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What Is A Turnkey Contract
A turnkey contract refers to a type of contractual arrangement where the service provider or seller provides the client with a fully delivered project.
The term “turnkey” has an equivalent meaning to “produce and deliver”.
For instance, a turnkey contract in real estate can be the building of a new residential home.
In essence, the general contractor will fully build the property and deliver the finished product to its customer.
This is referred to as a turnkey contract as the customer has to simply take over the keys to the property.
Typically, the client will have little involvement in the execution of the work or completion of the project.
The service provider and the client start the contract by agreeing on the specifications of the work and then the service provider will make most of the important decisions to deliver the work to the client.
When Turkey Contracts Are Used
Turnkey contracts are typically used in real estate and by service businesses.
In the context of a real estate project, an individual or business can sign a turnkey contract with a real estate developer or construction company to have a real estate project fully handled.
The project can be the full construction of a home, office building, industrial complex, manufacturing plant, or other.
In service projects, a client can require that the service provider handle a service project in full, such as the implementation of a software product or the setup of a network.
Turnkey contracts are not useful in situations where the market conditions can rapidly change or for highly complex projects where the contract cannot assess the entire scope of the project upfront.
Turnkey contracts are more useful in projects that are considered standard and that the scope and requirements are well-understood by the parties.
The third most important aspect of turnkey contracts has to do with the delivery of the work and acceptance by the client.
In this context, the parties should agree on the delivery timelines, what the service provider has a duty to deliver, and how will the client validate that the delivered result conforms to the contract specifications.
The parties should also provide a mechanism to have any defects or non-conformities resolved by the contract.
The concept of warranty and liability for defect is therefore important to be negotiated in the contract.
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Turnkey Contract Provisions
A turnkey contract, just like any other contract, must have certain key provisions.
The most important provision in a turnkey contract is the description of the work, specifications, or client requirements.
Typically, the specifications can be outlined in a design document, project plan, blueprint, or other specification documents.
The next important aspect of a turnkey contract is the agreement on price.
Is the contract fixed-price, cost-plus pricing, time and material, or is there another pricing strategy used?
Typically, turnkey contracts are fixed-price contracts.
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Turnkey Contract Benefits
There are several key benefits to turnkey contracts.
The first benefit to a turnkey contract for the client is that the client leaves the important decisions to the service provider.
As a result, clients who do not have the right skills and experience can rely on the service provider’s expertise to get the job done properly.
Another benefit for the client is that in turkey contracts, the service provider remains responsible for the project risk for the entire duration of the project.
The client will get the title to the final work product once it’s been delivered by the service provider in accordance with the contract specifications.
For the service provider, a turnkey contract is easier to manage as it does not have to deal with the ever-changing needs and requests of the client.
The service provider is responsible to deliver the project in accordance with the contract, nothing more, and nothing less.
Another benefit for the service provider is that its responsibilities are clearly called out in the contract.
As a result, it can agree to the appropriate terms and conditions relating to the project upfront knowing the risks and complexities of the project.
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Turnkey Contract Drawbacks
Although turnkey contracts have clear benefits, there are also certain drawbacks.
The most important drawback for the client is that it must clearly define its needs and specifications upfront when the contract is signed.
If the client does not have a clear idea of its needs, the turnkey project may end up resulting in something that does not satisfy the client’s needs.
Another important drawback is that the client must be able to adequately price the contract upfront.
If the client is not aware of the market rates and costs, it may end up agreeing to pay a much higher price for the contract.
For the service provider, the main drawback is that it is responsible for the project costs and risks.
If the contract is a fixed-price contract, the service provider will bear the burden of cost overruns and extra expenses without being able to pass on the costs to the client.
Another important drawback for the service provider is that it must ensure that the project is delivered exactly in accordance with the client’s specifications in the contract.
If the end result does not substantially conform to the contract specifications, the client may refuse the delivery of the end work.
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Turnkey Contract Examples
Let’s look at a few examples of turnkey contracts to better understand the concept.
The notion of a “turnkey” contract is a type of contract where the “key” is “turned over” to the client.
Another way of looking at it is that at the end of the project, all the client has to do is to “turn the key”.
One example of a turnkey contract is the construction of a residential property or building.
The contract is responsible to build the entire home in accordance with the plans and turn over the key of the house to the client.
In engineering, a turnkey contract could be for the building of a processing plant or production facility.
In technology, a turnkey contract is a type of contract where the service provider must deliver a fully functional network or system to the client.
As you can see, the common thread here is that the project is completed and the end result is delivered to the client.
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Takeaways
So there you have it folks!
What is a turnkey contract?
In a nutshell, a turnkey contract is a type of contract where the service provider or merchant agrees to deliver a certain product or complete a project based on the client’s specifications.
This happens quite often in real estate where a contractor is hired to build a specific type of property within a specific period of time in accordance with agreed plans.
In a turnkey contract, the contractor or service provider is responsible for the design, execution, and delivery of the work.
Now that you know what a turnkey contract is all about and how it works, good luck with your research!
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