What is a Turnkey Contract?
A turnkey contract is a business arrangement in which a project is delivered in a completed state. Rather than contracting with an owner to develop a project in stages, the developer is hired to finish the entire project without owner input. The builder or developer is separate from the final owner or operator, and the project is turned over only once it is fully operational. In effect, the developer is finishing the project and “turning the key” over to the new owner.
This type of arrangement is commonly used for construction projects ranging from single buildings to large-scale developments. Under a traditional lump-sum contract, the owner agrees to pay the developer to complete a project that is built to the owner's specifications. The owner is given many opportunities to make decisions throughout the project, and to make changes as needed. In a turnkey contract, the owner is generally left out of the building process entirely as the developer handles all decisions and problems related to construction.
A contract of this kind may also be used in the residential home building industry. With a turnkey agreement, a builder or developer completes both the construction and the finishes in the home before turning it over to the homeowner. The homeowner is often offered a chance to select finishes, including curtains, paint colors and carpeting.
Turnkey contracts offer many advantages over traditional building contracts. Because the developer still owns the building until the project is complete, he has financial motivation to complete the job as quickly and efficiently as possible. A turnkey contract also provides more time for an owner to seek financing and investors before he is required to pay for a completed project. These agreements also save inexperienced owners from making difficult construction decisions, leaving these decisions in the hands of the developer or builder.
Before choosing a turnkey contract for your project, it's important to understand the potential drawbacks of this type of agreement. The primary drawback is the lack of control the owner maintains over design and construction decisions. For some owners, this may mean the project is not perfectly suited to their needs once it is complete. For others, this drawback may be canceled out by the potential for cost savings and shorter construction schedules.
Some owners may choose a turnkey-plus contract, which leaves the developer with some financial long-term interest in the project. For example, a builder will construct a retail establishment for an owner, and the builder will receive a percentage of the gross receipts for a specific period of time. This may encourage the builder or developer to make construction decisions based on the long-term needs of the project, rather than just the short-term decisions needed to get the job done.
The study turnkey rental compared and ranked the costs of buying or renting a home in more than 200 US metropolitan areas with the salaries of more than 60 jobs.
Someone in my mother's neighborhood had a house built by someone who had full authority on decision making. Bad luck for her that substandard timber was used. She was unable to move in and is now renting a property elsewhere while the case goes through the legal system.
She chose the turnkey option because her circumstances left her no time to be around to make decisions. I really think turn key contracts are something that work better in the business world. Any complications make it tough for individuals to get compensation.
If you are taking construction bids for a turnkey contract project it is a good idea to have a maximum budget written into the agreement. This will really help protect your investment, as few developers want to pay the excess from their own pocket!
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