Turnkey Contract

(Source: businessnovice.net)
In short, Turnkey contract is an agreement between client and contractor under an
organizational structure that contractor shoulder main responsibility to complete the
project at an agreed price and schedule. It shares similarity with the structure of the
design and builds but with additional service including finance, operating and
maintenance. The main contractor needs to develop a complete scheme from
planning and commissioning stages and control the budget. In other words, the risk is
allocated to the contractor from the client and contractor ensures the full operation
of the buildings. Detailed concepts are going to be explained below.
The turnkey contract is the extension of the design and build contract. Therefore, the
very first thing is to dig into the structure of the design and build. The design and
construction process are integrated and under the control of contractors. Client or its
independent advisor would develop the scope and the requirement in the
procurement process. Then contractors develop their management and working
team on their own. Yet, the most critical part besides design and build is the
operation. It is often included in the turnkey contract to guarantee the
comprehensive function of the construction.
As for the other difference from design and build, according to American Water
Works Association (AWWA, 2010), the turnkey contract also includes more variants
like design-build-operate (DBO) or design-build-finance-operate (DBFO). For DBO, the
main contractor would hold the construction operation for a period as specified. It is
similar to the building own operate transfer (BOOT) under design and build structure,
but it is more common in public-private partnership while DBO is not limited and less
involvement of the client. The fixed annual cost for operation and variable cost is
included in the agreement. With full responsibility, contractors need to guarantee
reliability and durability. As for DBFO, the contractor would work along with a
financing organization.
DBO approach- Tolt Water Treatment Facility
Place The City of Seattle Public Utilities
Capacity 454, 250 m3/d
Duration 2 years (1998-2000)
Compared to the traditional structure, the turnkey contract allowed 15% cost
savings. It may be due to the minimization of the construction cost. Besides, there
was a prediction of 30% savings for their Cedar Treatment Plant (the second plant),
over the design-bid-build approach.

What is more, the turnkey contract could be implied to the establishment of

operation in a foreign country. A variety of concerns like site selection, standards and
assessment of suppliers could arise. As such, everything is covered from basic
planning to delivery of the facilities. Using the cases study of overseas construction
from Hitachi conducted by Kimoto et al., (2013) as an example.
Turnkey Supply of Optical Materials Plant Turnkey Contract for Supply of Utilities
to Brewery
Place China Place The Socialist Republic of Viet
Nam.
Design Forming a joint venture
(Shin-Etsu Chemical Co.,
Ltd., Jiangsu Fasten
Hongsheng Group Co., TKH
Group N.V.)
Site area 120,000 m2
Working area 64,000 m2 Model
Buildings Main factory, Company Sapporo Holdings
administration building Its second production
and 10 more other facility outside Japan
buildings
Duration 14-month turnkey From July 2010 to November 2011
contract
Scope Extension to design, Complete design and contract for all
procurement and onsite utility supply are provided by
construction Hitachi
The turnkey contract also enjoys an advantage of the familiarity of the local law or
standard. This could help foster the construction progress.
Come to the suitability of the Turnkey contract in mega infrastructure projects. In
engineering and management aspect, the key factors to deal with the complexity of
the projects are the completion time, financial certainty and quality.
From Starr, Ng & Tan (2020), there are different mega infrastructure projects in Hong
Kong awaiting or in the progress such as the Shatin to central link, the Kai Tik
development, various new town extension. Particularly, the large social demand of
Hong Kong like housing, transport is shown in the chart below.

(Source: SCMP)
Therefore, the construction work time is necessary to be drastically reduced to fulfil
the demand and increase social capacity. The preliminary design requires only 30-
40% completion including performance specification and concept design as the
contractor retain the control of the remaining by sticking to the client’s brief. It could
allow fast-tracking as the construction can proceed even before the final approval of
construction plans. What is more, the quantities and unit rate are clearly shown in
the breakdown of work items. Thus, there is a significant reduction on the time for
tender preparation. It further pushes the pace of the construction which prevent a
long period of the pre-contract stage.
Design process aside, there could be more efficient communication within
contractors and the team. Compared to the traditional structure, there may not be
direct communication and information exchange between the contractor and
consultant on account of no consultancy agreement between them. They are only in
a project-based relationship, resulting in less tight collaboration and support. To give
a practical scenario, the building model produced by the consultant may not be
passed to the contractor directly under the claim of contract. Then, the contractor
may not know the exact look of the structure in 3D view. The turnkey contract could
provide clear information to the contractor which foster the efficiency and working
progress for mega projects.
On the other hand, the effective communication and all-in-one control of turnkey
structure ensure the buildability. Active involvement for contractors in the design
stage increases the buildability because they provide clear information about the
other things around the project like the work schedule, finance, site situation and
material supply. It raises the certainty of the mega infrastructure.
Nevertheless, the time and cost pressure exerted on the contractor is undue. The risk
of the client is completely transferred to the contractor under the turnkey contract.
Although the client or the employer enjoys a single point of responsibility, it is hard
for them to ensure or monitor the quality of the construction. Inadequate
supervision easily results which raise the tendency of the contactor to fulfil the
minimum requirement of performance stated in the contract only. Quality is an
important measure and concern for the success of mega infrastructure due to its
large social impact. Yet, the turnkey contract requires the contractor to be
responsible for the operation and maintenance. There is also the necessity of
controlling the quality of contractors. Below manifests the risk allocation for turnkey
contact with a comparison.

