Turnkey contracts | Simplified project delivery

June 11, 2024 Roberto Magalhães

In the field of project management, turnkey contracts have proven to be a popular and effective approach. These contracts offer a comprehensive solution where a project is delivered to the customer ready for use. In this article, we take a deep dive into the world of turnkey contracts and explore their benefits, components, challenges, and practical applications.

As the name suggests, “turnkey” means that the customer receives the key to the door. This means that all associated work is carried out by the turnkey contractor and the client only has to carry out the work themselves.

Turnkey contracts, a comprehensive solution to simplify project execution, have gained enormous popularity in recent years. Turnkey projects span a wide range of industries and offer benefits such as streamlined execution, cost predictability, and reduced risks.

However, for a successful implementation, challenges such as balancing quality and speed and ensuring clear communication must be overcome. In the construction and IT sectors, turnkey contracts have proven their effectiveness and led to greater efficiency and customer satisfaction.

Areas of application of turnkey contracts

construction industry

In construction, turnkey contracts have revolutionized the way projects are delivered. An excellent example is the design-build model, in which a single entity is responsible for planning and executing a project.

This approach minimizes conflicts, accelerates deadlines and ensures a seamless transition from conception to completion. Turnkey construction contracts ensure that the customer receives a fully functional system ready for immediate use.

Information technology sector

In the fast-paced world of technology, companies are often looking for off-the-shelf solutions for their IT needs. A turnkey IT project is the purchase of a complete package that includes software, hardware, installation and training.

This eliminates the effort for companies to bring together different components and ensures a quick integration process. With turnkey contracts in the IT sector, companies receive functional systems that can be immediately integrated into their operations.

Important facts to create a successful turnkey contract

Complete project assessment

Before entering into a turnkey contract, a comprehensive assessment of the project is crucial. The project scope, requirements, and potential challenges are determined.

A detailed assessment provides a solid basis for drafting a contract that meets the client's needs and expectations.

Choosing the Right Contractor

Choosing the right contractor is crucial to the success of a turnkey project. The selected contractor must have proven experience in carrying out similar projects and have extensive knowledge of the sector.

A collaborative partnership between client and contractor ensures smoother execution and minimizes the risk of conflict.

Since contractor selection is based on your specific area of expertise, this is always a challenge.

Detailed contract conditions

A well-structured turnkey contract should describe all project details, including timelines, milestones, payment terms, and quality metrics.

This level of detail leaves no room for ambiguity and ensures both parties are on the same page. Clear contractual conditions pave the way for successful and smooth project execution.

Turnkey vs. turnkey contracts traditional contracts

Important differences

The fundamental difference between a turnkey contract and a traditional contract is the level of responsibility.

In turnkey contracts, the contractor assumes greater responsibility, as he is responsible for the entire project, from conception to completion.

Traditional contracts, on the other hand, often divide responsibility between multiple parties, potentially leading to coordination problems.

Choose the right approach

The choice between turnkey and traditional contracts depends on the type and complexity of the project, as well as the client's preferences.

While turnkey contracts offer a simplified and comprehensive solution, traditional contracts may be preferable in cases where the client wants to maintain more control over various aspects of the project.

Advantages of turnkey contracts

Turnkey contracts offer several benefits to parties involved in commercial and construction projects. Key benefits of turnkey contracts include:

