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
Tips for choosing the correct contractor
Components of a Turnkey Contract
Turnkey contracts include at least three components:
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:
The contractor´s main obligations are:
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.
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: