🤝 Joint Venture Accounting
Joint ventures are common on large projects. Understanding JV accounting protects your interests and keeps you compliant.
Key Principle
A JV is a separate entity with separate books. Even if it's "just" two contractors working together, treat it with the same rigor as your own company.
Why Joint Ventures?
Common Reasons to JV
- Project too large for one contractor's bonding
- Geographic expansion - Partner with local expertise
- Capability gap - Partner brings skills you lack
- Risk sharing - Split large project risk
- Prequalification requirements - Meet owner's requirements together
- Relationship building - Develop a strategic partner
Types of JV Structures
Incorporated JV (LLC/Corp)
- Separate legal entity
- Separate EIN
- Separate bank accounts
- Required for large/long projects
- Clearest for accounting
Contractual JV (Unincorporated)
- Agreement between parties
- May or may not have separate EIN
- Often "sponsor" handles banking
- Common for smaller projects
- Can be accounting nightmare
JV Accounting Basics
Setting Up the JV
From day one:
- Separate bank account(s)
- Separate accounting records
- Defined chart of accounts
- Clear cost allocation methodology
- Monthly financial statements
- Defined approval processes
Who Does the Accounting?
Options:
- One partner serves as "Administrative Partner"
- Third-party accountant
- Shared responsibility (rarely works)
Admin Partner typically:
- Maintains books
- Processes payables
- Handles billing
- Produces financial statements
- Files tax returns
Compensation: Usually a fee (% of contract or fixed) for administrative burden
Financial Statements
The JV should produce:
- Monthly income statement
- Monthly balance sheet
- Job cost reports
- Cash flow projections
- WIP schedule
Each partner receives:
- Copy of JV financials
- Their proportionate share for their books
- Capital account statement
Accounting for JV on Your Books
Proportionate Consolidation vs. Equity Method
Proportionate Consolidation (common in construction):
- Include your % of each line item
- Revenue: Your share of JV revenue
- Costs: Your share of JV costs
- Assets/Liabilities: Your share
Equity Method:
- Single line on income statement
- Single line on balance sheet
- Investment account + share of income
Which to use: Check your accounting policy and bonding company preference. Most sureties prefer proportionate consolidation.
Example: 50/50 JV
JV Income Statement:
| Item | JV Total | Your 50% |
|---|---|---|
| Revenue | $10,000,000 | $5,000,000 |
| Direct Costs | ($8,000,000) | ($4,000,000) |
| Gross Profit | $2,000,000 | $1,000,000 |
| G&A | ($200,000) | ($100,000) |
| Net Income | $1,800,000 | $900,000 |
Your books show: $5M revenue, $4.1M costs, $900K profit
Capital Accounts
Each partner has a capital account tracking:
- Initial contributions
- Additional contributions
- Share of profits/losses
- Distributions received
- Current balance
Example:
Partner A Capital Account:
Opening balance: $500,000
Share of income (50%): $900,000
Distributions: ($600,000)
Ending balance: $800,000
Cash Management
Contributions
When JV needs cash:
- Capital call to partners
- Pro-rata based on ownership %
- Document in writing
- Track in capital accounts
Distributions
When JV has excess cash:
- Distribute per agreement
- Usually pro-rata
- After reserves for retention/warranty
- Document in writing
Cash Flow Timing
Challenge: JV cash flow may not align with your cash flow
Manage by:
- Reviewing JV cash projections
- Planning for capital calls
- Monitoring JV receivables
- Understanding JV payment terms
Tax Considerations
JV as Partnership (Most Common)
- JV files Form 1065 (Partnership return)
- Issues K-1 to each partner
- Each partner reports their share
- No entity-level tax
Your Tax Basis
Track your outside basis:
Beginning basis
+ Contributions
+ Share of income
- Distributions
- Share of losses
= Ending basis
Important: Can't deduct losses exceeding basis
Self-Employment Tax
JV income may be subject to self-employment tax depending on your involvement level.
Key JV Agreement Terms
Financial Terms to Negotiate
| Term | What to Clarify |
|---|---|
| Ownership % | Profit/loss split, may differ from work split |
| Capital contributions | Initial and ongoing requirements |
| Distribution policy | When and how much |
| Administrative fee | Compensation for admin partner |
| Cost allocation | How shared costs are split |
| Approval thresholds | What requires joint approval |
| Banking | Signature requirements |
| Financial reporting | Frequency and format |
| Audit rights | Access to books |
Management Terms
| Term | What to Clarify |
|---|---|
| Managing Partner | Day-to-day control |
| Scope split | Who does what work |
| Equipment | Rental rates to JV |
| Personnel | Billing rates for seconded staff |
| Subcontracts | Approval process |
| Change orders | Negotiation authority |
Common JV Problems
"My partner isn't paying their share"
Prevent by:
- Clear capital call procedures
- Defined timelines
- Default provisions in agreement
- Remedies for non-payment
"The admin partner's numbers don't match mine"
Prevent by:
- Monthly financial review meetings
- Audit rights in agreement
- Defined accounting policies
- Third-party review option
"We disagree on project decisions"
Prevent by:
- Clear decision authority
- Defined approval thresholds
- Dispute resolution process
- Executive escalation path
"JV has a loss - who covers it?"
Per agreement:
- Usually pro-rata
- Some agreements cap exposure
- May have "deficit restoration" requirements
- Get clear before signing
Reporting to Sureties
What Sureties Want to See
- JV financial statements
- Your capital account balance
- Your contingent liabilities
- Partner financial strength
- Project status
Impact on Bonding Capacity
- JV revenue may count toward your volume
- JV backlog affects your capacity
- Partner's credit matters
- Guarantees affect your balance sheet
Best Practices
Before the JV
- Due diligence on partner
- Review partner financials
- Clear JV agreement
- Defined accounting policies
- Surety approval
During the JV
- Monthly financial review
- Quarterly partner meetings
- Track capital accounts
- Monitor cash flow
- Document everything
At JV End
- Final accounting
- Distribute remaining cash
- Settle retentions
- Address warranty obligations
- Close out entity