Turnkey projects or contracts are common in international business in the supply, erection and commissioning of plants, as in the case of oil refineries, steel mills, cement and fertilizer plants, etc., construction projects as well as franchising agreements.
A turnkey project is a contract under which a firm agrees to fully design, construct and quip a manufacturing/ business/ service facility and turn the project over to the purchaser when it is ready for operation for remuneration. The form of remuneration includes:
- A fixed price (firm plans to implement the project below this price)
- Payment on cost plus basis (i.e., total cost incurred plus profit)
This form of pricing allows the company to shift the risk of inflation/enhanced costs to the purchaser. Larsen and Toubro, and Mumbai’s Jyothi Structures Ltd and KFC International Ltd are the three Indian companies that have been shortlisted from nearly a dozen for turnkey operations including laying transmission lines and building a substation for the 456 MW Upper Tamakoshi Hydroelectric Project, Nepal’s biggest hydel project being built with domestic funding.
Benefits of Turnkey Projects
- The opportunity at sell both components and other intangible assets,
- Host government patronage which ensures that payments are made promptly and may also lead to mutually beneficial relationship in other areas, and
- for the host nation, the opportunity to build industrial complexes and train local personnel.
Limitations of Turnkey Projects
- Lack of client control and participation.
- Higher overall cost than traditional approach.
- Limited flexibility to incorporate change.
- A firm that enters into a turnkey project with a foreign enterprise may inadvertently create a competitor.