Q2/91 Discuss from the viewpoints of the employer and the contractor the advantages and

disadvantages of turnkey (ie "design and construct") contracts. What role can an
engineering adviser play in such arrangements?
By Kelvin Au Yeung 5/91
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1.0 INTRODUCTION

When an employer makes a contract with a single firm for carrying out both
design and construction, this is referred as a turnkey contract or a `design & construct'
contract. Although this concept is extensively employed in some of the countries in Europe,
Latin America and United States, it is not yet the most usual contracting procedure. In Hong
Kong, the traditional and still predominant practice is to have the design and construction
carried out by two separate and unrelated parties. The design is customarily done by in-house
staff or a consultant firm in an agreement with the employer. The construction is then
undertaken by a contractor bonded by a contract to the employer. Same as conventional
contracts, a turnkey contract may be in the form of a lump sum, re-measurement or cost
reimbursement contract.

As the contractor is responsible for both design and construction in a turnkey

contract, the engineer who conventionally carries out the design of the project and supervises
the construction on site plays a rather different role this time.

2.0 THE EMPLOYER

The employer is the promoter and initiator of the project and provides all the
funding incurred. In return, he requires the project to be completed on time and within
budget, and the performance of the final product to be up to his standard.

2.1 Advantages

Unlike the conventional `design then construct' contract, the construction of

the project can start before the completion of the design. The time for completion of the
project can thus be reduced and the employer's scheme can be implemented earlier. As a
result, the employer has a quicker turnover for his investment. Besides, a short completion
period enables him to cut down his expenses by reducing the time related costs of the project
such as overhead costs, consultant fees and loan interest.

By inviting tenders, the employer can obtain at no direct cost and in a

relatively short period a variety of alternative designs from the tenderers which are devised
from their own experience and expertise. Moreover, the employer can benefit from the
competition in tendering among the contractors in both the design and construction aspects.

Lastly, if little or no variation is anticipated, a turnkey contract offers an all-in

service to the employer with a high degree of price certainty.
As the design is done by the contractor, there is little excuse for him to claim
on design faults or other design related matters. The employer can thus concentrate more on

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project administration and contractual matters.

2.2 Disadvantages

On the other hand, the contractor may submit a design in favour of his own
method of construction. There is the possibility that the contractor emphasizes much on his
personal preference rather than the actual needs of the project. The design may come out to
be different from the employer's original concept or not complying with the exact
requirements of the employer. As most contractors tend to develop their design with capital
cost as their prime concern. Other design aspects, such as functionability, aesthetic standards
and future maintenance needs, may be ignored or put to a lower priority of consideration.

Since the employer is usually of non-technical background, it is difficult for

him to appraise the contractor's proposal for the tender and his subsequent performance.
There will be no one to oversee the interests of the employer and advise him when disputes
arise. Therefore, the employer needs to employ a checking engineer to check the design and
monitor the works. This increases the project cost as the employer has to pay the checking
engineer as well as the contractor.

As the contractor plays an important role in both the design and the
construction processes, it is extremely difficult to find another contractor to follow up his
works in case of bankruptcy of the original contractor.

As the design is tailored to the contractor's strength and resources, the cost of
the works will be lower. However this saving is often offset by the risk caused by the
uncertainty in the details of the works at the time of tender. If the construction commences
before the design has been finalised, subsequent changes to the initial design are inevitable.
These will render the original cost estimate of the employer unrealistic and his budget
difficult to control.

3.0 THE CONTRACTOR

In a turnkey contract, the contractor is not only responsible for the construction but
also the design aspects of the whole project.

3.1 Advantages

As the contractor has taken up the full responsibility in preparing the design
for the project, he can devise works programmes and construction methods that best suit his
own resources and expertise. As such, the contractor can reduce the cost of the project,
improve its efficiency, and subsequently, enhance his own profit.

Since both the design and the construction are done by the contractor,
bureaucratic communication channels between the design and construction groups can be
avoided. Thus the contractor can revise the design promptly to suit any actual site conditions
discovered during construction.

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3.2 Disadvantages

During tendering, the contractor has to carry out preliminary design for the
project in accordance with the criteria set out by the employer. Thus he has to maintain a
team of design staff even at the pre-tender stage. A failed tender may render the design work
abortive and incur financial losses to the contractor.