In general, there is only a slight difference in the quality aspect as the contractor
shares the responsibility of the client. Therefore, the ability to handle the projects
and tackle different problems is important to the contractors and firms.
Besides, the claimed price in the turnkey contract is always higher than expected.
With the absence of the price basis and a common basis for tender comparison, the
difficulty of design and specification is increased. As such, the variations are hard to
be valuated and actualized. Despite the minimization of the construction cost, the
contractor would likely to increase the budget at the early cost estimation due to the
possibility of high running cost in the future. It may be correlated with the common
phenomenon of over-budget for infrastructure in recent years, which affect the
financing availability of the client and induce public doubt and objection.
With the above concerns, it may reduce the suitability of the turnkey contract.
Nonetheless, the continuous performance of the construction becomes significant
with the stated operation period under a turnkey contract. Instead of minimizing the
construction cost, the contractor would possibly to use material with higher quality
to reduce the future operation and maintenance cost. Hence, it elevates the quality
of the construction and the design liability, contributing to the suitability of the
turnkey contract.
However, the traditional structure and fixed lump sum contracts are more common
in Hong Kong as the government is the client in numerous projects. (Starr, Ng & Tan,
2020). Yet, its relatively low efficiency may be one of the causes of delay schedule in
various projects. Take Shatin-to-Central line as an example, the problems of delay
and cost overrun are serious (Smith, 2020).
Price $HK 90.7 billion
Original mid-2019
schedule
Total 17 km
length Tai Wai to Hung Hom: 11km
Hung Hom to Admiralty: 6km
Problems
-Lagging behind the work schedule
-Over budget (The costliest project for
MTR)
-Construction changes without issuing
the MTR management team and the
government.
(Source: MTR) -Public concern about the safety.
Based on the traditional structure, there seems to be inadequate information flow
and ineffective management, which are the typical problems arise with such system.
Therefore, all-in-one control by the turnkey system may secure the construction
process. However, there would also be the same problem of lacking formal issue to
the government for construction changes for the turnkey contract.
As such, comparison between different structure is done to assess the suitability of
the turnkey contract. For the traditional structure, the comprehensive preparation of
detailed drawings, quantities and specifications results higher certainty of price and
relatively low risk of design changes. There would be lengthened duration of the
project and surging cost with longer financial period. The buildability could not be
ensured due to inadequate involvement of contractors in design stage. As for the
management system, the ‘team approach’ could secure the best option form the
client by evaluation of cost and time. Buildability could also be raised with the
advising from management contractor. It further fosters the speed by dividing into
work packages and better communication. Yet, the flexibility for the design changes
induce more variations and unclear cost commitment. High risk is additionally posted
to the clients when letting the work packages. By balancing the insufficiency from
different structure, the Turnkey contract could be in the equilibrium on different
aspects.

As stated in the concept explanation part, the operation is the key difference from
other structure. There is indeed a similarity between the turnkey construction and
BOOT approach that the private consortium encourages the complete operation. From
the West Kowloon Cultural District project, it stressed the need for cultural facilities.
West Kowloon Cultural District project
Floor area 726,000m2
Project estimate HK$25 billion
Duration 10 years
Thus, a good and well-maintained operation is a key concern. In conclusion, the
turnkey contract could be a suitable option to ensure the smooth operation with the
balance of the working schedule and price certainty.

