What is a Turnkey Project?

What is a Turnkey Project?

Turnkey project is basically a contract under which a firm agrees to completely design, construct and equip a manufacturing/ business/ service facility and turn over the project to the buyer when it is ready for operation for a fixed amount or remuneration. The supplier takes on complete responsibility for the adherence to delivery dates, the scope and the cost of the entire subject of delivery to the customer.

The word ‘Turnkey’ is a reference to the fact that the customer, upon receiving the product, just needs to turn the ignition key to make it operational, or that the key just needs to be turned over to the customer.

Phases of a turnkey project

  • Contract Preparation Phase, which includes preparation of documents for inviting the tenders, comparison and selection of offers, and development of overall project specifications with required technical conditions by the customer
  • Execution Phase, which includes start of the work, progressive development of the work, its full implementation, operation and acceptance by the client.

Benefits

  • No multiple contracts and payments. Client only has to pay the contractor for all the services he provides.
  • Turnkey manufacturers can easily provide discounts on their services when design, manufacturing and installation are all handled by a single provider, hence reducing the overall cost of the project.
  • High quality product can be obtained when a single company handles the project right from the concept to its completion. Expert and experienced teams taking up individual tasks like design, manufacturing and installation can ensure high quality product for the client.
  • Single point of contact for all the kinds of communications, and a single contract for handing over the project to the client eases the management task on the client’s part.
  • Eliminationofextra expenses as the contractor works with a fixed price that is decided during the agreement phase.

Tips for choosing the correct contractor

  • Choose a company that gives efficient support from the start to handing over of the project.
  • Company should provide essential technical assistance and access to financing.
  • Company should possess a team of experts possessing the required skill-set to accomplish your task.
  • Choose a company that lays down transparent pricing system suiting your needs and budget.
  • Go for a company that provides long term support even after handing over the project to the client.
  • Make sure that the contract terms are well laid down, including details of every service that is to be provided by the contractor.

Components of a Turnkey Contract

Turnkey contracts include at least three components:

  • The design of the facility by the contractor. This does not exclude that certain aspects of the design are already defined in the contract or that the preparation of the design forms the object of a separate, preliminary contract. In any event, even where the contract is only for the construction of the facility, the contractor normally has to prepare the detailed design.
  • The technology component, i.e., patents, know-how, etc., in so far as it concerns the completed works, can be seen as incorporated already in the design. However, in certain cases the contractor uses the technology of their parties by virtue either of his own contractual arrangements or as requested by the employer or his engineer.
  • Supplies, construction and erection, form also part of contractor´s obligations. Even in the more restrictive definition of a turnkey contract, the contractor owns the construction of the complete facility ready to be operated. Nevertheless is not infrequent for the employer to require from the contractor the he retains specified subcontractor or to limit the choice to certain supplies. In this manner, the employer may wish to assure himself of the quality of certain components or negotiate directly the price of certain subcontractors.

Obligations of Employer and Contractor

Any turnkey contract contains a detailed description of the general obligations imposed on the purchaser (referred to as the “employer”) and the contractor.

The main obligations of the employer are:

  • Giving the contractor access to the site.
  • Assisting the contractor with obtaining licenses and permits.
  • Paying the contract price.

The contractor´s main obligations are:

  • To obtain the necessary permits and licenses.
  • To carry out the design of the works.
  • To provide the Employer with the required operation and maintenance manuals.
  • To provide the works on a turnkey basis and remedy defects in accordance with the contract.

Main Clauses of a Turnkey Contract

Turnkey contracts often seek to regulate in great detail all issues which possibly might arise between the parties. The main clauses of a turnkey contract are: design of the project, the construction site, time for completion, price and payments, performance guarantees and the law governing the contract.

Design of the project

In principle it is the contractor´s responsibility that the design of the project is complete, sufficient and adequate and assures the facility meets the contractually required performance guarantees. If one were to consider the design obligations as distinct from those of construction, the nature of these obligations and the question whether they have been performed properly might have to be determined independently of the quality and performance of the finally constructed plant.

The construction site

The choice if the site, access to it and frequently also the availability of utilities during the construction period, normally are an obligation of the employer. The contractor has to specify the corresponding requirements. Particularly difficult problems arise where an appropriate site cannot be found or where the site retained at the time when an appropriate site cannot be found or where the site retained at the time when the contract was concluded turns out to be unsuitable.

