In the world of construction, infrastructure, and industrial projects, selecting the right contract type is crucial for project success. Two widely used contract models are EPC (Engineering, Procurement, and Construction) contracts and turnkey contracts. While these contracts may seem similar at first glance, they differ significantly in terms of design responsibility, risk allocation, employer involvement, and project execution.
This article explores the differences between EPC and turnkey contracts, their advantages, and when to use each contract type.
1. What is an EPC contract?
An EPC contract is a project delivery method where the contractor is responsible for:
- Engineering: Performing detailed design and planning based on the employer's basic engineering inputs.
- Procurement: Sourcing materials, equipment, and hiring subcontractors.
- Construction: Executing the project until completion.
In an EPC contract, the employer provides the basic design, and the contractor completes the detailed engineering. The employer has more involvement in the project, and in some cases, commissioning and start-up may be handled by a third party.
2. What is a turnkey contract?
A turnkey contract is a type of agreement where the contractor is responsible for delivering a fully operational facility to the employer. The contractor handles:
- Engineering: Both basic and detailed design.
- Procurement: Sourcing materials and equipment.
- Construction: Executing the project from start to finish.
- Commissioning and Start-up: Ensuring the facility is fully functional.
- Handover: Delivering a ready-to-use facility to the employer.
Unlike EPC contracts, turnkey contracts place minimum involvement on the employer, and the contractor is responsible for everything until the facility is operational.
3. Key Differences Between EPC and Turnkey Contracts
FeatureEPC (Engineering, Procurement, and Construction) Turnkey
In EPC, the employer provides basic engineering; the contractor completes detailed design. IN In Turnkey, the contractor is responsible for both basic and detailed design.
In EPC, it includes engineering, procurement, and construction.
In turnkey, it includes engineering, procurement, construction, commissioning, start-up, and handing over a fully operational facility.
In EPC, it may be handled by a third party.
In turnkey, the contractor is responsible for commissioning, start-up, and handing over a fully functional facility.
In EPC, the employer has more involvement in project execution.
In turnkey, the employer has minimal involvement.
In EPC, it is shared between employer and contractor.
In turnkey, most of the risk is on the contractor.
In EPC, it is milestone-based payments.
In turnkey, it is a fixed-price or lump-sum contract.
In EPC, it is moderate control over costs and timeline.
In turnkey, it has high certainty in cost and timeline as the contractor bears the risk.
4. Detailed Explanation of Key Differences
A. Design Responsibility
- EPC Contract: The employer provides basic engineering and specifications, while the contractor completes detailed design.
- Turnkey Contract: The contractor is responsible for both basic and detailed design, giving them full control over project execution.
B. Commissioning and Start-Up
- EPC Contract: The contractor focuses on engineering, procurement, and construction, but commissioning and start-up may be assigned to a third party.
- Turnkey Contract: The contractor is fully responsible for commissioning, start-up, and handing over a fully operational facility.
C. Employer’s Involvement
- EPC Contract: The employer has more control over the project and may be involved in design approvals, procurement decisions, and construction execution.
- Turnkey Contract: The employer has minimal involvement and only provides high-level specifications. The contractor takes full responsibility for delivering a ready-to-use facility.
D. Risk Allocation
- EPC Contract: The risk is shared between the employer and the contractor. If there are design errors in the employer's basic engineering, the employer may be responsible.
- Turnkey Contract: The contractor bears the majority of the risk, as they are responsible for design, procurement, construction, and commissioning.
E. Payment Structure
- EPC Contract: Payments are typically milestone-based, meaning the contractor is paid as the project progresses.
- Turnkey Contract: Payments are fixed-price or lump sum, ensuring cost certainty for the employer.
F. Time and Cost Control
- EPC Contract: The employer has some control over project costs and timelines, but changes in design and procurement can lead to variations.
- Turnkey Contract: Since the contractor takes full responsibility, there is high certainty in cost and schedule.
5. When to Use EPC vs. Turnkey Contracts?
Employer Wants Design Control
- ? EPC Contract: Suitable when the employer wants to retain control over the project's design process. The employer provides basic engineering and specifications, while the contractor is responsible for detailed engineering. This allows the employer to influence the final design, ensuring that it meets their specific requirements.
