TURNKEY CONTRACT

ABDUL AZIZ HUSSIN AMN

DPA;LL.B ( Hons ); Dip. M. Mgmt.;M.Sc ( Prjt. Mgmt );

MMIM; Advocate & Solicitor; MMAP.

 

•   What Is “Turnkey Contract” ?

•    Relationship between parties & their rights and obligations.

 

Retsal Drilling Co.

v

Commissioner of Internal Revenue

(127 F. 2D. 355)

(Circuit Court of Appeal, USA)

 

Turkey job is a job wherein,

                              “the driller of an oil well undertakes to furnish everything and does all the work required to complete the well, place it on production, and turn it, over ready to ‘turn the key’ and start the oil running into the tanks”.

 

Duncan Wallace, QC, Contracts for Industrial Project, (Paper presented at a Seminar on Building and Civil Engineering Claims held in Kuala Lumpur in February, 1984, at p.3) described “turnkey” as.

 

                              “ …. a contract where the essential design emanates from, or is supplied by, the Contractor and not the owner, so that the legal responsibility for the design, suitability and performance of the work after completion will be made to rest … with the contractor …. ‘Turnkey’ is treated as merely signifying the design responsibility as the contractor’s”.

 

 

In High Mark (M) Sdn. Bhd. v. Pacto Malaysia Sdn. Bhd.;

                        (1987) 2 M.L.J. 85,

 

 

Zakaria Yatim J, refers to Duncan Wallace’s

paper (op.cit.) at p.6, and said,

 

                           “The turnkey system, however, may be modified. The owner may engage consultants to do the foundation or sub-structure designs leaving only the superstructure the subject of the lumps sum turnkey arrangements. This known as a “mixed – turnkey” contracts.

 

 

 

And states further (at p. 86),

 

                             “It is clear, therefore that, in its pure from the turnkey contractor is responsible for the planning, construction and supervision of the work. On completion of the work the contractor hands over the completed job to the owner. Sometime the owner engages consultants to do the foundation and sub-structure design. The contractor is only responsible for the planning, construction and supervision of the rest of the construction work. In oder to determine what is the nature of a particular turnkey job, it is necessary to look at the relevant contracts between the parties concerned”.

 

 

In High Mark (M) Sdn. Bhd.’s case, the consultants firms employed by the consultant firms  employed by the contractors in connection with a turnkey contract. Then it was held by the court that all the drawings and designs prepared by the consultants were the property of the contractors.

 

 

 

                          

                         PACKAGE/TURNKEY CONTRACT

 

A SCENARIO-

Client to Contractor:

 

 

A  ¢     “Please  build me a house”.

 

B  ¢     “Please build me a house with six bedrooms”.

 

C  ¢     “Please build me a house with six bedrooms, with the cost not exceeding RM100,000”.

 

D  ¢     “Please build me a house with six bedrooms, with the cost not exceeding RM100,000, facing the sea”.

 

E  ¢     “Please build me a house with six bedrooms, with the cost not exceeding RM100,000 facing the sea, and the lay-out is as attached”.

 

F  ¢     “Tenderers are invited to submit their own designs with a lump-sum price for a house”.

 

 

Q: BASED ON THE ABOVE STATEMENTS, WHERE IS THE BOUNDRY BETWEEN CONVENTIONAL CONTRACT AND TURNKEY CONTRACT?

 

Check the answer below…

 

 

 

TURNKEY CONTRACT

 

Under original concept of turnkey contract, the entire process of

 

·       design;

·       specification;

·       construction;

·       commissioning; and

·       operation

 

(and sometimes, to include maintenance) is carried out by the contractor.

                                           Ref.:

                                         Greenwood, D., 1988, Building Technology and Management, Journal of the Building Technology, Vol. 14, 1987/88, p.24.

 

According to Merna, A. (1987) and United Nation Guidelines (1983), this type of contract is preferred when a client does not have the expertise or resources to undertake the works.  The turnkey contract has been used extensively in so many countries for water treatment plant.

 

               Ref.:

 

a.    Merna, A., 1987; Turnkey Contract for the Water Treatment Industry, M. Phil Thesis, Sheffield: University of Sheffield.

 

b.    United Nations, 1983, Features and Issues in Turnkey Contracts in Developing Countries.  New York:  Centre on Transnational Corporation.

 

According to Greenwood, D. (1988), the number of contractors capable of carrying out turnkey contracts will be limited which shortens the pre-qualification stage.  The client will usually issue a performance specification and standards required or outline drawings indicating a preferred layout.  The evaluation of turnkey bids is more complex with tender bids submitted in two separate parts; one indicating the bid price and financial aspects and one indicating the proposed design and technical specification, the latter being evaluated before the price is considered.  The bids will be initially checked on technical merit which will allow clients to evaluate on a purely technical and performance basis.  The financial evaluation on capital expenditure and running costs would then be carried out possibly using discounted cash flow methods.  Since there is no standard method of evaluation the final assessment is based on a balance of objective and subjective criteria; the latter possibly including:

 

·       preference for particular types of process;

·       experience of previous contracts;

·       operation and maintenance requirements; and

·       good working relationships.

 

 

 

 

TURNKEY/PACKAGE DEAL: OBLIGATION

 

In turnkey or package deal situations, the contractor undertakes primary design responsibility and all a designer’s usual liabilities.

 

Greaves (Contractors) Ltd. v.  Baynham Meikle & Partners (1975) 3 All E.R. 99.

 

 

 

 

 

London Borough of Newham v. Taylor Woodrow – Anglian Ltd.

 

Under design and construct agreement, TW built several blocks of flats for LBN.  A major progressive collapse occurred due to a domestic gas explosion in one of the blocks, and 4 accupants killed.

 

Held:      The obligation of a contractor under a design and construct contract was to ensure that the design complied with all relevant legislation.  The load-bearing capability of the design was inadequate, and the contractor was therefore in breach of contract.

 

DESIGN AND BUILD (CONSTRUCT) CONTRACTS

 

Definition of scope of work is represented by the detailed proposals prepared by the contractor (directly or by his consultants) in response to an invitation to do so, and following the briefing provided by the client or owner (or his consultants).

 

Client

Contractor

o      Briefing:

o      Proposal

·       Terms of user requirements as to space and facilities.

·       Acceptability criteria as to standard of confort and quality (or outline performance specifications).

 

     To satisfy client’s requirements:

·       Drawings.

·       Specification of material and workmanship standard.

·       Price and payment schedule.

 

In package-deal contracts, the benefits of the system are realized if the employer (client) can accept the contractor’s design proposal without ammendment:   interferrence is expensive.

 

                                          Ref.:

                                          Robinson, N.M. & Lavers, A.P., 1988, p. 138.

 

 

RISK ALLOCATION IN DESIGN & BUILD/TURNKEY CONTRACT

 

Package deal (design & build/turnkey contracts) imply low risk on the design by the employer (but high risk on commitment to a price), and high risk on the design by the contractor (but low risk on commitment to a price).                           

                                         Ref.:

 

                                                   Robinson, N.M. & Lavers, A.P., 1988, Construction Law In Singapore and Malaysia.  Singapore: Butterworth & Co., p. 72.

 

 

 

 

 

 

 

 

 

 

AAH/ns.