Central point : In a turnkey contract, the contractor assumes responsibility for the entire project, from design and construction to delivery. This streamlines the project management process as there is a single point of contact and ownership for all aspects of the project.
Reduced client effort : The client or project owner is relieved of the responsibility of coordinating multiple contractors, suppliers, and consultants. The general contractor takes care of all the complexities so the client can focus on their core business activities.
Faster project delivery : Turnkey contracts often come with predefined timelines and deadlines. Because the contractor is responsible for the entire project, he or she has a strong incentive to complete the project efficiently and on time. This can result in faster project delivery compared to traditional contracts.
Risk Transfer : One of the biggest advantages of turnkey contracts is that many of the risks associated with the project are transferred to the contractor. This includes risks related to design defects, construction delays, cost overruns and even certain regulatory compliance issues.
Fixed price and budget predictability : Turnkey contracts typically include a fixed price or a pre-determined budget. This provides the client with financial predictability, as they know the total cost of the project in advance and are protected against unexpected cost increases.
Competence and experience : General contractors are often selected based on their knowledge and experience in specific industries or project types. This can lead to higher quality results and more innovative solutions.
Time Saving : The client can save a lot of time by entrusting the execution of the project to the general contractor. This is particularly beneficial for clients who do not have the in-house resources or expertise to manage complex projects.
Quality control : Turnkey contracts often include integrated quality assurance measures, as the contractor is responsible for delivering a finished product that meets the required specifications and standards.
Focus on core competencies : Clients can focus on their core business instead of delving into project details. This can lead to a better distribution of resources and greater competitiveness.
Minimum client knowledge required : Clients with limited construction or project management knowledge can benefit from turnkey contracts as they rely on the contractor's expertise to successfully complete the project.
Dispute arbitration : Turnkey contracts often contain clauses regarding dispute resolution mechanisms, which can help prevent disputes from escalating and project disruption.

It's important to note that while out-of-the-box contracts offer these benefits, they may not be suitable for every project or situation. When deciding on a turnkey contract, it is essential to carefully consider the complexity of the project, risk factors and the competencies of the selected contractor.

Disadvantages of turnkey contracts

Although turnkey contracts offer several advantages, they also have some disadvantages that must be taken into account before entering into such contracts. Disadvantages of turnkey contracts include:

Limited client control : In a turnkey contract, the client gives up a significant degree of control over project design, execution and decision-making. This can lead to dissatisfaction if the end result does not perfectly match the client's vision or desires.
Dependency on Contractor : Since the general contractor is responsible for the entire project, the client is highly dependent on his experience and performance. If the contractor encounters problems or does not meet expectations, it can directly affect the success of the project.
Lack of flexibility : Turnkey contracts often include predetermined project plans and specifications. This lack of flexibility can be a disadvantage if changes or adjustments are necessary throughout the project.
Higher acquisition costs : Turnkey contracts usually have a fixed price or a specified budget. While this can provide cost predictability, it can also result in higher upfront costs than more traditional contracts, where the client has more control over individual components of the project.
Risk of disputes with contractors : If the client and contractor have different interpretations of project requirements or specifications, disputes may arise, potentially leading to delays, cost overruns, and legal complications.
Limited customization : Turnkey contracts may limit the client's ability to customize the project to their specific needs or desires, especially if the contractor's standard procedures and designs are used.
Quality concerns : Although general contractors are chosen for their experience, there is a risk that the contractor will prioritize completing the project quickly in order to move on to the next one, potentially sacrificing quality.
Potential for hidden costs : Although turnkey contracts seek cost predictability, there is the possibility of hidden costs that may not become apparent until later in the project and result in unexpected financial burdens.
Risk of project delays : Although turnkey contracts aim for faster project delivery, unforeseen delays may still occur due to factors beyond the contractor's control. Resolving these delays may require additional time and negotiations.
Reduced sense of ownership : Reduced client involvement in the project can lead to a reduced sense of responsibility and commitment, potentially affecting the long-term success of the project.

When considering such an arrangement, it is important to weigh the pros and cons of turnkey contracts. A thorough assessment of project requirements, contractor capabilities and the

Turnkey contracts have proven to be a transformative approach to project delivery, offering optimized solutions and reduced risks across multiple sectors.

While there are challenges such as maintaining quality in fast-moving projects, turnkey contracts continue to define the future of project management.

With technological advancements and increasing global collaboration, turnkey contracts will undoubtedly play a central role in determining successful project outcomes.