When comes to type Construction Contract it is very common that stakeholders are missing and in such a case misleading interpretation of two types of Contracts:
- Lump Sum based Contract
- Turnkey Contract
This article is aiming to present difference in such manner that obvious difference is simply understand for all readers.
Lump Sum based Contract:
Lump sum base Contract is type of fixed-price or lump sum negotiated project, where, in particular in Construction industry, Contractor offers and agrees to build/execute works for a fixed total price per defined product or service. Contractors within a fixed-price contract are legally obligated to complete contract deliverables and may be subject to financial damages if they do not meet client’s expectations. While these types of contracts can serve to benefit the client, there is the expected level of precision relative to the product or service being procured. Changes in scope relative to project expectations can be accommodated by the contractor providing the contract price is adjusted relative to agreed-upon changes.
This type of project is considered to benefit the client as the contractor assumes most of the risk.
Lump sum contracts are very common in construction projects; however they aren’t suitable for every situation. These contracts work best for projects with finalized plans, clearly defined scopes and schedules and proper documentation of all assessments and other pre-construction activities. These aspects are crucial to allow the contractor to estimate project costs and provide the lump-sum amount accurately.
Otherwise, if initial specs and design are subject to be modified and the Client is asking for changes, there is obvious Contractors’ right to vary hence total price is being modified.
Turnkey Contract is a contractual arrangement in which a project is delivered in completed stage. In other words turnkey project is a delivery method in which a Contractor works for the Investor/Client under a single contract to complete all project stages from detail engineering through construction. The contractor is separate from the final owner or operator, and the project is turned over only once it is fully operational. In effect, the contractor is finishing the project and “turning the key” over to the final owner.
Characteristics of turnkey projects are as follows :
- Scope definition: The scope must be fully established before entering the engineering and design phase of a turnkey project. In other words, making changes and adding additional components to the project shouldn’t be done after the scope has been defined.
- Cost overruns are limited: Project budgets are typically presented before design finalization and are often estimated to account for unpredictable changes in budget requirements, such as cost increases resulting from inflation and final design material takeoffs and labor. However, price certainty is arguably more important,
Difference between lump-sum contract & turnkey contract:
- Under a traditional lump-sum contract, the Client/Investor agrees to pay the Contractor to complete a project that is built in line with Client’s specifications and design. However, the client is given many opportunities to make/modify decisions throughout the project, and to make changes as needed.
- In a turnkey contract, the Client is generally left out of the building process entirely as the Contractor handles all decisions and problems related to construction.