In turnkey construction projects, the main contractor agrees to complete the entire project for a set price and time. These are often used by clients as a way of shifting construction risk to the contractor. Turnkey construction projects require the contractor to provide a finished product that is ready to use. All the client has to do is pay the contract costs and pick up the keys at completion. Turnkey construction projects are higher risk projects for contractors as they carry most of the operational risk.
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The complexity and magnitude of a turnkey construction requires, even more so than in other construction project types, the effective coordination and management of providers, subcontractors and government agencies. The most important criteria that determine the success of a construction project include budget and schedule compliance and whether it conforms to owner's expectations. Effective project management is required to control the progress and cost of a construction project.
Risk Allocation and Cost Estimation
Turnkey construction projects require the contractor to assume higher risks than other construction contract methods. A turnkey project may require the contractor to allow for multiple eventualities that cannot be easily foreseen. For instance, a contractor may have to take into account the ground conditions of a building site. The parties in successful turnkey projects take into account the extra risk and provide the contractor with the time and opportunity to study the project in detail and provide an accurate estimate of cost and completion date. Contractors must modify their tender prices to allow for the higher risks.
Turnkey projects require one company to take on the operational costs until the project is completed. Successful projects require the main contractor to have the necessary cash flow to meet construction costs until payment is received. Sometimes contractors and clients can agree on a gradual payment once certain completion stages are met.
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