Guaranteed Maximum Price (GMP) contracts are widely used, widely vary, and are widely misunderstood. The essence of the GMP contract is that the owner is promised a ceiling on the price and participates in any savings if the project costs less than the limit. The most popular versions of this contract are published by the American Institute of Architects (AIA). Even though we have been using GMP contracts almost exclusively for almost 30 years, we still find many project owners don’t really understand them, despite our best efforts to explain how they work. Here is a capsule description of a GMP contract: There is a large pile of estimates of what the costs will be. Added on to that is a fee for the contractor to cover their general overhead and hoped-for profit. On top of those two is added a contingency to cover unexpected costs. There are many variations in the way these three pieces are presented at the beginning and evaluated at the end.
First come the estimates. They can either be firm bids from subcontractors if the plans are complete enough, or they can be reasoned guesses of the cost of each part of the work. The sum of all of those prices, often a mixture of bids and guesses, makes up what is usually called the estimated “Cost of the Work.” When the project is done, there is an accounting of the actual Cost of the Work.
Second comes the fee. It is sometimes a fixed amount or monthly charge but most often is expressed as a percentage of the Cost of the Work. That number or formula to reach a number is a key part of the terms of the GMP contract.
Third comes the contingency. Curiously, this is the element with the most variation in calculation and presentation. Usually, it is expressed as a percentage of the first two items. That percentage or lump sum depends on the completeness of the documents, detail of the estimates, size of the project, and riskiness of the work (i.e.,remodeling versus new construction). Sometimes, the contingency is at least partially distributed (or hidden) in the estimates because the estimator is trying to cover some of the unknowns. Arrangements for sharing contingency and other savings deserve its own article.
So what is guaranteed? Technically, the guarantee is to do what is in the documents and what should be reasonably inferred from them. Both of these can be fertile ground for disputes since the criteria are vaguer than other contract forms. As you can imagine, “reasonably inferred” can be interpreted many ways, depending on your incentives.
What is not guaranteed? Changes. Contractors are incredibly bad mind readers. If something does not show up in the documents or recorded conversations, it will be missed. If a government agency representative goes off script, serious unexpected conditions are found, or the project goals change, the GMP will change, usually increasing.
Like most things in life, clear communications and realistic expectations hold the key. Initially, it depends on the clarity of the documents and how well they represent the owner’s desires. If either of those is lacking, there surely will be disagreements on what is to be done for the GMP. This is not just a one-way street, with the entire burden on the owner and design team to be explicit. The contractor or construction manager (CM) has a responsibility to reflect back to them what is in the estimates in enough detail for them to know if he “gets it.” Note that a CM in this case is usually a licensed general contractor who joins a construction project early in the design phase, may provide a GMP before the plans are complete, and subcontracts all the work out, doing little or no work with its own forces. The acronym for this is CMaR – CM at Risk. AIA has specific contract forms for this relationship.
Can a GMP project be competitively bid? Not really. The incentives are all mixed up. The advantage to an owner of a GMP is the cap on the project cost, with some hope for savings. When faced with a competitive bidding situation, the one with the most complete and accurate estimate will always lose to the person who made the biggest mistake. It quickly descends into an argument about scope — what’s in and what’s out.
How can you, the owner, get the best GMP? If you mean a reliable price and harmonious relationships, then choose trustworthy team members with successful GMP experience. And communicate, communicate, communicate by speaking, listening, reading, and documenting.
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Jay True, former vice-president of JMA, became partners with Jim Murphy in 1987. In 2015, Jay and his wife Elaine True, our office manager, retired from JMA and moved to Michigan to escape the cool summers and warm winters in Santa Rosa.