Does your project need a consortium?

Risk Management

Does your project need a consortium?
Does your project need a consortium?

Consortiums are not right for every project. They are however a useful contractual arrangement for delivering risky engineering projects. But they bring their own unique risks and a considerable management challenge. The consortium approach to project delivery is chosen because of the desire to share the risks inherent in that project as evenly as possible. In this regard consortium agreements are sharply different in concept to subcontracts. Most legal systems view consortia as partnerships subject to the laws in the current jurisdiction governing the contract. A consortium is like establishing a temporary business without the formal structure or tax liabilities – a business that is governed by the rules laid down in a contract or “consortium agreement”.

The advantages of forming a consortium are as follows:

Ease of formation
No formal procedure must be followed though most consortia are formed in writing by the execution of a consortium agreement. In addition, no capital is required to create the consortium.

Members of the consortium can change their contractual agreement at anytime to suite changed circumstances.

Ease of Termination
Consortia can be set to expire on a given date or on the occurrence of certain events without the formal requirements needed in the case of the dissolution of a corporation.

Tax Transparency
The consortium is not directly subject to taxation but the individual members are.

Some of the members of a consortium may choose to be “undisclosed” parties in dealings with third parties.

The cost of running a contractual joint venture is generally lower than running a joint venture company.

The disadvantages of forming a consortium are as follows:

It is difficult for a consortium member to restrict or limit its liability. Members may even become liable to third parties for the non-performance of other members of the consortium or the debts of such members incurred in undertaking the common project.

External Relationships and Finding
Third parties often find it difficult to enter into contract with a non-legal entity like a consortium. Because it is a non-legal entity funding is also normally only available to the individual members and not the consortium itself.

Lack of Permanent Structure
The lack of a permanent structure makes it difficult for a consortium to establish long-term business relationships with third parties. In addition, the lack of permanence means the consortium agreement is a crucial document and not easy to draft. It must be clear on the rights and obligations of the parties, which need to be focused firmly on the purpose of the consortium.
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