Concerning the analysis of the turnkey contract in mega infrastructure projects, here
come the critical factors for the successful implementation of the Turnkey contract in
different public construction projects.
Firstly, choosing an appropriate contractor is essential. There is a low possibility of
changing the contractor in terms of poor performance due to the familiarity of the
whole project. It is hard to replace the original contractor. Additionally, change of
contractors would adversely affect the construction progress and public credibility.
The public would cast doubt on the construction regarding the changes. Therefore,
the selection of contractors is needed to be ensured.
The next is the contract arrangement and drafting, which includes the obligation
between client and contractors and defined parties ("What is a Turnkey contract?",
2020) For the obligation, it should clearly state the responsibility of them with the
agreed contract price. The contractors carry out full construction work on a turnkey
basis while the client provides site access and obtainment of license and permits.
Clients need to ensure the employed contractors are in the approved list of
contractors from the Hong Kong government includes the List of Approved
Contractors for Public Works and the List of Approved Suppliers of Materials and
Specialist Contractors for Public Works (Starr, Ng & Tan, 2020). Therefore, the
contractors should fulfil the criteria for admission in financial, technical and
management.
Additionally, the parties are necessary to be clearly defined. Different clauses like the
project scope and statements like the disclamation of liability in an unpredicted
event by parties should all be included in the contract. The turnkey should be based
on the agreement on the balance of obligation and rights between parties. There is
also the right for parties to select the applicable law to govern and regulate their
contractual obligation. ("What is a Turnkey contract?", 2020)
In Hong Kong, the government is the client in most of the public projects. Public-
private partnerships (PPP) are common and widely adopted for public construction
projects. In a similar approach to PPP, there should be closer and more frequent
monitoring of the budget and the construction quality by the client or its
independent advisor team under the turnkey contract. It is due to the common delay
of construction project and cost overrun in Hong Kong. Supervision of the
performance during the operation stage is also critical to ensure the buildings are
‘ready-to-use’.
More importantly, risk control for public projects is required to be addressed.
Comparing to the private project, there is more public awareness and larger pressure
to bear. Particularly, the contractors shoulder the full responsibility in the turnkey
contract. Concerning Peng, J. L. (2012), he suggested that awareness should be put
on the financial situation of the clients and the contractor’s organization and
coordination. It helps prevent the risk through proper management and successful
investment and financing. Furthermore, the dynamic management of risk could help
allocate specific resources to tackle the main risk to occur at a different stage. To
illustrate, the default risk of sub-contractors including material supply is likely to
occur in early or mid-stage. What is more, there should be rational distribution of risk
like the balance of responsibilities to the benefits which higher returns in the
contract management process and risk-sharing among different parties. Clear
definition of contractors and client risk range in the contract foster a more balanced
risk allocation. The study points out that the quality of risk management is directly
correlated to the success of the project.
Reference list
1. Design-Build and Turnkey Construction. (2010). In Capital Project Delivery - Manual
of Water Supply Practices, M47 (2nd ed., pp. 1-2). American Water Works Association
(AWWA).
2. Kimoto, Y., Chang, J., & Sugiura, T. (2013). Turnkey Construction of Factories in
Asia. Hitachi Review, 62(4), 244-249. DOI:
http://www.hitachi.com/rev/pdf/2013/r2013_04_102.pdf
3. Starr, P., Ng, F., & Tan, L. (2020). Construction and projects in Hong Kong: overview.
Retrieved 4 November 2020, from https://uk.practicallaw.thomsonreuters.com/6-
502-0698?transitionType=Default&contextData=(sc.Default)&firstPage=true
4. Zhao, S., & Kao, E. (2016). One million flats needed to meet growing demand in Hong Kong
by 2046. Retrieved 1 November 2020, from https://www.scmp.com/news/hong-
kong/health-environment/article/2048009/one-million-flats-needed-meet-growing-
demand-hong
5. Peng, J. L. (2012). Risk Prevention and Control Measures in Highway Design and
Construction Turnkey Project. 446-449, 3814-3819.
6. Turner, A. (1990) Building procurement, Macmillan.
7. What is a Turnkey contract?. (2020). Retrieved 5 November 2020, from
http://globalnegotiator.com/files/Turnkey-contract.pdf
8. Smith, K. (2020). MTR and contractor heavily criticised but Sha Tin - Central Link safe
to complete - International Railway Journal. Retrieved 1 November 2020, from
https://www.railjournal.com/passenger/metros/mtr-and-contractor-heavily-criticised-
but-sha-tin-central-link-safe-to-complete/
9. Turnkey and Engineering Construction Contract | Agreements. Org. Retrieved 3
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10. What is Turnkey contract? Meaning, definition and usages | BusinessNovice.net.
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