Pauschale (Turn Key) Agreements

Pauschale (Turn Key) Agreements

November 23, 2016

In the relationship between a contractor and a client, both parties are undertake a series of risks as part of the engagement, but try to minimize such risks as much as possible. Generally, the client wishes to enter into a Pauschale (turn key) agreement and the contractor wishes to work on the basis of measurement. What are the meaning of these terms?

A Contract between a client and a contractor called a "Measurement Contract" is a contract according to which the client pays the contractor pursuant to the actual work made (at the end of the project or by key stages agrees between the parties).  In contrary, a " Pauschale Contract" (deriving from the German word “Pauschale” meaning: fixed price) is an agreement under which the contractor estimates, based on its own calculations and measurements, the total cost of the project and provides to the customer with a total price, embodying all the estimated required work. In such kind of an agreement the contractor assumes the risk that the project will reach higher costs than predicted. Using the description of Justice Elyakim Rubinstein: "meaning a turn-key agreement which is a contract where the customer receives the work in a status which requires only to "turn the key "and use a product".

Many cases reach the courts with the question whether the extra work carried out by the contractor is part of the “turn key” contract or whether the extra work is not part of it and entitles the contractor to additional payment. The Courts held that if the turn-key contract states that the contractor to reach a particular outcome (for example, construction of a specific facility) then even where the work was significantly more than predicted the contractor is not entitled to additional payment.  This is also the case where the contractor made additions without notifying the client in advance and receiving its approval. However, in a situation where the extra work is required and the contractor demanded additional payment before carrying out the extra work or the contract stated the pricing of the extra work, the contractor will be entitled to additional payment.

Hence, there is high importance to the formulation of a turn key contract and particularly to the definition of the work to be done and what will be deemed extra work and the pricing thereof. Misdrafting of the agreement may cause the contractor to bear higher unplanned costs or the contrary situation where the customer finds out at the end of the project that it is expected to pay a much higher price than excepted due to many "extras" that where not part of the original project definition