Turnkey contracts are among the most common contract type in large-scale construction projects. Under current legal regulations, provisions on turnkey contracts have been specifically formulated to protect the rights of participating parties and ensure transparency in project performance.
1. Definition of turnkey contract
• According to Article 3 of Decree No. 37/2015/ND-CP, a turnkey construction contract is an agreement in which the contractor performs all necessary tasks for a construction project. This includes project planning, designing, providing technological equipment, and constructing, all to ensure the project is completed in accordance with approved criteria.
• The content of a turnkey contract outlines the contractor’s responsibilities, from preparing the construction investment project, designing, supplying equipment, to constructing the project. Furthermore, the contract includes activities such as training, operational guiding, maintenance, repairing, technology transferring, and conducting operational trials under both no-load and load conditions. Finally, the contractor is required to deliver a completed project, ready for operation, as per the requirements of the contracting party.
2. Key features of turnkey contracts
Turnkey construction contracts have the following prominent features:
• Comprehensive scope of work: The contractor is responsible for the entire process, from design to handover, meaning the investor only needs to take over the project once it is completed.
• Fixed contract value: Turnkey contracts are typically signed on a lump-sum basis, except in cases of force majeure or other agreements between the parties.
• Clear commitment to quality: The contractor assumes full responsibility for the quality, schedule, and all risks associated with the project’s implementation.
3. Rights and obligations of the contractor in a turnkey contract
The contractor, responsible for undertaking the entire construction project under the turnkey contract, has the rights and obligations detailed in Article 34 of Decree 37/2015/ND-CP. Similar to an EPC contract, contractors in turnkey contract also have the following rights:
– The right to request the project owner to provide information, documents, and working facilities.
– The right to propose work arising outside the contract’s scope and to refuse to perform any unlawful requests or requests not agreed upon by both parties in the signed contract.
– The right to organize and manage the performance of the work under the contract.
Regarding obligations, the contractor must:
– Provide sufficient resources: Provide adequate manpower, materials, machinery, and other means necessary to perform the contract.
– Manage documents and facilities: Receive, safeguard, manage, and return documents and facilities provided by the project owner (if agreed upon).
– Report on information and documents: Promptly notify the project owner if information or documents are incomplete, or if the facilities fail to meet the requirements.
– Confidentiality: Keep of all information related to the contract confidential as agreed upon or as required by law.
– Ensure the working standards: Complete the work as per the contract, ensure the safety, quality, timely progress, and compliance with other agreements.
– Prepare and submit designs: Draft technical designs and construction drawings aligned with the basic design or FEED design, and submit them for review and approval by the relevant authorities and the project owner, as required by regulations.
– Procure technological equipment: Organize the procurement, manufacturing, and supply of technological equipment on schedule, select subcontractors (if any), and agree with the project owner on bidding details.
– Provide training and transferring technology: Conduct training in project management and operation, and transfer technology and technical services if agreed upon.
– Test and hand over the project: Carry out tests, adjustments, trial operations, and hand over the completed project as per the contract and legal requirements.
– Protect intellectual property rights: Ensure that the products do not infringe upon intellectual property rights.
– Submit documents and files: Provide the project owner with all documents related to the contract’s deliverables.
– In addition to the above obligations, specifically for turnkey contracts, the contractor also has the obligations to prepare the construction investment project, assist the project owner in defending the project before competent authorities, and complete the project as required by the project owner in accordance with the signed contract.
4. Advantages and disadvantages of turnkey contracts
a. Advantages
Turnkey contracts are often performed by general contractors from countries with advanced scientific and technological foundations. This is a popular choice for investors from developed countries as it significantly reduces the workload of project management for them.
b. Disadvantages
• However, a major drawback of this contract is the general contractors from developed countries often retain critical technological know-how and do not fully transfer it to the investor. This results in the investor being dependent on the contractor for technical issues, equipment, and materials throughout the project’s operation.
• Since full authority is given to the contractor, the investor faces challenges in deeply intervening in the implementation process, leading to risks in quality. If the contractor lacks sufficient capability or fails to meet the schedule, the project may be delayed or even fail to meet technical requirements.
• For domestic contractors with adequate capacity and experience, this type of contract can be effectively applied to common projects such as constructing office buildings or headquarters. Specially, it is a feasible option for investors who are not specialized in construction, helping them save time and effort in project management.
5. Legal status of turnkey contracts
A turnkey contract is one of the types of construction contracts. Therefore, based on Clause 3, Article 6 of Decree No. 37/2015/ND-CP, the legal status of a turnkey contract is defined as follows:
• An effective turnkey contract shall be the highest legal instrument that the employer, contractor and other related parties have the obligations to perform.
• An effective turnkey contract shall be the highest legal instrument for settling dispute between the parties. Any dispute that is not agreed by the parties shall be settled under the legal regulations.
• Regulatory agencies and agencies that perform controlling, allocation, provision of capital, investigation and auditing, and other relevant agencies shall perform their functions and duties as defined without encroachment on rights and interests of the parties in reliance on terms and conditions of the effective construction contract.
Turnkey contracts are an effective tool for performing large-scale construction projects, especially for projects requiring high integration. However, to ensure success, parties must be caution in negotiating, signing, and performing the contract.
This article, “Legal aspects of turnkey construction contracts” is brought to you by TNTP. We hope this article proves helpful to our readers.
Respectfully,