Time for completion

The contractor´s principal obligation is that of meeting the completion date or, if the installation is taken over in stages, the successive completion dates. However, where the construction program has become part of the contract, the purchaser may require that the contractor adheres to this program. One the one hand, this assures the purchaser that the progress of the works is sufficient in order to meet the completion date. On the other hand, the purchaser´s own production program and the co-ordination of the contract works with other work may require strict adherence by the contractor to his program.

Price and payments

The price for turnkey projects normally is a lump sum. While it is conceivable to express prices in a turnkey contract in the form of unit prices or by cost reimbursement, such arrangements seem to be rare. Nevertheless it is not infrequent the turnkey lump-sum contract contain a list of unit prices or prices for certain parts or components of the works. Such unit and partial prices then serve for the valuation of variations and possibly also for progress payments.

Where the works are of any importance, the contract provides for partial payments. In a case of lump-sum turnkey contracts, it is hardly possible to fix progress payments by reference to the measurement of quantities. These partial payments in these contracts normally are made on the basis of milestones such as dates of placing orders to suppliers, achievement of certain stages in the process of manufacturing, packing of equipment, shipment, arrival at site, etc.

Performance guarantees

It is the contractor´s obligations to meet these guarantees. Where his failure to do so is due to defects in approved design or variations ordered by the purchaser, the contractor is not relived of this obligation unless exoneration has been agreed, expressly or by implication. The performance guarantees undertaken by the contractor are based on certain assumptions with respect to the quality of raw materials used and the operating conditions such as climatic conditions, availability and regularity on supplies, etc.

The law governing the contract

This law determines the contractual rights and obligations of the parties, the interpretation of the contract and subject to some reservations, its formation and validity. The principle of party autonomy recognized for most types of contracts also applies to turnkey contracts.

Consequently, the parties are free to choose the law governing their contractual obligations, subject to certain restrictions resulting from rules of public policy. Such rules may relate to certain subject matters of the contracts (e.g., intellectual property rights) or to certain aspects of the transaction (e.g. rules on interest and rates, competition and antitrust, etc.).

The applicable law to dispute settlement procedures normally is the law of court or arbitration procedure at the place where the project takes place. It is determined independently. In some cases it can be the law of a country different from that whose law governs the contract itself.

In conclusion, a model of Turnkey Contract should be based on equilibrium of the rights and obligations between the employer and the contractor, and a balance risk allocations. Also, the Contract must provide a clear and compact structure that facilitates its administration. Finally, the contract should be suitable for use in civil and common law and other jurisdictions as arbitration courts.

Even during good economic times, a simple construction project can become a very frustrating experience for a business owner if they fail to choose the right contractor for the job. During tough economic times when the construction industry is in a downturn, choosing the right building professional for your project becomes even more critical. The following items should be considered when deciding who to hire to perform your building project:

  • Integrity and a good working relationship. Don’t depend on an airtight contract for a problem-free project. Your contractor should be someone with a good track record of integrity and who is able to maintain a close, solid relationship with the client through the proposal, planning and construction stages. It should be a contractor that you would be willing to hire on a “handshake” agreement. Trust is vital.
  • Referrals and references. Most contractors will provide references from past clients and architects with whom they’ve worked. It is very important to contact those references to understand the type of firm and people you are considering for your project. Do they have a long list of repeat clients? What is the builder’s reputation on service issues after the project is completed and the final payment has been made? Are they a firm that is determined to earn their clients’ referrals?
  • Consider experience. Not only how long a contractor has been in business, but the type of work they normally do. For example, it probably wouldn’t make sense to hire a contractor to build a medical clinic if their only experience is in constructing manufacturing facilities.
  • Financial stability. This could not be more important in tough times. Does the contractor have the financial strength to “weather the storm?” Check financial references like their bank and bonding companies. Obtain a certificate of insurance to ensure they are properly insured. You want to be certain you hire a contractor that will be around long after the project is complete.
  • Payment process. Find out what process they use for paying their subcontractors and vendors. How do they ensure the project owner that payments are being made and protect the owner from potential liens on the property? Ask around, as a contractor who habitually pays its vendors late will have that reputation.
  • Sustainability and energy efficiency. You may not necessarily be interested in building a LEED-certified green building, but most clients want to know that their building will be energy efficient, given the rising cost of energy. What is your builder’s experience in sustainable construction? Do they have a LEED Accredited Professional on staff?
  • Budget and schedule compliance. Find out what the builder’s track record is when it comes to staying within the building owner’s budget. A cheap price up front will do you no good if you are constantly hit with change orders to get what you really wanted, resulting in a project that goes over your budget. Also, ask how well the contractor does in getting projects completed on time. Remember the old saying, “Time is money.”