As most of the designs are either completed within a very short period of time
during the tendering stage or yet to be finalised after the commencement of works, it is very
difficult for the contractor to price the tender accurately. In a competitive tendering system,
he may bid a price too low and render a loss to himself.

Since the contractor is responsible for the whole project, he is liable for the
consequential damages arising from any failure caused by him in his fulfilling of his
obligations. As the contractor is also responsible for the design of the works, he has to take
up additional legal liabilities for negligence or error in exercising his professional functions
similar to those of an engineer. Thus he has to take up both the duties and obligations of a
contractor and an engineer during the whole period of the contract.

4.0 THE ROLE OF THE ENGINEERING ADVISER

In a turnkey contract, an engineer may be employed for the preparation and

assessment of the tender, and the monitoring of the construction process. He will mainly act
as an adviser and coordinator for the employer.

Before the contract is ready for tendering, an engineer may be employed to

carry out the site investigation to provide the employer a clear picture of the physical
conditions and restraints of the site. He is then responsible for the preparation of the
specifications, the tender drawings, and other tender documents so as to present the concept
and requirements of the employer to the tenderers. The engineer should exercise due care and
consideration in the preparation of the above since well-written contract documents are
essential in safeguarding the interests of the employer.

When assessing a conventional form of tender, the engineer needs only to

consider the price of the tender, the competence of the contractor and its financial situation.
However, in a turnkey contract, he also has to assess the design proposals submitted by the
tenderers on aspects like feasibility, durability, appearance, fitness, engineering merits in
design and construction, safety and future maintenance.

During design and construction, the engineer will have to pay particular
attention to the progress and the quality of the works to ensure that the project will be
completed on schedule and to the satisfaction of the employer.

If there is a variation to the design or the works, the engineer will act as a
professional in justifying the cost of the variation for the employer as the latter is generally in
lack of the professional expertise. In the case of claims, he may try to liaise and compromise

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with the contractor on the behalf of the employer to help settling the disputes. However, it is
a difficult task for the engineer because he may be in lack of some of the detail knowledge of
the design since the latter is done by the contractor.

5.0 CONCLUSIONS

There are both advantages and disadvantages for the employer and contractor in a
turnkey contract. It is actually a complex process for the involved parties to balance all the
technical, economical and contractual factors of the project. To safeguard his investment, the
employer have to work closely with the engineer to devise effective ways in promoting and
monitoring the quality and progress of the works. For instance, he may adopt a profit sharing
scheme to provide more incentive for the contractor to work efficiently and economically in
fulfilling the requirements of the project.

In this type of contract, both the workload and liabilities of the engineer in the design
aspects are largely taken up by the contractor. The role of the engineer has changed mainly to
that of an adviser in providing professional guidance to the employer in monitoring the
works carried out by the contractor and settling claims.

(1500 words)

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 Q2/91 - Summary

1.0 Introduction

- A single firm for carrying out both design and const. => not yet usual

- Engineer has a different role

2.0 The Employer

2.1 Advantages

- Saving of time and costs

- Alternative choices of design & competition for both design and const.

- All-in services => Price certainty

- Less claim on design aspects

2.2 Disadvantages

- Non-compliance with employer's original concept & requirements

- Need for checking engineer => more cost

- Bankruptcy of contractor => hard to follow up

- Subsequent changes to unfrozen project may lead to difficulty in budgetary control

3.0 The contractor

3.1 Advantages

- Choice of programme & const. methods to suit his expertise and resources

- Avoiding bureaucratic communication channels => change of design promptly

3.2 Disadvantages

- Expensive overheads at tendering => abortive works if failed in tendering

- Difficult to price the tender => loss

- Increased liability => those of an engineer's

4.0 The Role of The Engineering adviser

- As an adviser and coordinator

- Prepare documents => well written

- Tender assessment => include design aspects

- Monitor & check during design and const. stages => progress & quality

- Assessment of Variations & settling claims

5.0 Conclusions

- Both advantages and disadvantages for the employer and contractor

- employer works closely with engineer => effectiveness

- Engineer's workload and liability shared by the contractor

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