge such decision and direction by reference to the Project Management Committee for conference and resolution within ten business days. Any issue not resolved unanimously by the Project Management Committee shall be referred to the Executive Committee where it shall be resolved by majority action (including the use of an outside member as necessary).

What: Organization & Structure - Building Block: Indemnity

Each Party shall indemnify and hold harmless, without the obligation to defend except in the case of sole negligence, the other from any and all claims, liabilities, losses, fines, penalties, and costs related to the Project, to the extent arising out of such Party’s negligent acts, errors, or omissions or intentional wrongdoing.

Where any claim or allegation arises from or relates to a Party’s scope of work, acts, errors, omissions, or communications, such Party shall assume the responsibility to evaluate, defend, and respond to such claim or allegation on behalf of the Parties.

What: Organization & Structure - Building Block: Insurance

Key is coordination with indemnity and prime.

All staff to be separately employed with separate workers’ compensation.

General and professional liability coverage necessary to jointly or individually cover (or exceed) prime obligations as well as coverage for mutual obligations.

What: Organization & Structure - Building Block: Insurance

Policy linkage to joint venture participation

- Work with Agent

- Work with Carrier

Consider:

- Project Policy

- Project Specific Excess

- JV Specific Excess

Administration: Subconsultant and Contractor Policy Requirement & Confirmation & AI Status Critical

What: Organization & Structure - Building Block: Non-Poaching

Neither Party may take any of the following actions within 12 months of the completion of the later of the Agreement or the Services without the express written consent of the other Party:

- Solicit or accept a retention from the Project Owner/Client or its affiliates;

- Accept work on any project or service jointly proposed on by the Parties; or

- Hire or employ an employee of the other party whether as an employee, temporary worker, or independent contractor.

How: Resources, Operations, & Delivery - Operational Checklist

Service Management & Leadership

— Accounting

— Communications & Meetings • Internal

• External – Client/Subconsultants/Contractors

— Systems Compatibility & Maintenance

— Record Keeping • Team

• Project

• Archiving

How: Resources, Operations, & Delivery - Leadership/Management

Sequential Services (and Leadership)

- Protocols for Clear Handoff in Responsibility and Information

Simultaneous Services

- Avoid coextensive “co-leads”

- Insist on Regular Meetings w/ Agenda

- Consider separate leads for service and financial

How: Resources, Operations, & Delivery - Closeout

1. Closeout and Confirm Client Completion - Final Invoice & Correspondence

- No later than 45 days after “substantial completion”

2. De-clutter & Archive Records with Jt. Access - Single site. Pursuant to written procedure.

- Goal: within 30 days of final invoice. No more than 90.

3. Final Accounting & (Potential) Dissolution - Reduce to Final Accounting with Agreement & Distribute Funds

- Consider retentions for specific issues

- Close accounts as appropriate

- Dissolve entity if not necessary for limited liability

- Within 90 days

Questions & Answers Thank You!

David A. Ericksen, Esq.

Severson & Werson

(415) 677-5637

dae@severson.com

www.severson.com