- ? Turnkey Contract: Not ideal for employers who want design control. In a Turnkey contract, the entire design process (both basic and detailed engineering) is the responsibility of the contractor. The employer provides only high-level specifications, and the contractor delivers a completed facility based on those specifications.
Project Requires High Time & Cost Certainty
- ? EPC Contract: Does not always guarantee strict cost and time control. Since the employer provides basic engineering and may request modifications during project execution, there is a higher chance of cost overruns and schedule delays due to design changes, unforeseen risks, or procurement delays.
- ? Turnkey Contract: The contractor is responsible for delivering the project within a fixed budget and timeline, ensuring higher cost and time certainty. Employers who need predictability in project costs and schedules prefer Turnkey contracts, as they reduce financial uncertainties.
Employer Prefers Lower Risk
- ? EPC Contract: Risk is shared between the employer and the contractor. Since the employer provides the initial design, any errors or modifications in the basic engineering stage could lead to cost escalations, delays, or disputes. Additionally, procurement and construction risks are partially transferred to the contractor, but not completely.
- ? Turnkey Contract: The majority of the project risk is transferred to the contractor, making it a low-risk option for the employer. The contractor is responsible for design, procurement, construction, commissioning, and handover, ensuring that the employer receives a fully operational facility with minimal risk exposure.
Commissioning and Start-Up Responsibility
- ? EPC Contract: Typically, commissioning and start-up are not included in the EPC contract. These activities may be performed by a third party or the employer’s internal team after the construction phase is complete. This means additional time and resources are required for testing and bringing the facility into operation.
- ? Turnkey Contract: The contractor is responsible for commissioning, start-up, and performance testing of the facility. This ensures that the project is delivered in a ready-to-use state, eliminating the employer’s need for additional contractors or technical teams to handle commissioning.
Complex, Large-Scale Projects
- ? EPC Contract: Suitable for large-scale infrastructure and industrial projects, such as power plants, oil & gas facilities, and transportation systems, where the employer has in-house technical expertise to oversee the design and execution.
- ? Turnkey Contract: Also well-suited for large projects, especially when the employer wants a complete, ready-to-use facility with minimal involvement. Examples include manufacturing plants, airports, desalination plants, and commercial complexes, where full functionality upon handover is essential.
Employer Has Technical Expertise
- ? EPC Contract: Preferred when the employer has a strong in-house technical team capable of reviewing designs, monitoring project execution, and managing risks. This allows the employer to influence project decisions and ensure compliance with internal standards.
- ? Turnkey Contract: More suitable for employers without technical expertise, as the contractor takes full responsibility for design, procurement, construction, commissioning, and handover. This makes Turnkey contracts a hassle-free solution for clients who need a functional facility but lack the resources to oversee technical aspects.
6. Real-World Examples of EPC and Turnkey Projects
EPC Contract Examples
- Power Plants – The employer provides a basic design, and the contractor completes engineering, procurement, and construction.
- Oil & Gas Pipelines – The employer specifies key requirements, while the contractor handles execution.
- Highways and Bridges – The employer defines specifications, and the contractor builds based on those.
Turnkey Contract Examples
- Industrial Manufacturing Plants – The contractor delivers a complete, operational facility.
- Airport Terminals – The contractor handles everything from design to commissioning.
- Desalination Plants – The contractor ensures the plant is fully functional upon completion.
7. Conclusion
Choosing between an EPC contract and a Turnkey contract depends on the employer’s needs, risk tolerance, and project complexity.
- EPC contracts are ideal when the employer wants to retain design control and is willing to take some project risks.
- Turnkey contracts are better suited when the employer wants a fully functional facility with minimal involvement and maximum cost certainty.
Both EPC and Turnkey contracts have their advantages, and the choice depends on the employer’s specific needs. If the employer wants design control, has technical expertise, and is willing to share risks, an EPC contract is the better choice. On the other hand, if the employer wants minimal involvement, lower risk, and a fully operational facility upon handover, a Turnkey contract is the best option.
Understanding these differences helps project owners make strategic contract decisions that ensure efficient project execution, cost control, and risk mitigation. By selecting the most suitable contract type, employers can effectively manage risks, optimize costs, and achieve project success with minimal disruptions.
