Turnkey and Engineering construction contracts are contracts that are signed for Engineering, Procuring, and Constructing. It is a form of procurement frequently used for extensive international infrastructure or power projects, mainly where project financing is involved. Its popularity is attributed to the fact that under a Turnkey contract, both the design and construction risk in the project is on the contractor.
EPC contracts are also referred to as turnkey contracts because the concept is that once the project is complete and ready to be handed over to the user, it will require only the ‘turn of a key’ for the user to operate. Normally the EPC Contractor has to execute and deliver the project within an agreed time and budget, commonly known as a Lump Sum Turn Key Contract.
Purpose of Turnkey and Engineering Construction Contract
The purpose of a turnkey contract is to transfer, to the extent contractually possible, of all of the design, engineering, and construction risk from the project company who owns the project, to the EPC contractor who builds the same. An EPC Contract lessens and manages risk in the form of written terms and conditions. In fact, EPC Contracts were specifically conceived to transfer risk to the contractor. They make the contractor responsible for all project activities from the design phase all the way through the construction phase.
Inclusions in a Turnkey and Engineering Construction Contract
A turnkey contract majorly includes provisions pertaining to the transfer of risks, contractors’ commissions, and the rights and obligations of the project owner and the contractor. Apart from the technical and operational terms, the standard boilerplate clauses such as names of the parties, the effective date, waivers, remedies, amendments, notices, dispute resolution, choice of law, and severability need to be included.
Key Terms in a Turnkey and Engineering Construction Contract
Following are the key terms to be included in a turnkey contract:
- Design and design risk—Almost complete transfer of design responsibility to the contractor, including any design carried out by or on behalf of the employer under the contract.
- Contractor claims—What claims can a contractor raise, the procedure and manner of raising the same etc. needs to be outlined.
- Price and Payment—As a result of the transfer of risk, the price paid by the project owner will generally be higher than it would for other forms of procurement. The quantum of the price and the payment timelines and mechanism need to be included.
- Handover, testing, and commissioning—A detailed procedure that has to be followed prior to handover needs to be laid down. In addition, provisions need to be made for testing and commissioning
- Limits of liability—Due to huge financial implications, if the project is delayed or in some way defective, limitation of liability clause needs to be included.
How to Draft the Turnkey and Engineering Construction Contract?
The following guidelines need to be followed to draft a turnkey contract:
- The parties need to be defined clearly.
- The relationship between the parties is of a consultant and client; not a master-servant relationship needs to be mentioned clearly.
- Statements confirming that the risk is borne completely by the contractor need to be included.
- It is preferred if there is a statement stating that the project owner is not liable in the event if any project eventuality. Such eventuality should be defined.
- Force Majeure clause or a clause which enables parties to disclaim their liability in the event an unforeseen event occurs should be included, especially by the contractor.
- The scope of work and the purpose and the target consumer should be defined clearly.
- The contract must also explicitly stipulate the date of commencement and the duration of the agreement.
Benefits of a Turnkey and Engineering Construction Contract
- The risk gets completely transferred to the contractor.
- Establishes a structure whereby the project company only contracts with and engages only one contractor, who, in turn, manages all the relationships with subcontractors. This assignment of work makes managing the project considerably easier.
- EPC Contracts also centralize all of the control over the design, development, and construction in the hands of the EPC contractor.
Cons of a Turnkey and Engineering Construction Contract
Following are the cons of a turnkey contract:
- The owners seldom participate in the project, and the control degree is also low for the owners.
- The owner transfers the risk to EPC companies. So it is important to choose the right EPC companies. If the EPC companies being chosen do not have sufficient financing or expertise, this may jeopardize the project.
- EPC companies have to take on the responsibility and risks. Hence, the cost of EPC companies will be higher for the owner.
- Project owners who have always gone with the traditional construction model, may not fully understand the way a turnkey contract function.
- Such a contract may not be very beneficial to a contractor, and as most of the time, he is the one who would end up with all the risk.
[Also Read: Engineering And Construction Agreement]
Although there are many types of construction contracts(1) used in project financings, the majority of project sponsors and all project finance lenders strongly prefer turnkey contracts. Turnkey contracts are based on the idea that when construction is complete, all you need to do is turn the key, and the project will function as intended, which induces ease of business and thereby is a preferred type of contract for the long term big-budget projects.
Sample for Turnkey and Engineering Construction Contract
A sample of the Turnkey Engineering and Construction Contract can be downloaded from below.
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