A turnkey project involves a single contractor or EPC firm engaged for the entire project life-cycle, responsible for engineering design to construction, procurement, and commissioning, finally handing over to the asset owner as a ready-to-use facility. Here, the asset owner usually turns the key to start the operation.
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In turnkey type projects, the asset owners get a chance to escape from the responsibility and risk associated with the project by compensating for the higher cost and loss of control over project execution or implementation.
Previously, power utilities had a very high level of competency and knowledge on their own assets like substations, generating stations, etc., and so the conventional method of contracting was in use, and execution of the project was done in-house, while the detailed engineering, construction, and commissioning was done by the utility’s staff.
But as the power industry deregulated, the majority of utilities shifted to turnkey style contracting rather than the conventional in-house because of limited specialization and skill.
Steps Involved in Turnkey Project
Detailed Engineering Design: In this phase, the EPC contractor or firm engages with the asset owner or utility for a deep understanding of the owner’s needs and lays out the project objectives and design accordingly, utilizing the firm’s expertise in the field.
Procurement: The second stage that follows the Engineering and design phase is the procurement, or sourcing of all necessary materials and equipment as per the detailed standards agreed upon in the first phase. It is a crucial stage in the project life-cycle, as any delay in the supply of building materials hampers the project’s efficiency and timely completion.
Construction: The third phase in a turnkey project is the construction stage, where the contractor oversees the execution of the project as per the detailed design. Coordination with the subcontractors and material suppliers becomes the main priority, which decides the project’s deliverability and the high degree of workmanship. Regular progress reporting, issue resolving, and ensuring seamless communication to minimize any disruption are major tasks in this stage.
Installation and Commissioning: On completion of all the construction works, installation and commissioning of all equipment begins. In this stage, proper care is taken to ensure the smooth operation of all installed equipment and systems. Rigorous Testing is carried out as per standards, which ensures that the project meets all regulatory standards.
Handing over: Once the EPC firm is satisfied that the project meets all standards and performance criteria as decided upon previously by the utility owner, the EPC company formally hands over the project to the asset owner. This stage involves various documentation processes, transfer of operation and maintenance manuals of various equipment, along with the warranty.
Advantages of a Turnkey project
Simplicity: The Utility deals with a single EPC company or a contractor, who is in charge of providing engineering design, procurement, construction, and commissioning services for the entire project. This makes the project management simple for the Utility owner.
Options: The utility owner receives many bids for the contracts. Many contractors offer their services for the completion of the project in a variety of different ways, which the utility owner would have missed.
New Technologies: Utility owners, because of the risk-averse tendency of the stakeholders and conservativeness, find it difficult to introduce new technology. But the EPC company will be using new technology to make its bid attractive and competitive, as the reputed equipment manufacturers are at the forefront of R&D, constantly initiating new technologies.
Price Certainty: The price of these projects is usually fixed as per the contract agreement. The EPC company assumes all the risk of the project within the agreed time scale. Assuming the contract has been set up correctly, the utility owner has little risk and claims of cost overrun.
Time Certainty: As the EPC company is solely responsible for the design, procurement, construction, and commissioning of the project, it must therefore give a time guarantee that on a specified date, the project will achieve its completion with the required operational performance. It therefore helps in ascertaining the in-service date, which is critical to system performance in the energy sector. This type of contract also provides scope for penalties and compensation in case of any scheduled delays.
Utility owner’s reduced resource: As the EPC company does the entire work associated with the project, there is a very low demand for resources of the utility owner. The utility owner’s role becomes limited to only overseeing and ensuring compliance with the agreed contract.
Disadvantages of a Turnkey project
Control Loss: In the conventional style of contracting, the utility retains full control of the project and can make changes and adjustments during the execution phase of the project with little to no financial penalty. Whereas in the case of a turnkey project, the entire control of the project is taken by the EPC company, and any modification and adjustments to the contract become time-consuming and expensive.
Complexities in Evaluation: In the case of a turnkey project, the utility owner may receive a number of bids, and each bid can involve different concepts towards the project completion. In such cases, it becomes difficult to evaluate and introduce complex comparisons to the pricing and select the best alternative.
Limited number of bidders: Substation turnkey projects, especially involving retrofitting and other refurbishment works, involve significantly higher risk. Because of this, the number of bidders may be reduced and resulting in limited competition. With a limited number of bidders, the price may increase because the normal tendency of the bidders will be to financially cover themselves against the high risk.
Risk of inferior procurements: As the EPC companies will be in competition during the bidding process, the selection of all building materials and equipment will be dominated by lower pricing rather than lifecycle consideration of being reliable and high quality. Therefore, the equipment should be thoroughly checked, and any extra costs should be taken into consideration during the evaluation phase.
Engineering expertise loss for the Utility: As the Utility owners have limited control over the engineering design and execution approach of the construction, the technical expertise of the Utility’s staff may be reduced to project supervision. Thus, if the Utility only practices Turnkey projects, it will lose the technical expertise in detailed engineering and construction execution.
