Turnkey Contracts are contracts that provide for the construction of a facility. Under a turnkey contract, the contractor is responsible for facility design and construction. The fundamental idea is that under the case of a Turnkey Contract the contractor shall offer the completed work to be used at the price agreed upon and at a predetermined date. In reality, the contractor would like to be involved in the project from beginning to end. The term is in conjunction with terms such as “package contract”, “design and build” or “design constructor”.In French the expression is”cle en mains,” in Spanish the expression llave en Mano, as well as schlusselffertig German. EPC Contracts also known as (Engineering, Procurement and Construction).
Components of a turnkey contract
Turnkey contracts require minimum three components:
The contractor will decide on the layout of the building. This does not entail, however, that the contract specifies any design features or that the design is the subject of a separate preliminary contract. Nevertheless, regardless of whether the contract just covers construction of the building the contractor must create the particular design.
The technological component, that is knowledge or patents. Given that it relates to the last task, one sees it already included into the design. Under the terms of his contract or in response to the needs of his employer or the engineer, the contractor occasionally uses the technologies of his partners.
The contractor also has responsibilities including materials, building and construction. Under less restricted terms of the turnkey agreement, the contractor owns the whole facility that is ready for operation. It is not unusual, though, for the company to ask the contractor to contract with a particular subcontractor or restrict the choice to a particular supply. In this regard, companies could wish to guarantee the quality of particular components or even negotiate directly the cost of particular subcontractors.
MAIN CLAUSES OF A TURNKEY CONTRACT
Usually, turnkey contracts are meant to control exactly any possible conflict between two parties. In turn, the most important terms in a turnkey agreement are the plan, construction site, completion timeline, cost and payment, guarantees for performance and the law controlling the contract.
The project design
Generally speaking, it is the contractor’s duty to make sure their project’s design completely meets the performance criterion mandated by contract and guarantees that the construction conforms with it. If one were to consider the design criteria as unique from those related with construction the particular nature of those obligations as well as the issue of whether they have been properly executed could have to be evaluated independently of the performance and quality of the final plant.
The construction site
Usually, the contractor is in charge of the choice of the site since the availability of the utilities during the building stage usually falls under his control. The contractor has to outline building specifications. Especially challenging problems develop when the correct site cannot be found or when the site that was kept at the time the contract was signed proves to not be adequate.
The time to finish
The contractor’s main responsibility is to satisfy the completion deadline either in whole or, should the building be carried out in sections, next date of completion. Should the building plan be included into an agreement, the buyer could insist on the contractor following the program. Conversely, this gives the buyer hope since the work will be enough to finish before the deadline. Conversely, the buyer’s production schedule and the synchronization of contract’s activity with other activities could demand close adherence of the contractual party to the programme.
Payments and expenses
Usually, turnkey projects pay for themselves in one big sum. Although a contract for turnkey can specify prices, these agreements are rare even if it is possible to define prices in terms of units or cost refunding. Still, it is not unusual for the lump-sum turnkey contract will call for an inventory of unit pricing—that is, the costs for specific components or segments of the project. Both partial and unitary, these rates can be paid for progress and employed for the estimate of variance.
Should the work be of any significance, the contract lets one pay only half-amounts. Regarding lump-sum turnkey contracts, it is impossible to ascertain progress payments based on measuring quantities. Usually, the partial payments made in these agreements depend on milestones such as dates for ordering supplies, reaching particular stages during the manufacturing process, equipment packaging and shipment, arriving on site, etc.
Performance guarantee
The contractor bears the obligation of respecting these commitments. Unless clear or implied exoneration, his failure to meet his responsibility stemming from flaws in approved designs or revisions demanded by the customer and the contractor is not free from this obligation. The performance guarantees given by the company are based on some presumptions about the quality of the raw materials utilized as well as operational factors including climate conditions, supply chain frequency, etc.
The law that governs the contract
Along with the legal interpretation of the contract and, with some exceptions, the validity and creation of the contract, the law lists the rights and obligations of contract that the contractual parties have. Turnkey contracts also use the notion of autonomy for the parties involved in all sorts of contracts. Therefore, under certain restrictions resulting from the laws controlled by public policy, the parties are able to decide on the law that controls their contract responsibilities. The regulations might cover some of the contract’s terms (e.g., intellectual property rights) or some of its components (e.g., interest rates as well as antitrust and competition and so on).
The legislation applicable to conflict resolution either follows the guidelines of the court or the arbitration procedure at the site of the activity. One decides personally. Sometimes it could be controlled by the laws of another nation, the law controlling the contract.
Turnkey project models
Most government-funded, major infrastructure projects are built in turn-key style. For example, the upcoming Jewar Airport project in India is a turn-key project developed in association with Zurich Airport International. Zurich Airport International, a Swiss company. Once fully completed, the airport will be assigned for operations to local authorities.
