TURNKEY AGREEMENT

International Turnkey Plant Contracts: Everything You Need to Know

Turnkey plant contracts, known as “turnkey contracts”, are essential agreements in large construction and engineering projects. In this type of contract, a company takes care of everything necessary to build and deliver a plant ready to operate. This model is common in industries such as energy, petrochemicals or manufacturing, where projects require great coordination and complex technical specifications. Here we explain in detail how they work, their advantages and the challenges they present. We’ll also explore practical examples and additional tips to get the most out of these types of contracts.

What is a Turnkey Contract?

1. All included: The contracted company (the contractor) is responsible for designing, building and delivering the finished plant, including aspects such as the installation of equipment and control systems. This integration facilitates customer management.
2. Contractor Responsibility: The contractor assumes almost all project risks, such as delays, design errors or construction failures. This means that the customer has greater peace of mind and can focus on their business.
3. Agreed Price: Typically, a total price is set from the beginning, which helps the client know how much the project will cost. This avoids financial surprises during project development and encourages financial planning.
4. Delivery on date: The contractor must deliver the plant on the agreed date, functioning correctly and meeting the established standards. Punctuality is key in industries where delays can have high costs.
5. Operation guarantee: In addition to delivering the plant, the contractor usually guarantees that it will operate according to the objectives and parameters defined in the contract. This includes final testing to ensure that the installation meets expectations.

Why use this type of contracts?

• Simply for the client: The client does not have to worry about every detail of the project, since the contractor takes care of everything. This allows the client to focus on their core business or other strategic initiatives.
• Less risks for the client: By transferring the main risks to the contractor, the client is protected from unforeseen events such as cost increases or technical failures. This is especially relevant in international projects.
• Fixed cost: There are no surprises with the costs, since the contract establishes a fixed price. This gives financial security to the client and allows for better allocation of resources.
• Everything under control: A single company coordinates the entire project, which avoids confusion and facilitates communication between the parties. This improves efficiency and minimizes errors.
• Speed ​​in execution: By integrating all phases under a single person, execution times can be reduced, which especially benefits industries with critical deadlines.

Challenges of Turnkey Contracts

1. Complex documents: It is important to write the contract very well to avoid misunderstandings. This should include all the details of the project, from technical specifications to delivery times. Inappropriate wording can lead to conflicts later.
2. Risk for the contractor: If something goes wrong, the contractor can lose a lot of money. For example, if there is an error in the design, the contractor will have to bear the cost of correcting it, which can affect its profitability.
3. International laws: In projects in other countries, local laws and international standards must be followed. This can complicate the process if the country’s regulations are very different from those of the client’s or contractor’s country.
4. International conflicts: If a problem arises, resolving it can be complicated by legal and cultural differences. Additionally, the costs of international litigation can be very high.
5. External factors: Events such as changes in government policies, economic fluctuations or supply chain problems can affect the development of the project. These variables require additional planning.

Application Examples

1. Energy Sector: In the construction of solar plants, the contractor designs the system, installs the panels and guarantees connectivity to the electrical grid.
2. Petrochemical Industry: For a refinery, the contractor is responsible for the installation of the processing systems and ensures that they comply with environmental regulations.
3. Manufacturing: In an assembly plant facility, the contractor ensures that production lines are ready to operate immediately.

Important Legal Points

• Applicable law: It must be agreed upon which laws will be used to resolve any problem. Many times laws from countries such as England or Switzerland are chosen, since they offer greater neutrality and legal clarity.
• Dispute resolution: It is common to use international arbitration to resolve disputes neutrally. This method is faster and less expensive than going to court.
• Guarantees: The contractor must guarantee that the plant will operate as agreed. This includes guarantees on the performance and quality of the materials used.
• Force Majeure: These clauses protect the parties if unforeseen events occur, such as natural disasters, wars or pandemics. This ensures that neither party will be penalized for circumstances beyond their control.
• Intellectual property: In international projects, it is important to define who will be the owner of the patents, designs or technologies developed during the project.

Tips for Negotiating a Turnkey Contract

1. Define the project well: Detail what is expected of the contractor and what the objectives are. It is essential that the contract is clear about the technical specifications, deadlines and expected results.
2. Choose the contractor well: Make sure they have experience and ability to handle similar projects. Research their history and ask for references if necessary.
3. Monitor: Even if the contractor does the work, it’s good to review the progress. Establish regular meetings and request detailed reports on the status of the project.
4. Plan for risks: Prepare a plan to handle unexpected problems, such as delays in the delivery of materials or changes in local regulations.
5. Includes audits: Consider hiring a third party to audit the project and ensure established standards are met.
6. Negotiate incentives: Sometimes it is useful to include incentives for the contractor if they finish the project ahead of schedule or exceed quality standards.
7. Evaluate guarantees: Check the guarantees offered by the contractor and ensure that they cover a reasonable period after delivery of the project.

Conclusion
Turnkey contracts are an excellent option for large projects because they facilitate the process and provide clarity on costs and times. However, for them to work well, it is key to make a clear contract, have good communication and have advice from experts on the subject. Furthermore, understanding the risks and preparing strategies to deal with them is essential. This way, both the client and the contractor can achieve a successful outcome that meets the expectations of both parties. With proper planning, these contracts can be a powerful tool for carrying out complex projects efficiently.