Turnkey Delivery: What Is It and Why Use It?
Risk Transference and Other Drivers
The use of a turnkey delivery process is a well-established practice throughout the United States. While this method of delivery has been around for decades, it is generating a renewed focus for being a cost-effective and strategic means of managing complex facility needs for varying institutions.
“Other institutions that have struggled to deliver facilities on time and on budget, or are stretched thin with limited resources, may find turnkey strategies to be a useful method of project delivery.”
Turnkey delivery strategies are alternatives to traditional design-bid-build (DBB) or even design-build (DB) delivery; they provide risk transference and certainty of delivery to both the public and institutional sectors. Turnkey delivery is flexible and comes in a variety of methods to meet the owner’s procurement requirements. Unlike a traditional DBB approach, turnkey delivery consolidates multiple aspects of development, building design, financing, construction and O&M into a comprehensive facility solution with financial and organizational flexibility and a single point of accountability.
There are four main activities associated with the delivery and operation of a facility throughout its useful life; (1) development, (2) design & construction, (3) financing, and (4) operations & maintenance/lifecycle costs. Under the traditional DBB or DB approaches, an institution carries the risk and cost uncertainties affiliated with each of these activities. Because the DBB delivery process is linear and generally not integrated, construction cost is not always certain until the design is complete, and the drawings are bid. Likewise, operating and lifecycle costs are not truly known until the facility is online and operating. Often, an institution’s operations group is a separate entity from the real estate and construction department. Effectively managing these risks requires an institution to commit significant resources from various groups to the delivery and operations process.
Turnkey delivery strategies mitigate these risks and the disconnect of the component parts to a project by contractually transferring them to the private sector. This allows the government or institution (“Agency”) to conserve resources and enables people and financial assets to focus on the Agency's core organizational mission. Risk transfer can be comprehensive or selective, depending on the project and Agency goals. A turnkey delivery contract combines some development activities with any or all of the other four main activities described above. With a comprehensive turnkey design-build-finance-operate-maintain (DBFOM) structure, an institution can transfer all the risk to the private sector in exchange for a guaranteed fixed monthly payment over a defined term. However, a developer-led turnkey design-build (DB) solution in which the developer helps analyze feasibility, financing, permitting, and other early development activities may be appropriate when an Agency really needs help on the front end of its project, or getting a project off the ground.
“The [turnkey] design-build process was critical to the success of the new middle school project. It allowed the Owner many more options throughout the project that would not have been available through a traditional Design-Bid-Build.”— Lois F. Berlin, Ed.D., Superintendent (retired) Falls Church City Public Schools
Agencies that have a good track record in managing project risks and have both adequate, experienced staff and the necessary financial resources may find that the traditional DBB or DB approaches remain their best options for delivering new facilities. Other Agencies that have struggled to get projects under construction and/or deliver facilities on-time and on-budget may find turnkey solutions attractive.
While risk transference is a major factor for the implementation of a turnkey delivery strategy, other reasons, such as speed of delivery, access to new sources of capital and managing building complexity, have been cited by some institutions as their primary motivator in implementing a turnkey approach.
Presented in the Beyond Risk entries are three examples from the Edgemoor portfolio where additional considerations were motivators for the implementation of a turnkey delivery strategy.