Another kind of turnkey project is the one in which a third-party contractor is contracted to design and build a facility in addition to providing full manufacturing and supply chain support for a services or manufacturing facility. The contractor’s duties include designing, manufacturing, and installing as well as aftermarket support and technical support for the construction.
Turnkey properties in the real estate market are fully furnished apartments that can be bought and subsequently rented out in a few hours without the buyer having to search for further work or investment. One might occupy this kind of property straight away or rent after the purchase.
The benefits of turnkey projects
Turnkey projects provide a number of advantages and are a popular alternative for those looking for an easier approach to complicated projects. These are the five benefits:
Simple management: Turnkey projects give one point of contact, therefore simplifying project management. This helps to simplify communication and teamwork, therefore lessening the load of handling many suppliers and contractors.
Save Money: Usually, the projects result in rather large cost reductions. Customers can gain from bulk purchasing cheap overheads as well as fixed pricing that helps to stay inside their budget by merging several components of the project under one firm.
Time Efficiency: Generally speaking, Turnkey initiatives including time efficiency complete traditional duties faster. The contractor oversees all related aspects of the project, therefore minimizing delays resulting from collaboration among several stakeholders and guaranteeing timely operation of the construction.
Quality Assurance: Turnkey agreements include a thorough framework including strict quality monitoring. From idea to implementation every stage is closely examined to guarantee that the product satisfies high standards and guarantees that the resultant product either meets or surpasses consumer expectations.
Lower Risk: One entity overseeing the entire project helps to significantly reduce the risks associated with cooperation, contractual duties, and any conflicts among various entities. This results in less unanticipated issues and simpler project execution.
Success in turn-key projects depends on choosing the correct contractor with the knowledge and capacity to provide top-quality Engineering and Construction services, therefore ensuring that the objectives of the project as well as budget are satisfied.
Steps Of Fulfilling A Turnkey Contract
Completing a turnkey contract in several stages is necessary to guarantee that the project is carried out fast and in compliance with all particular requirements. The primary actions engaged were:
To guarantee a successful completion of the project, the contractor provides a complete technical help covering fabrication, design installation, and aftermarket support.
Starting Design and Planning:
Perfect planning and design mark the beginning of the procedure. At this level, the contractor develops thorough plans for the building. This stage comprises the first cost estimates, risk analysis, and feasibility research. Working with the owner, the contractor will decide on the extent of the job and objectives.
Engineering:
The engineering process produces exact technical guidelines and designs. Covering mechanical, structural, civil, and electrical engineering as well as mechanical aspects, this procedure guarantees that the project’s needs are satisfied. Designed specifically to assist with construction guidance are engineering plans.
Procurement:
The contractor will get the required tools, supplies, and services to finish the project in the course of procurement. This entails selecting suppliers, haggling over terms and guarantees of timely material delivery to the site. Avoiding overruns and delays depends on a well-run procurement system.
Construction:
The real building of the project as detailed by engineering drawings is known as the construction phase. Every facet of building, including equipment, manpower, and subcontractors, falls to the contractor. This covers site foundation construction and structural building as well as installing systems and finishing details.
Commissioning and testing:
The project undergoes extensive testing and commissioning when building is finished. This is the procedure of making sure every system and component satisfies performance criteria and operates as expected. This phase allows any required changes or corrections to guarantee that the project is ready for usage and functional.
Disadvantages Of Turnkey Projects/Contracts
Turnkey projects have many advantages like simplified processes and less effort in managing, but they also have some notable negatives
Strong Scope Definitions Required: Prior to beginning the design and engineering stages, strong scope definition is absolutely necessary for turn-key projects. This rigidity could make it challenging to adjust to new criteria or revisions following the start of the project.
High Reliance on Trust: The success of the project depends on the confidence of the owners toward the building firm. Any misalignment of aim and budget or in the implementation will lead to major issues. It is imperative to choose the correct contractor who understands project objectives.
Limits of Flexibility: Once a turnkey contract has been completed, there is limited room for modifications or corrections. This arises when unanticipated occurrences call for adjustments to the working schedule.
Possibility of higher Initial Costs: Usually, more expensive to incorporate future changes and risks like inflation or growing material costs is a possibility of higher initial expenses budget estimations. This could make turnkey projects seem more costly than conventional contracting methods.
The risk of a contractor’s failure: Should the contractor fail to satisfy the conditions of agreement, the project owner is left with very few options. Dependency on one entity means that any mistake could have major effects on the quality or project success.
Conclusion
Turnkey Contract should be modeled on a balanced of risk-adjusted allocations as well as on an equilibrium between the rights and responsibilities of the contractor and the employer. Moreover the Contract ought to have a clear and simple framework that facilitates administration. Apart from other jurisdictions like arbitration courts, the contract has to be suitable for usage under civil and common law as well.
